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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED:   Commission file number:  
                September 30, 2004                                      1-14527                 
       
EVEREST REINSURANCE HOLDINGS, INC.  
(Exact name of registrant as specified in its charter)  
       
                Delaware                                       22-3263609      
(State or other jurisdiction of   (I.R.S. Employer  
incorporation or organization)   Identification No.)  
       
477 Martinsville Road      
Post Office Box 830      
Liberty Corner, New Jersey 07938-0830      
(908) 604-3000      
(Address, including zip code, and telephone number, including area code,      
of registrant's principal executive office)      
       

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

  YES      X      NO                  


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

  YES             NO      X           


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

      Number of Shares Outstanding  
                           Class     at November 1, 2004
Common Shares, $.01 par value     1,000  






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

EVEREST REINSURANCE HOLDINGS, INC.

Index To Form 10-Q

PART I

FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS       Page  
     
                  Consolidated Balance Sheets at September 30, 2004 (unaudited)          
                     and December 31, 2003       3  
 
                  Consolidated Statements of Operations and Comprehensive Income          
                     for the three and nine months ended September 30, 2004          
                     and 2003 (unaudited)       4  
 
                  Consolidated Statements of Changes in Stockholders’ Equity for the          
                     three and nine months ended September 30, 2004 and 2003    
                     (unaudited)       5  
 
                  Consolidated Statements of Cash Flows for the three and nine          
                     months ended September 30, 2004 and 2003 (unaudited)       6  
 
                  Notes to Consolidated Interim Financial Statements (unaudited)       7  
 
ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF    
                  FINANCIAL CONDITION AND RESULTS OF OPERATION       22  
 
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES    
                  ABOUT MARKET RISK       45  
 
ITEM 4.   CONTROLS AND PROCEDURES       46  
 

PART II

OTHER INFORMATION


ITEM 1.   LEGAL PROCEEDINGS       47  
 
ITEM 2.   CHANGES IN SECURITIES, USE OF PROCEEDS          
                  AND ISSUER PURCHASES OF EQUITY SECURITIES       47  
 
ITEM 3.   DEFAULTS UPON SENIOR SECURITIES       47  
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF    
                  SECURITY HOLDERS       47  
 
ITEM 5.   OTHER INFORMATION       47  
 
ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K       48  


EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS

      September 30,   December 31,
(Dollars in thousands, except par value per share)       2004     2003  
      (unaudited)
ASSETS:    
Fixed maturities - available for sale, at market value    
  (amortized cost: 2004, $5,776,520; 2003, $5,649,269)     $ 6,020,878   $ 5,942,899  
Equity securities, at market value (cost: 2004, $437,372; 2003, $146,407)       455,306     154,381  
Short-term investments       427,596     113,186  
Other invested assets (cost: 2004, $89,289; 2003, $59,183)       89,992     59,801  
Cash       72,354     142,094  
          Total investments and cash       7,066,126     6,412,361  
Accrued investment income       85,711     83,023  
Premiums receivable       1,017,643     988,039  
Reinsurance receivables - unaffiliated       1,199,522     1,245,891  
Reinsurance receivables - affiliated       1,358,758     1,156,615  
Funds held by reinsureds       139,710     142,775  
Deferred acquisition costs       210,997     220,677  
Prepaid reinsurance premiums       373,027     353,764  
Deferred tax asset       230,304     159,758  
Other assets       133,115     106,462  
TOTAL ASSETS     $ 11,814,913   $ 10,869,365  
LIABILITIES:    
Reserve for losses and adjustment expenses     $ 6,681,791   $ 6,227,078  
Unearned premium reserve       1,428,129     1,357,671  
Funds held under reinsurance treaties       397,654     450,936  
Losses in the course of payment       29,826     2,577  
Contingent commissions       3,919     3,811  
Other net payable to reinsurers       294,241     370,604  
Current federal income taxes       51,071     40,945  
8.5% Senior notes due 3/15/2005       249,949     249,874  
8.75% Senior notes due 3/15/2010       199,317     199,245  
Junior subordinated debt securities payable       546,393     216,496  
Revolving credit agreement borrowings       70,000     70,000  
Interest accrued on debt and borrowings       4,028     13,695  
Other liabilities       180,581     119,569  
          Total liabilities       10,136,899     9,322,501  
STOCKHOLDERS' EQUITY:    
Common stock, par value: $0.01; 3000 shares authorized;    
  1,000 shares issued and outstanding (2004 and 2003)       -     -  
Additional paid-in capital       271,104     263,290  
Treasury shares, at cost; 0.5 million shares (2004 and 2003)       (22,950 )   (22,950 )
Accumulated other comprehensive income, net of deferred income    
   taxes of $98.6 million at 2004 and $112.2 million at 2003       183,073     208,305  
Retained earnings       1,246,787     1,098,219  
          Total stockholders' equity       1,678,014     1,546,864  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY     $ 11,814,913   $ 10,869,365  

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

3

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

         Three Months Ended       Nine Months Ended
            September 30,        September 30,
(Dollars in thousands)       2004     2003     2004     2003  
              (unaudited)         (unaudited)
REVENUES:    
Premiums earned     $ 688,087   $ 776,895   $ 2,096,711   $ 1,974,187  
Net investment income       81,227     70,619     242,381     211,010  
Net realized capital gains (losses)       9,388     (11,843 )   59,846     (23,922 )
Other expense (income)       (30,378 )   625     (74,313 )   1,202  
Total revenues       748,324     836,296     2,324,625     2,162,477  
CLAIMS AND EXPENSES:    
Incurred losses and loss adjustment expenses       569,889     571,914     1,551,095     1,419,312  
Commission, brokerage, taxes and fees       142,792     158,158     425,996     418,380  
Other underwriting expenses       20,171     20,973     61,749     60,012  
Interest expense on senior notes       9,737     9,733     29,209     29,197  
Interest expense on junior subordinated debt       9,363     4,249     23,030     12,747  
Interest expense on credit facility       339     327     997     1,035  
Total claims and expenses       752,291     765,354     2,092,076     1,940,683  
 
(LOSS) INCOME BEFORE TAXES       (3,967 )   70,942     232,549     221,794  
 
Income tax (benefit) expense       (11,666 )   10,451     57,719     45,785  
 
NET INCOME     $ 7,699   $ 60,491   $ 174,830   $ 176,009  
Other comprehensive income (loss), net of tax       96,197     (74,279 )   (25,232 )   41,226  
COMPREHENSIVE INCOME (LOSS)     $ 103,896   $ (13,788 ) $ 149,598   $ 217,235  

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

4

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

         Three Months Ended     Nine Months Ended
             September 30,        September 30,
(Dollars in thousands, except share amounts)       2004     2003     2004     2003  
                (unaudited)           (unaudited)
COMMON STOCK (shares outstanding):    
Balance, beginning of period       1,000     1,000     1,000     1,000  
Issued during the period       -     -     -     -  
Balance, end of period       1,000     1,000     1,000     1,000  
COMMON STOCK (par value):    
Balance, beginning of period     $ -   $ -   $ -   $ -  
Issued during the period       -     -     -     -  
Balance, end of period       -     -     -     -  
ADDITIONAL PAID IN CAPITAL:    
Balance, beginning of period       271,014     259,711     263,290     259,508  
Tax benefit from stock options exercised       44     1,606     7,678     1,809  
Dividend from parent       46     -     136     -  
Balance, end of period       271,104     261,317     271,104     261,317  
ACCUMULATED OTHER COMPREHENSIVE INCOME,    
NET OF DEFERRED INCOME TAXES:    
Balance, beginning of period       86,876     253,662     208,305     138,156  
Net increase (decrease) during the period       96,197     (74,280 )   (25,232 )   41,226  
Balance, end of period       183,073     179,382     183,073     179,382  
RETAINED EARNINGS:    
Balance, beginning of period       1,239,088     1,007,252     1,098,219     891,734  
Net income       7,699     60,491     174,830     176,009  
Dividends paid       -     -     (26,262 )   -  
Balance, end of period       1,246,787     1,067,743     1,246,787     1,067,743  
TREASURY SHARES AT COST:    
Balance, beginning of period       (22,950 )   (22,950 )   (22,950 )   (22,950 )
Treasury shares acquired during the period     -     -     -     -  
Balance, end of period       (22,950 )   (22,950 )   (22,950 )   (22,950 )
TOTAL STOCKHOLDERS' EQUITY, END OF PERIOD     $ 1,678,014   $ 1,485,492   $ 1,678,014   $ 1,485,492  

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

5

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

      Three Months Ended Nine Months Ended
         September 30,    September 30,
(Dollars in thousands)       2004     2003     2004     2003  
              (unaudited)          (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net income     $ 7,699   $ 60,491   $ 174,830   $ 176,009  
    Adjustments to reconcile net income to net cash provided by    
     operating activities, net of effects from the sale of subsidiary:    
     Decrease (increase) in premiums receivable       5,552     (60,278 )   (115,740 )   (249,742 )
     (Increase) decrease in funds held by reinsureds, net       (24,056 )   (646 )   (61,756 )   15,836  
     Increase in reinsurance receivables       (20,133 )   (134,764 )   (161,586 )   (306,787 )
     Increase in deferred tax asset       (37,780 )   (6,906 )   (56,956 )   (17,819 )
     Increase in reserve for losses and loss adjustment expenses       427,235     374,912     928,464     780,262  
     Increase in unearned premiums       10,988     117,403     164,021     435,631  
     Decrease in other assets and liabilities       (126,674 )   (35,154 )   (41,769 )   (82,211 )
     Amortization of bond premium/accrual of bond discount       (971 )   (1,050 )   (137 )   (5,456 )
     Amortization of underwriting discount on senior notes       50     46     147     135  
     Realized capital (gains) losses       (9,388 )   11,843     (59,846 )   23,922  
Net cash provided by operating activities       232,522     325,897     769,672     769,780  
CASH FLOWS FROM INVESTING ACTIVITIES:    
Proceeds from fixed maturities matured/called - available for sale       92,879     182,695     299,862     451,886  
Proceeds from fixed maturities sold - available for sale       25,042     88,168     604,280     402,181  
Proceeds from equity securities sold       10,000     7,759     17,995     8,056  
Proceeds from other invested assets sold       80     3     517     244  
Cost of fixed maturities acquired - available for sale       (349,841 )   (577,342 )   (1,455,444 )   (1,624,881 )
Cost of equity securities acquired       (93,094 )   (6,095 )   (302,786 )   (10,254 )
Cost of other invested assets acquired       (2,243 )   (5,197 )   (9,108 )   (6,757 )
Net sales (purchases) of short-term securities       100,140     (36,318 )   (314,387 )   (63,580 )
Net increase (decrease) in unsettled securities transactions       7,385     45,147     (12,007 )   65,742  
Proceeds from sale of subsidiary, net of cash disposed       -     -     (2,744 )   -  
Net cash used in investing activities       (209,652 )   (301,180 )   (1,173,822 )   (777,363 )
CASH FLOWS FROM FINANCING ACTIVITIES:    
Tax benefit from stock options exercised       44     1,606     7,678     1,809  
Dividend from parent       46     -     136     -  
Proceeds from junior subordinated notes       -     -     329,897     -  
Net cash provided by financing activities       90     1,606     337,711     1,809  
EFFECT OF EXCHANGE RATE CHANGES ON CASH       206     (7,231 )   (3,301 )   1,899  
Net increase (decrease) in cash       23,166     19,092     (69,740 )   (3,875 )
 
Cash, beginning of period       49,188     93,876     142,094     116,843  
Cash, end of period     $ 72,354   $ 112,968   $ 72,354   $ 112,968  
SUPPLEMENTAL CASH FLOW INFORMATION:    
Cash transactions:    
  Income taxes paid, net     $ 41,667   $ 818   $ 97,263   $ 46,856  
  Interest paid     $ 29,072   $ 23,859   $ 62,756   $ 52,495  
Non-cash financing transaction:    
  Non-cash dividend to parent     $ -   $ -   $ 26,262   $ -  

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

6

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

For the Three and Nine Months Ended September 30, 2004 and 2003

1. General

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

The consolidated financial statements of the Company for the three and nine months ended September 30, 2004 and 2003 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results on an interim basis. Certain financial information, which is normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America, has been omitted since it is not required for interim reporting purposes. The year end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America. The results for the three and nine months ended September 30, 2004 and 2003 are not necessarily indicative of the results for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2003, 2002 and 2001 included in the Company’s most recent Form 10-K filing.

2. New Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 46, “Consolidation of Variable Interest Entities (“VIEs”) (“FIN 46”). FIN 46 addresses whether certain types of entities, referred to as VIEs, should be consolidated or deconsolidated in a company’s financial statements. During October 2003, the FASB deferred the effective date of FIN 46 provisions for VIEs created prior to February 1, 2003 to the first reporting period ending after December 15, 2003. During December 2003, the FASB issued FIN 46R, replacing FIN 46. FIN 46R is effective, for entities that had not adopted FIN 46 as of December 24, 2003, no later than the end of the first reporting period that ends on or after March 15, 2004. The Company adopted FIN 46R in the first quarter of 2004, resulting in the deconsolidation of Everest Re Capital Trust (“Capital Trust”) and Everest Re Capital Trust II (“Capital Trust II”). The 2003 consolidated balance sheet and statement of operations and comprehensive income have been restated to reflect the deconsolidation.

Capital Trust II and Capital Trust are wholly owned finance subsidiaries of Holdings that issued trust preferred securities on March 29, 2004 ($320 million of trust preferred securities) and November 14, 2002 ($210 million of trust preferred securities), respectively.

The proceeds of the March 29, 2004 and November 14, 2002 trust preferred securities offerings, together with Holdings’ investments in Capital Trust II ($9.9 million) and Capital Trust ($6.5 million), which are held as equity investments on the consolidated balance sheets, were used to purchase from Holdings $329.9 million of 6.20% junior subordinated debt securities and $216.5 million of 7.85% junior subordinated debt securities, respectively.

7

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

For the Three and Nine Months Ended September 30, 2004 and 2003

The impact of the deconsolidation effectively substituted Holdings’ junior subordinated debt securities, which are held by Capital Trust and Capital Trust II, for the trust preferred securities previously reported.

In March 2004, the Emerging Issue Task Force (“EITF”) reached a final consensus on Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. This issue establishes guidance for determining whether to record impairment losses associated with investments in certain equity and debt securities. The application of this issue was required for reporting periods beginning after June 15, 2004. On September 30, 2004, the FASB issued a final FASB Staff Position EITF Issue 03-1-1, which delayed the effective date for the measurement and recognition guidance included in paragraphs 10 through 20 of EITF Issue 03-1. The Company is unable to predict the impact on other-than-temporary impairments until the guidance is finalized. Currently, the Company continues to apply Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“FAS 115”) and the Securities and Exchange Commission (“SEC”)‘s Staff Accounting Bulletin Topic 5:M, “Other Than Temporary Impairment Of Certain Investments In Debt And Equity Securities,” and believes that unrealized losses in its investment portfolio are temporary in nature.

3. Capital Transactions

Group has a shelf registration statement on Form S-3 on file with the SEC, which was declared effective by the SEC on December 22, 2003, that provides for the issuance of up to $975.0 million of securities. Generally, under this shelf registration statement, Group is authorized to issue common shares, preferred shares, debt securities, warrants and hybrid securities, Holdings is authorized to issue debt securities and Capital Trust II and Everest Re Capital Trust III (“Capital Trust III”) are authorized to issue trust preferred securities. The following securities have been issued pursuant to that registration statement, which at October 7, 2004 has a remaining balance of $405.0 million.

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

  o On October 6, 2004, the Company completed a public offering of $250.0 million principal amount of 5.40% senior notes due October 6, 2014, pursuant to its currently effective shelf registration statement. The net proceeds will be utilized to retire existing debt of the Company, which is coming due in March 2005, and for other general corporate purposes.

On July 30, 2002, Group filed a shelf registration statement on Form S-3 with the SEC, providing for the issuance of up to $475.0 million of securities. Generally, under this shelf registration statement, Group was authorized to issue common shares, preferred shares, debt securities,

8

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

For the Three and Nine Months Ended September 30, 2004 and 2003

warrants and hybrid securities, Holdings was authorized to issue debt securities and Capital Trust was authorized to issue trust preferred securities. This shelf registration statement became effective on September 26, 2002 and was effectively exhausted with the April 23, 2003 transaction described below. The following securities were issued pursuant to that registration statement.

  o On November 14, 2002, Capital Trust, an unconsolidated affiliate, issued trust preferred securities resulting in a takedown from the shelf registration statement of $210 million. In conjunction with the issuance of Capital Trust’s trust preferred securities, Holdings issued $216.5 million of 7.85% junior subordinated debt securities due November 15, 2032 to Capital Trust. The proceeds from the junior subordinated debt securities issuance were primarily used for capital contributions to Holdings’ operating subsidiaries.

  o On April 23, 2003, Group expanded the size of the remaining shelf registration to $318 million by filing a Post-Effective Amendment under Rule 462(b) of the Securities Act of 1933, as amended, and General Instruction IV of Form S-3 promulgated there under. On the same date, Group issued 4,480,135 of its common shares at a price of $70.75 per share, which resulted in $317.0 million in proceeds, before expenses of approximately $0.2 million.

4. Contingencies

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

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

9

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

For the Three and Nine Months Ended September 30, 2004 and 2003

reinsurance coverage; and (g) uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure.

With respect to asbestos claims in particular, several additional factors have emerged in recent years that further compound the difficulty in estimating the Company’s liability. These developments include: (a) continued growth in the number of claims filed, in part reflecting a much more aggressive plaintiff bar and including claims against defendants formerly regarded as “peripheral”; (b) a disproportionate percentage of claims filed by individuals with no functional injury, which should have little to no financial value but that have increasingly been considered in jury verdicts and settlements; (c) the growth in the number and significance of bankruptcy filings by companies as a result of asbestos claims (including, more recently, bankruptcy filings in which companies attempt to resolve their asbestos liabilities in a manner that is prejudicial to insurers and forecloses insurers from the negotiation of bankruptcy plans); (d) the concentration of claims in a small number of states that favor plaintiffs; (e) the growth in the number of claims that might impact the general liability portion of insurance policies rather than the product liability portion; (g) measures adopted by specific courts to ameliorate the worst procedural abuses; (h) an increase in settlement values being paid to asbestos claimants, especially those with cancer or functional impairment; (i) legislation in some states to address asbestos litigation issues; and (j) the potential that other states or the U.S. Congress may adopt legislation on asbestos litigation.

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

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

Due to the uncertainties discussed above, the ultimate losses attributable to A&E and particularly asbestos may be subject to more variability than are non-A&E reserves and, depending on coverage under the Company’s various reinsurance arrangements, such variation could have a material adverse effect on the Company’s financial condition, results of operations and/or cash flows.

10

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

For the Three and Nine Months Ended September 30, 2004 and 2003

The following table shows the development of prior year A&E reserves on both a gross and net of retrocessional basis for the periods indicated:

      Three Months Ended Nine Months Ended
      September 30, September 30,
(Dollars in thousands)       2004     2003     2004     2003  
Gross basis:    
Beginning of period reserves     $ 829,899   $ 646,159   $ 765,257   $ 667,922  
Incurred losses       20,000     56,323     139,300     73,996  
Paid losses       (31,645 )   (9,702 )   (86,303 )   (49,138 )
End of period reserves     $ 818,254   $ 692,780   $ 818,254   $ 692,780  
Net basis:    
Beginning of period reserves     $ 303,983   $ 237,529   $ 262,990   $ 243,157  
Incurred losses       1,232     5,154     8,394     13,620  
Paid losses       3,556     11,839     37,387     (2,255 )
End of period reserves     $ 308,771   $ 254,522   $ 308,771   $ 254,522  

At September 30, 2004, the gross reserves for A&E losses were comprised of $146.9 million representing case reserves reported by ceding companies, $141.3 million representing additional case reserves established by the Company on assumed reinsurance claims, $326.8 million representing case reserves established by the Company on direct insurance claims including Mt. McKinley, and $203.3 million representing incurred but not reported reserves (“IBNR”).

Mt. McKinley is a reinsurer of Everest Re. Under a series of transactions dating to 1986, Mt. McKinley reinsured several components of Everest Re’s business. In particular, Mt. McKinley provided stop loss protection, in connection with the Company’s October 5, 1995 initial public offering, for any adverse loss development on Everest Re’s June 30, 1995 (December 31, 1994 for catastrophe losses) reserves, with $375.0 million in limits, of which $41.6 remains available (the “Stop Loss Agreement”). The Stop Loss Agreement and other reinsurance contracts between Mt. McKinley and Everest Re remain in effect following the Company’s acquisition of Mt. McKinley. However, these contracts became transactions with affiliates effective on the date of the Mt. McKinley acquisition. Effective September 19, 2000, Mt. McKinley and Bermuda Re entered into a loss portfolio transfer reinsurance agreement, whereby Mt. McKinley transferred, for what management believes to be arm’s-length consideration, all of its net reinsurance exposures and reserves to Bermuda Re.

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

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

11

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

For the Three and Nine Months Ended September 30, 2004 and 2003

enforce alleged rights. Such disputes are resolved through formal and informal means, including litigation and arbitration.

In all such matters, the Company believes that its positions are legally and commercially reasonable. The Company also regularly evaluates those positions, and, where appropriate, establishes or adjusts insurance reserves to reflect its evaluation. The Company’s aggregate reserves take into account the possibility that the Company may not ultimately prevail in each and every disputed matter. The Company believes its aggregate reserves reduce the potential that an adverse resolution of one or more of these matters, at any point in time, would have a material impact on the Company’s financial condition or results of operations. However, there can be no assurances that adverse resolutions of such matters in any one period or in the aggregate will not result in a material adverse effect on the Company’s results of operations.

In 1993 and prior, the Company had a business arrangement with The Prudential wherein, for a fee, the Company accepted settled claim payment obligations of certain property and casualty insurers and, concurrently, became the owner of the annuity or assignee of the annuity proceeds funded by the property and casualty insurers specifically to fulfill these fully settled obligations. In these circumstances, the Company would be liable if The Prudential, which has an A+ (Superior) financial strength rating from A.M. Best Company (“A.M. Best”), were unable to make the annuity payments. The estimated cost to replace all such annuities for which the Company was contingently liable at September 30, 2004 was $155.0 million.

Prior to its 1995 initial public offering, the Company had purchased annuities from an unaffiliated life insurance company with an A+ (Superior) financial strength rating from A.M. Best to settle certain claim liabilities of the Company. Should the life insurance company become unable to make the annuity payments, the Company would be liable for those claim liabilities. The estimated cost to replace such annuities at September 30, 2004 was $17.0 million.

5. Other Comprehensive Income

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

      Three Months Ended Nine Months Ended
      September 30,   September 30,
(Dollars in thousands)       2004     2003     2004     2003
Net unrealized appreciation    
   (depreciation) of investments,    
   net of deferred income taxes     $ 91,604   $ (69,979 ) $ (25,500 ) $ 31,168
Currency translation    
   adjustments, net of deferred    
   income taxes       4,593     (4,301 )   268     10,058
Other comprehensive income    
   (loss), net of deferred income    
   taxes     $ 96,197   $ (74,280 ) $ (25,232 ) $ 41,226

12

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

For the Three and Nine Months Ended September 30, 2004 and 2003

6. Letters of Credit

The Company has arrangements available for the issuance of letters of credit, which letters are generally collateralized by the Company’s cash and investments. Under these arrangements, at September 30, 2004 and December 31, 2003, letters of credit in an aggregate amount of $0.0 million and $104.3 million, respectively, were issued and outstanding, generally supporting reinsurance provided by the Company’s non-U.S. operations. Effective January 1, 2004, Everest Re sold its United Kingdom branch to Bermuda Re, a Bermuda insurance company and direct subsidiary of Group. The outstanding letters of credit supporting reinsurance provided by the London branch were transferred to Bermuda Re as part of the sale transaction.

7. Trust Agreements

A subsidiary of the Company, Everest Re has established a trust agreement as security for assumed losses payable of a non-affiliated ceding company, which effectively uses Company investments as collateral. At September 30, 2004, the total amount on deposit in the trust account was $18.6 million.

8. Senior Notes

On March 14, 2000, the Company completed public offerings of $200.0 million principal amount of 8.75% senior notes due March 15, 2010 and $250.0 million principal amount of 8.5% senior notes due March 15, 2005.

Interest expense incurred in connection with these senior notes was $9.7 million for each of the three months ended September 30, 2004 and 2003 and $29.2 million for each of the nine months ended September 30, 2004 and 2003.

9. Junior Subordinated Debt Securities Payable

On March 29, 2004, the Company issued $329.9 million of 6.20% junior subordinated debt securities due March 29, 2034. The Company can redeem the junior subordinated debt securities before their maturity at 100% of their principal amount plus accrued interest as of the date of redemption, in whole or in part, on one or more occasions at any time on or after March 30, 2009; or at any time, in whole, but not in part, within 90 days of the occurrence and continuation of specific events.

On November 14, 2002, the Company issued $216.5 million of 7.85% junior subordinated debt securities due November 15, 2032. The Company can redeem the junior subordinated debt securities before their maturity at 100% of their principal amount plus accrued interest as of the date of redemption, in whole or in part, on one or more occasions at any time on or after November 14, 2007; or at any time, in whole, but not in part, within 90 days of the occurrence and continuation of specific events.

13

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

For the Three and Nine Months Ended September 30, 2004 and 2003

Interest expense incurred in connection with these junior subordinated notes was $9.4 million and $4.2 million for the three months ended September 30, 2004 and 2003, respectively, and $23.0 million and $12.7 million for the nine months ended September 30, 2004 and 2003, respectively.

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

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

There are certain regulatory and contractual restrictions on the ability of Holdings’ operating subsidiaries to transfer funds to Holdings in the form of cash dividends, loans or advances. The insurance laws of the State of Delaware, where Holdings’ direct insurance subsidiaries are domiciled, require regulatory approval before those subsidiaries can pay dividends or make loans or advances to Holdings that exceed certain statutory thresholds. In addition, the terms of the Credit Facility (discussed below) require Everest Re, Holdings’ principal insurance subsidiary, to maintain a certain statutory surplus level as measured at the end of each fiscal year. At December 31, 2003, $1,561.1 million of the $2,264.0 million in net assets of Holdings’ consolidated subsidiaries were subject to the foregoing regulatory restrictions.

10. Credit Line

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

The Credit Facility requires the Company to maintain a debt to capital ratio of not greater than 0.35 to 1 and a minimum interest coverage ratio of 2.5 to 1 and requires Everest Re to maintain its statutory surplus at $1.0 billion plus 25% of aggregate net income and capital contributions earned or received after January 1, 2003. As of September 30, 2004, the Company was in compliance with these covenants.

During the three and nine months ended September 30, 2004 and 2003, respectively, the Company made no payments on and had no additional borrowings under the Credit Facility. As of September 30, 2004 and December 31, 2003, the Company had outstanding Credit Facility borrowings of $70.0 million.

14

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

For the Three and Nine Months Ended September 30, 2004 and 2003

Interest expense incurred in connection with these borrowings was $0.3 million for each of the three months ended September 30, 2004 and 2003 and $1.0 million for each of the nine months ended September 30, 2004 and 2003.

11. Segment Reporting

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

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

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

Effective January 1, 2004, Everest Re sold the net assets of its United Kingdom branch to Bermuda Re, a Bermuda insurance company and direct subsidiary of Group, for $77.0 million. In connection with the sale, Everest Re provided Bermuda Re with a reserve indemnity agreement providing for indemnity payments of up to 90% of £25 million in the event December 31, 2002 loss and LAE reserves develop adversely. The impact on the financial statements for the nine months ended September 30, 2004 was a dividend to Group of $26.3 million as net assets sold exceeded the purchase price, an underwriting gain of $10.9 million due to the sale related transactions of the 2003 and 2002 whole account quota shares with Bermuda Re (discussed in Note 14) and an increase in the current period incurred losses of $36.8 million relating to liability under the reserve indemnity agreement with Bermuda Re. Business for the UK branch was previously reported as part of the Company’s International segment.

15

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

For the Three and Nine Months Ended September 30, 2004 and 2003

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

                      U.S. Reinsurance
 
      Three Months Ended     Nine Months Ended  
      September 30,     September 30,  
(Dollars in thousands)       2004     2003     2004     2003  
Gross written premiums     $ 362,129   $ 533,497   $ 1,048,879   $ 1,259,026  
Net written premiums       287,779     412,614     823,368     951,193  
                             
Premiums earned     $ 266,611   $ 336,747   $ 811,794   $ 786,943  
Incurred losses and loss    
 adjustment expenses       267,820     266,010     649,921     597,590  
Commission and brokerage       60,645     80,828     195,400     188,385  
Other underwriting expenses       4,655     4,935     16,326     15,341  
Underwriting loss     $ (66,509 ) $ (15,026 ) $ (49,853 ) $ (14,373 )

                      U.S. Insurance
 
      Three Months Ended     Nine Months Ended  
      September 30,     September 30,  
(Dollars in thousands)       2004     2003     2004     2003  
Gross written premiums     $ 253,245   $ 221,604   $ 918,470   $ 808,297  
Net written premiums       167,826     135,145     635,963     563,565  
                             
Premiums earned     $ 192,965   $ 173,680   $ 546,624   $ 505,448  
Incurred losses and loss    
 adjustment expenses       128,676     131,843     397,843     368,927  
Commission and brokerage       24,118     21,152     52,098     81,221  
Other underwriting expenses       11,153     9,231     32,467     25,714  
Underwriting gain     $ 29,018   $ 11,454   $ 64,216   $ 29,586  

                             Specialty Underwriting
 
      Three Months Ended     Nine Months Ended  
      September 30,     September 30,  
(Dollars in thousands)       2004     2003     2004     2003  
Gross written premiums     $ 127,975   $ 124,090   $ 352,565   $ 393,762  
Net written premiums       95,431     94,316     273,476     301,388  
                             
Premiums earned     $ 93,070   $ 91,688   $ 270,428   $ 295,538  
Incurred losses and loss    
 adjustment expenses       71,574     58,649     177,481     202,747  
Commission and brokerage       26,224     23,427     72,613     78,128  
Other underwriting expenses       1,386     1,473     4,841     4,392  
Underwriting (loss) gain     $ (6,114 ) $ 8,139   $ 15,493   $ 10,271  

16

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

For the Three and Nine Months Ended September 30, 2004 and 2003

                    International
 
      Three Months Ended     Nine Months Ended  
      September 30,     September 30,  
(Dollars in thousands)       2004     2003     2004     2003  
Gross written premiums     $ 204,084   $ 275,798   $ 512,337   $ 645,462  
Net written premiums       143,194     198,598     366,283     431,927  
                             
Premiums earned     $ 135,441   $ 174,780   $ 349,050   $ 386,258  
Incurred losses and loss    
 adjustment expenses       101,819     115,410     212,103     250,048  
Commission and brokerage       31,805     32,751     74,923     70,646  
Other underwriting expenses       2,530     4,221     8,000     11,491  
Underwriting (loss) gain     $ (713 ) $ 22,398   $ 54,024   $ 54,073  

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

      Three Months Ended   Nine Months Ended  
      September 30,   September 30,  
(Dollars in thousands)     2004   2003     2004   2003
Underwriting (loss) gain from segments     $ (44,318 ) $ 26,965   $ 83,880   $ 79,557  
UK branch sale and related    
   transactions       -     -     (25,894 )   -  
Underwriting (loss) gain       (44,318 )   26,965     57,986     79,557  
Net investment income       81,227     70,619     242,381     211,010  
Net realized capital gains (losses)       9,388     (11,843 )   59,846     (23,922 )
Corporate expense       (447 )   (1,115 )   (115 )   (3,074 )
Interest expense       (19,439 )   (14,309 )   (53,236 )   (42,979 )
Other (expense) income       (30,378 )   625     (74,313 )   1,202  
(Loss) income before taxes     $ (3,967 ) $ 70,942   $ 232,549   $ 221,794  

The comparability of the International segment underwriting results has been impacted by the sale of the UK branch from Everest Re to Bermuda Re. In order to provide comparability, the 2003 results for the International segment need to be adjusted to exclude the UK branch activity. Effectively, these adjustments remove the UK branch from 2003 in the International segment underwriting results allowing for the comparability of the results period over period.

17

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

For the Three and Nine Months Ended September 30, 2004 and 2003

The following table reflects the underwriting results for the International segment as reported for the three and nine months ended September 30, 2004 and proforma for the three and nine months ended September 30, 2003:

  Three Months Ended   Nine Months Ended  
September 30,   September 30,  
  International   International   International   International  
  Segment   Segment   Segment   Segment  
  2004   2003   2004   2003  
(Dollars in thousands) As Reported   Proforma   As Reported   Proforma  
Gross written premiums $   204,084   $   135,520   $   512,337   $   325,662  
Ceded written premiums     (60,890 )     (48,132 )     (146,054 )     (131,875 )
Net written premiums $   143,194   $   87,388   $   366,283   $   193,787  
 
Premiums earned $   135,441   $   82,093   $   349,050   $   183,050  
Incurred losses and loss adjustment 
  expenses     101,819       47,780       212,103       106,275  
Commission, brokerage, taxes and fees     31,805       17,537       74,923       35,319  
Other underwriting expenses     2,530       2,233       8,000       6,906  
Underwriting (loss) gain $   (713 ) $   14,543   $   54,024   $   34,550  

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

12. Derivatives

The Company has remaining in its product portfolio a credit default swap, which it no longer offers. This product meets the definition of a derivative under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”). The Company’s position in this contract is unhedged and is accounted for as a derivative in accordance with FAS 133. Accordingly, this contract is carried at fair value and is recorded in “Other liabilities” in the balance sheet and changes in fair value are recorded in the statement of operations and comprehensive income.

13. Investments — Interest Only Strips

Commencing with the second quarter of 2003 and through the second quarter of 2004, the Company had investments in interest only strips of mortgage-backed securities (“interest only strips”). These securities give the holder the right to receive interest payments at a stated coupon rate on an underlying pool of mortgages. The interest payments on the outstanding mortgages are guaranteed by entities generally rated AAA. The ultimate cash flow from these investments is primarily dependent upon the average life of the mortgage pool. Generally, as market interest rates and, more specifically, market mortgage rates decline, mortgagees tend to refinance which will decrease the average life of a mortgage pool and decrease expected cash flows. Conversely,

18

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

For the Three and Nine Months Ended September 30, 2004 and 2003

as market interest rates and, more specifically, mortgage rates rise, repayments will slow and the ultimate cash flows will tend to rise. Accordingly, the market value of these investments tends to increase as general interest rates rise and decline as general interest rates fall. These movements are generally counter to the impact of interest rate movements on the Company’s other fixed income investments. As interest rates rose during the second quarter of 2004, the Company fully liquidated its interest only strip investment portfolio.

The Company accounted for its investment in interest only strips in accordance with Emerging Issues Task Force No. 99-20, “Recognition of Interest Income and Impairment on Purchases and Beneficial Interests in Securitized Financial Assets”(“EITF 99-20”). EITF 99-20 sets forth the rules for recognizing interest income on all credit-sensitive mortgage and asset-backed securities and certain prepayment-sensitive securities, including agency interest only strips, whether purchased or retained in securitization, as well as the rules for determining when these securities must be written down to fair value because of impairment. EITF 99-20 requires decreases in the valuation of residual interests in securitizations to be recorded as a reduction to the carrying value of the residual interests through a charge to earnings, rather than an unrealized loss in stockholders’ equity, when any portion of the decline in fair value is attributable to, as defined by EITF 99-20, an impairment loss. This portfolio was liquidated during the second quarter of 2004 and as such there were no impairments recorded for the three months ended September 30, 2004. The Company recorded realized capital losses due to impairments of $28.5 million, net of income tax benefit of $15.4 million for the nine months ended September 30, 2004 and $13.7 million, net of income tax benefit of $7.4 million for the nine months ended September 30, 2003. As a result of liquidating the interest only strip investment portfolio during the second quarter of 2004, the Company recognized pre-tax realized gains of $77.6 million.

14. Related-Party Transactions

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

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

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

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

19

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

For the Three and Nine Months Ended September 30, 2004 and 2003

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

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

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

  o Effective January 1, 2003 and continuing through March 2004, Everest Re has a quota share reinsurance agreement with Bermuda Re, whereby Everest Re’s Canadian branch cedes to Bermuda Re 50% of its net retained liability on all new and renewal property business.

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

20

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

For the Three and Nine Months Ended September 30, 2004 and 2003

The following table summarizes the premiums and losses ceded by the Company to Bermuda Re and Everest International, respectively, for the periods indicated:

                  Bermuda Re
 
      Three Months Ended Nine Months Ended
      September 30, September 30,
(Dollars in thousands)       2004     2003     2004     2003  
Ceded written premiums     $ 198,859   $ 269,487   $ 439,052   $ 704,579  
Ceded earned premiums       198,847     218,663     426,054     561,902  
Ceded losses and LAE (a)       231,680     140,868     414,262     361,083  

                     Everest International
 
      Three Months Ended Nine Months Ended
      September 30, September 30,
(Dollars in thousands)       2004     2003     2004     2003  
Ceded written premiums     $ 18,867   $ –   $ 38,054   $ –  
Ceded earned premiums       13,120     –     23,009     –  
Ceded losses and LAE       13,713     –     19,358     –  

(a) Ceded losses and LAE relates to the Mt. McKinley loss portfolio transfer and constitute losses ceded under retroactive reinsurance and therefore, in accordance with FAS 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts,” a deferred gain on retroactive reinsurance is reflected in other expense on the consolidated statements of operations.

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

15. Subsequent Events

On October 6, 2004, the Company completed a public offering of $250.0 million principal amount of 5.40% senior notes due October 6, 2014, pursuant to its currently effective shelf registration statement, leaving a remaining balance on the registration statement of $405 million. The net proceeds will be utilized to retire existing debt of the Company, which is coming due in March 2005, and for other general corporate purposes.

21

Part I — Item 2.

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

RESULTS OF OPERATIONS

Industry Conditions

The worldwide reinsurance and insurance businesses are highly competitive yet cyclical by product and market. Competition with respect to the types of reinsurance and insurance business in which the Company is engaged is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer by A.M. Best Company and/or Standard & Poor’s (“S&P”) Rating Services, 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. The Company competes in the U.S. and international reinsurance and insurance markets with numerous international and domestic reinsurance and insurance companies. The Company’s competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies and domestic and international underwriting operations, including underwriting syndicates at Lloyd’s. Some of these competitors have greater financial resources than the Company and have established long-term and continuing business relationships throughout the industry, which can be a significant competitive advantage. In addition, the potential for securitization of reinsurance and insurance risks through capital markets provides an additional source of potential reinsurance and insurance capacity and competition.

Thus far in 2004, the favorable market conditions, which developed during 2000 through 2003, have generally begun to weaken. There are signs that pricing for most property classes has declined modestly and that pricing for most casualty classes has started to soften. Competition is increasing despite the fact that the industry generally still remains exposed to fundamental issues that negatively impacted its aggregate capacity in 2002 and 2003, including weak investment market conditions and adverse loss emergence. Both of these tend to depress the industry’s aggregate financial performance and perceptions of financial strength of industry participants. It is unclear whether the property catastrophe losses experienced by the industry in the three months ended September 30, 2004 will reverse, stop or even moderate the current year’s trends, particularly as respects property classes.

Through 2003, reinsurance and insurance markets had generally continued to firm, reflecting the continuing, although diminishing, implications of losses arising from the terrorist attacks of September 11, 2001 and, more broadly, the impact of aggregate company reactions to broad and growing recognition that competition in the late 1990s reached extremes in many classes and markets, which ultimately led to inadequate pricing and overly broad terms, conditions and coverages. The effect of these extremes, which became apparent through excessive loss emergence, varied widely by company depending on product offerings, markets accessed, underwriting and operating practices, competitive strategies and business volumes. Across all market participants, however, the aggregate general effect was depressed financial results and erosion of the industry capital base. Coupled with deteriorating investment market conditions

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and results, and renewed concerns regarding longer-term industry specific issues, including asbestos exposure and sub-par capital returns, these financial impacts introduced substantial, and in some cases extreme, pressure for the initiation and/or strengthening of corrective action by individual market participants. These pressures, aggregating across industry participants, reinforced the trend established in 2000 through 2003 toward firming prices, more restrictive terms and conditions, tightened coverage availability across most classes and markets and increasing concern with respect to the financial security of insurance and reinsurance providers.

The Company has been somewhat disappointed by industry developments thus far in 2004, which have generally operated to modestly weaken pricing. The Company cannot predict with any reasonable certainty whether and to what extent these trends or conditions will persist and in particular whether the property catastrophe losses experienced by the industry in the three months ended September 30, 2004 will lessen competitive pressures, particularly for the property classes of business. Notwithstanding these catastrophe losses, changes in the Lloyd’s market and the potential reemergence of a market share orientation among some industry participants, combined with improving and in some cases strong financial results, continue to contribute to uncertainty about the prospective level of competitive pressures.

Financial Summary

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

Consolidated Net Income                  
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(Dollars in thousands)   2004     2003     2004     2003  
Gross written premiums $ 947,433   $ 1,154,989   $ 2,832,251   $ 3,106,547  
Net written premiums   694,230     840,673     2,238,841     2,248,073  
                         
REVENUES:    
Premiums earned $ 688,087   $ 776,895   $ 2,096,711     1,974,187  
Net investment income   81,227     70,619     242,381     211,010  
Net realized capital gains (losses)   9,388     (11,843 )   59,846     (23,922 )
Other (expense) income   (30,378 )   625     (74,313 )   1,202
Total revenues   748,324     836,296     2,324,625     2,162,477  
                         
CLAIMS AND EXPENSES:    
Incurred losses and loss adjustment expenses   569,889     571,914     1,551,095     1,419,312  
Commission, brokerage, taxes and fees   142,792     158,158     425,996     418,380  
Other underwriting expenses   20,171     20,973     61,749     60,012  
Interest expense   19,439     14,309     53,236     42,979  
Total claims and expenses   752,291     765,354     2,092,076     1,940,683  
                         
(LOSS) INCOME BEFORE TAXES   (3,967 )   70,942     232,549     221,794  
Income tax (benefit) expense   (11,666 )   10,451     57,719     45,785  
NET INCOME $ 7,699   $ 60,491   $ 174,830   $ 176,009  

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Underwriting gain (loss) or underwriting results is a non-GAAP standard measure of performance used with related ratio analysis by the Company to evaluate financial performance of its reinsurance operations and is considered an important measure of profitability by analysts and investors in the insurance industry. Underwriting gain (loss) is calculated as premiums earned less incurred losses and loss adjustment expenses (“LAE”); commission, brokerage, taxes and fees; and non-corporate other underwriting expenses. The following tables provide reconciliations from net income to underwriting results and total underwriting results by segment for the periods indicated:

Underwriting Results                            
      Three Months Ended     Nine Months Ended  
      September 30,     September 30,  
(Dollars in thousands)       2004     2003     2004     2003  
Net income (from table above)     $ 7,699   $ 60,491   $ 174,830   $ 176,009  
    Net investment income       (81,227 )   (70,619 )   (242,381 )   (211,010 )
    Net realized capital (gains) losses       (9,388 )   11,843     (59,846 )   23,922  
    Other expense (income)       30,378     (625 )   74,313     (1,202 )
    Corporate expense       447     1,115     115     3,074  
    Interest expense       19,439     14,309     53,236     42,979  
    Income tax (benefit) expense       (11,666 )   10,451     57,719     45,785  
Underwriting (loss) gain       (44,318 )   26,965     57,986     79,557  
    UK branch sale and related transactions       -     -     25,894     -  
Underwriting (loss) gain from segments     $ (44,318 ) $ 26,965   $ 83,880   $ 79,557  
                             
Loss ratio       82.8 %   73.6 %   74.0 %   71.9 %
Commission and expense ratio       20.8     20.4     20.3     21.2  
Other underwriting expense ratio       2.9     2.7     2.9     3.0  
Combined ratio       106.5 %   96.7 %   97.2 %   96.1 %
                             
                             
Underwriting Results By Segment   
      Three Months Ended     Nine Months Ended  
      September 30,     September 30,  
(Dollars in thousands)       2004     2003     2004     2003  
U.S. Reinsurance     $ (66,509 ) $ (15,026 ) $ (49,853 ) $ (14,373 )
U.S. Insurance       29,018     11,454     64,216     29,586  
Specialty Underwriting       (6,114 )   8,139     15,493     10,271  
International       (713 )   22,398     54,024     54,073  
Underwriting (loss) gain     $ (44,318 ) $ 26,965   $ 83,880   $ 79,557  

The comparability of the above financial results has been impacted by the sale of the UK branch from Everest Re to Bermuda Re and the associated Everest Re and Bermuda Re reserve indemnity agreement, as well as sale related adjustments to the 2003 and 2002 quota share cessions. In order to provide comparability of the financial results between the years, the 2003 results need to be adjusted to exclude the UK branch activity. For the three months ended September 30, 2003, gross written premiums, net written premiums, premiums earned, incurred losses and LAE and underwriting expenses would decrease by $140.3 million, $111.2 million, $92.7 million, $67.6 million and $17.2 million, respectively, resulting in a net decrease in underwriting gain of $7.9 million. For the nine months ended September 30, 2003, gross written premiums, net written premiums, premiums earned, incurred losses and LAE and underwriting

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expenses would decrease by $319.8 million, $238.1 million, $203.2 million, $143.8 million and $39.9 million, respectively, resulting in a net decrease in underwriting gain of $19.5 million. Effectively, these adjustments remove the UK branch from the three and nine month 2003 underwriting results.

The following tables reflect the reconciliation from reported to proforma segment underwriting results for the periods indicated:

  Three Months Ended September 30, 2003
 
          UK Branch          
(Dollars in thousands) As Reported   Adjustment   Proforma  
Gross written premiums $   1,154,989   $   (140,278 ) $   1,014,711  
Ceded written premiums     314,316       (29,068 )     285,248  
Net written premiums $   840,673   $   (111,210 ) $   729,463  
 
Premiums earned $   776,895   $   (92,687 ) $   684,208  
Incurred losses and loss adjustment expenses     571,914       (67,630 )     504,284  
Commission, brokerage, taxes and fees     158,158       (15,214 )     142,944  
Other underwriting expense     19,858       (1,988 )     17,870  
Underwriting gain from segments $   26,965   $   (7,855 ) $   19,110  
 
Loss ratio   73.6%             73.7%  
Commission ratio        20.4                  20.9
Other underwriting expense ratio         2.5             2.6
Combined ratio   96.5%         97.2%  

  Nine Months Ended September 30, 2003
 
          UK Branch          
(Dollars in thousands) As Reported   Adjustment   Proforma  
Gross written premiums $   3,106,547   $   (319,800 ) $   2,786,747  
Ceded written premiums     858,474       (81,660 )     776,814  
Net written premiums $   2,248,073   $   (238,140 ) $   2,009,933  
 
Premiums earned $   1,974,187   $   (203,208 ) $   1,770,979  
Incurred losses and loss adjustment expenses     1,419,312       (143,773 )     1,275,539  
Commission, brokerage, taxes and fees     418,380       (35,327 )     383,053  
Other underwriting expense     56,938       (4,585 )     52,353  
Underwriting gain from segments $   79,557   $   (19,523 ) $   60,034  
 
Loss ratio   71.9%             72.0%  
Commission ratio        21.2                  21.6
Other underwriting expense ratio          2.9              3.0
Combined ratio   96.0%         96.6%  

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Additionally, in order to provide comparability of the financial results between the years, the 2004 results need to be adjusted to exclude the one-time effects associated with the branch sale wherein ceded written premiums would increase by $139.8 million, net written premiums would decrease by $139.8 million and premiums earned, incurred losses and LAE and underwriting expenses would decrease by $118.8 million, $113.7 million and $31.0 million, respectively, resulting in a net increase in underwriting gain of $25.9 million. This adjusts the nine months ended September 30, 2004 underwriting results to exclude the one-time effects related to the sale.

The following table reflects the reconciliation from reported to proforma segment underwriting results for the period indicated:

  Nine Months Ended September 30, 2004
 
          UK Branch          
(Dollars in thousands) As Reported   Adjustment   Proforma  
Gross written premiums $   2,832,251   $   –   $   2,832,251  
Ceded written premiums     593,410       139,751       733,161  
Net written premiums $   2,238,841   $   (139,751 ) $   2,099,090  
 
Premiums earned $   2,096,711   $   (118,815 ) $   1,977,896  
Incurred losses and loss adjustment expenses     1,551,095       (113,747 )     1,437,348  
Commission, brokerage, taxes and fees     425,996       (30,962 )     395,034  
Other underwriting expense     61,634       -       61,634  
Underwriting gain $   57,986   $   25,894   $   83,880  
 
Loss ratio   74.0%             72.7%  
Commission ratio        20.3                  20.0
Other underwriting expense ratio          2.9              3.1
Combined ratio   97.2%         95.8%  

In the remainder of this Financial Summary section and the following Segment Information section, all analyses relate to the comparable proforma information, except where indicated.

As indicated in the preceding “Industry Conditions” section, the reinsurance and insurance industry generally experienced favorable market conditions from 2001 through 2003. These favorable market conditions, coupled with the Company’s financial strength, strategic positioning and market and underwriting expertise, enabled the Company to increase its volume of business significantly over this period. With the change in trend established thus far in 2004 and with little clarity regarding the impact of third quarter property catastrophe losses on prospective market conditions, the Company continued to adapt its operations to slow its rate of growth and even decrease writings for some classes of business and reemphasize its focus on profitability as opposed to volume. For the three months ended September 30, 2004, gross written premiums were $947.4 million, a decrease of 6.6% from the same period of 2003. On a year to date basis, gross written premiums increased to $2,832.3 million, an increase of 1.6% over 2003. In contrast, gross written premiums had increased 55.8% during fiscal year 2003 in comparison with 2002.

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In June 2004, the Company received notification of termination with respect to its contract with an insurance agency that produced the majority of its California workers’ compensation business. Under the terms of the contract, the agency continued to produce business exclusively for the Company through October 15, 2004. The business produced under this relationship will continue in force through the policy expiration dates or cancellation. In 2003, under this contract, the agency produced approximately 14% of the Company’s full year gross written premium. However, in 2004, this percentage has been expected to decline due to increasing competition and a de-emphasis of this distribution channel. The Company does not believe that the termination of this contract will have a material adverse effect on future Company operations.

Due to the nature of its businesses, the Company is unable to precisely differentiate between the effects of price changes as compared to the effects of changes in exposure. Similarly, because individual reinsurance arrangements often reflect revised coverages, structuring, pricing, terms and/or conditions from period to period, the Company is unable to differentiate between the premium volumes attributable to new business as compared to renewal business. Management believes, however, that, on balance, the Company’s growth is reasonably balanced between growth in exposures underwritten and increased pricing and/or improved terms and conditions. Management believes further that market conditions, although changing, remain generally more favorable for casualty business classes than for property business classes; however, management notes that it continues to see business opportunities in most product classes and markets. Although premium volumes on a year to date basis have increased, the Company continues to decline business that does not meet its objectives regarding underwriting profitability.

Net written premiums, comprised of gross written premiums less ceded premiums, were $694.2 million for the three months ended September 30, 2004 a decrease of 4.8% compared to 2003. On a year to date basis, net written premiums were $2,099.1 million, an increase of 4.4% compared to 2003. These reflect premiums ceded of $253.2 million (26.7% of gross written premiums) and $285.2 million (28.1% of gross written premiums) for the three months ended September 30, 2004 and 2003, respectively, and $733.2 million (25.9% of gross written premiums) and $776.8 million (27.9% of gross written premiums) for the nine months ended September 30, 2004 and 2003, respectively. The majority of cessions in both periods continue to relate to the quota share reinsurance between Everest Re and Bermuda Re and Everest International Reinsurance, Ltd. (“Everest International”).

Premiums earned were $688.1 million for the three months ended September 30, 2004, an increase of 0.6% compared to 2003. On a year to date basis, premiums earned were $1,977.9 million, an increase of 11.7% compared to 2003. These increases reflect period to period changes in net written premiums and business mix together with normal variability in earnings patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets, but also as individual contracts renew or non-renew, almost always with changes in coverage, structure, prices and/or terms, and as new contracts are accepted with coverages, structures, prices and/or terms different from those of expiring contracts.

Incurred losses and LAE were $569.9 million for the three months ended September 30, 2004, an increase of 13.0% compared to 2003. On a year to date basis, incurred losses and LAE were $1,437.3 million, an increase of 12.7% compared to 2003. The major contributing factor for these increases was the increase in incurred losses and LAE due to the third quarter property catastrophe events, particularly hurricanes Charley, Frances, Ivan and Jeanne, of $183.0 million for the three months ended September 30, 2004. Other factors including the level of incurred

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losses and LAE related to changes in volume as measured by earned premium and the effect of changes in prior period loss reserve estimates, also contributed. Incurred losses and LAE were impacted by net favorable prior period reserve adjustments of $19.9 million for the three months ended September 30, 2004 and adverse development of $1.6 million for the nine months ended September 30, 2004. Reductions in the reserves related to the World Trade Center events was the primary factor. Incurred losses and LAE were impacted by adverse development of $48.2 million and $115.9 million for the three and nine months ended September 30, 2003, respectively, principally related to adverse developments on the Company’s casualty and asbestos exposures.

Commission, brokerage and tax expense decreased $0.2 million or 0.1% for the three months ended September 30, 2004 and increased $12.0 million or 3.1% for the nine months ended September 30, 2004. The 0.1% decrease for the three months ended September 30, 2004 compared to September 30, 2003 primarily reflects changes in the mix of business and commission rates. The 3.1% increase for the nine months ended September 30, 2004 compared to September 30, 2003 is generally the result of the increasing premium volume. Other underwriting expenses also increased due to the increase in business for the nine months ended September 30, 2004 compared to September 30, 2003.

Net investment income increased to $81.2 million, an increase of 15.0%, from $70.6 million for the three months ended September 30, 2004 compared to the three months ended September 30, 2003, and to $242.4 million, an increase of 14.9%, from $211.0 million for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. Net investment income for the three and nine months ended, September 30, 2004 included a $5.4 million and $29.7 million increase, respectively, arising from an atypical increase in the value of one of the Company’s limited partnership investments. Excluding this increase, the net investment income increase generally reflected growth in the Company’s cash and invested assets coupled with a generally variable and lower interest rate environment.

The Company’s cash flow from operations was $232.5 million, a decrease of 28.7% from $325.9 million for the three months ended September 30, 2004 compared to the three months ended September 30, 2003 and to $769.7 million, a slight decrease from $769.8 million for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. Coupled with the issuance of junior subordinated debt securities, this contributed to the growth in the Company’s total investments and cash to $7,066.1 million as of September 30, 2004 from $6,412.4 million at December 31, 2003.

Net realized capital gains were $9.4 million and $59.8 million for the three and nine months ended September 30, 2004, respectively, compared to net realized capital losses of $11.8 million and $23.9 million for the three and nine months ended September 30, 2003, respectively. The net realized capital gains in 2004 were primarily the result of the gains on the sale of the interest only strips of mortgage-backed securities (“interest only strips”) investment portfolio. The net realized capital losses in 2003 were primarily the result of valuation adjustments on the interest only strip portfolio in accordance with Emerging Issues Task Force No. 99-20, “Recognition of Interest Income and Impairment on Purchases and Beneficial Interests in Securitized Financial Assets” (EITF 99-20”).

The Company incurred an income tax benefit of $11.7 million and an income tax expense of $10.5 million for the three months ended September 30, 2004 and 2003, respectively, and an income tax expense of $57.7 million and $45.8 million for the nine months ended September 30,

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2004 and 2003, respectively. The decrease in tax expense for the three months ended September 30, 2004 as compared to 2003 primarily reflected the impact of the catastrophe losses on 2004 underwriting results, which were partially offset by additional taxable net investment income and taxable realized capital gains. The increase in tax expense for the nine months ended September 30, 2004 as compared to 2003 generally reflected the impact of realized capital gains and increased investment income, partially offset by the impact of catastrophe losses on underwriting results. Additionally, in conjunction with the transfer of the Company’s UK branch to Bermuda Re there were various tax issues giving rise to net expenses and benefits, affecting the variability between years.

The decrease in net income to $7.7 million from $60.5 million for the three months ended September 30, 2004 and 2003, respectively, generally reflected a decrease in underwriting results due to the impact of property and catastrophe event losses including hurricanes Charley, Frances, Ivan, and Jeanne and related tax benefits associated with those losses, partially offset by improved investment results and realized capital gains. The decrease in net income to $174.8 million from $176.0 million for the nine months ended September 30, 2004 and 2003, respectively, generally reflected a decrease in underwriting results due to the catastrophes and increased income taxes, partially offset by improved investment results and realized capital gains.

The Company’s stockholders’ equity increased to $1,678.0 million at September 30, 2004 from $1,546.9 million at December 31, 2003. This increase was primarily due to net income for the period, partially offset by reductions in unrealized appreciation on the Company’s fixed maturity portfolio and dividends paid.

Segment Information

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

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

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Effective January 1, 2004, Everest Re sold its United Kingdom branch to Bermuda Re, a Bermuda insurance company and a direct subsidiary of Group. Prior to 2004, business for this branch was previously included in the results of the International segment. The comparability of the financial results has been impacted by the sale of the UK branch from Everest Re to Bermuda Re. In order to provide comparability of the financial results between the years, the three months ended September 30, 2003 results for the International segment need to be adjusted to exclude the UK branch activity wherein gross written premiums, net written premiums, premiums earned, incurred losses and LAE and underwriting expenses would decrease by $140.3 million, $111.2 million, $92.7 million, $67.6 million, and $17.2 million, respectively, resulting in a net decrease in underwriting gain of $7.9 million. For the nine months ended September 30, 2003, gross written premiums, net written premiums, premiums earned, incurred losses and LAE and underwriting expenses would decrease by $319.8 million, $238.1 million, $203.2 million, $143.8 million and $39.9 million, respectively, resulting in a net decrease in underwriting gain of $19.5 million. Effectively, these adjustments remove the UK branch from the three and nine month 2003 International underwriting results making period over period results comparable.

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The following tables reflect reconciliations from reported to proforma underwriting results for the International segment for the periods indicated.

      Three Months Ended September 30, 2003
 
              UK Branch        
(Dollars in thousands)     As Reported   Adjustment   Proforma
Gross written premiums     $ 275,798   $ (140,278 ) $ 135,520  
Ceded written premiums       77,200     (29,068 )   48,132  
Net written premiums     $ 198,598   $ (111,210 ) $ 87,388  
 
Premiums earned     $ 174,780   $ (92,687 ) $ 82,093  
Incurred losses and loss adjustment expenses       115,410     (67,630 )   47,780  
Commission, brokerage, taxes and fees       32,751     (15,214 )   17,537  
Other underwriting expense       4,221     (1,988 )   2,233  
Underwriting gain     $ 22,398   $ (7,855 ) $ 14,543  
 
Loss ratio     66.0%         58.2%  
Commission ratio              18.7                  21.4
Other underwriting expense ratio                2.5              2.7
Combined ratio     87.2%     82.3%  

      Nine Months Ended September 30, 2003
 
              UK Branch        
(Dollars in thousands)     As Reported   Adjustment   Proforma
Gross written premiums     $ 645,462   $ (319,800 ) $ 325,662  
Ceded written premiums       213,535     (81,660 )   131,875  
Net written premiums     $ 431,927   $ (238,140 ) $ 193,787  
 
Premiums earned     $ 386,258   $ (203,208 ) $ 183,050  
Incurred losses and loss adjustment expenses       250,048     (143,773 )   106,275  
Commission, brokerage, taxes and fees       70,646     (35,327 )   35,319  
Other underwriting expense       11,491     (4,585 )   6,906  
Underwriting gain     $ 54,073   $ (19,523 ) $ 34,550  
 
Loss ratio     64.7%         58.1%  
Commission ratio              18.3                  19.3
Other underwriting expense ratio                3.0              3.7
Combined ratio     86.0%     81.1%  

All the comparative analysis in this Segment Information section relates to the proforma information in the above table except where indicated otherwise.

Three Months Ended September 30, 2004 compared to Three Months Ended September 30, 2003

Premiums.    Gross written premiums decreased 6.6% to $947.4 million in the three months ended September 30, 2004 from $1,014.7 million in the three months ended September 30, 2003,

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reflecting increased competitive pressures on pricing, particularly on U.S. Reinsurance property and casualty classes of business.

Adjusting to these market conditions, the U.S. Reinsurance operation decreased 32.1% ($171.4 million), principally reflecting a $128.8 million decrease in treaty casualty business, a $19.4 million decrease in treaty property business and a $13.7 million decrease in facultative business. Partially offsetting these decreases were areas where the Company continued to grow. The International operation saw a 50.6% ($68.6 million) increase, primarily due to a $49.9 million increase in international business written through the Miami and New Jersey offices, representing primarily Latin American business and a $19.4 million increase in Asian business. The U.S. Insurance operation grew 14.3% ($31.6 million), principally as a result of a $53.3 million increase in program business outside of the workers’ compensation class, partially offset by a $21.7 million decrease in workers’ compensation business. The effect of the previously noted cancellation of the Company’s largest California workers’ compensation agency arrangement will impact this segment although not until the quarter ending December 31, 2004 and subsequent quarters. The Specialty Underwriting operation increased 3.1% ($3.9 million), resulting primarily from a $10.6 million increase in marine and aviation business and a $5.1 million increase in surety business, partially offset by an $11.8 million decrease in A&H business, reflective of softening in pricing of this business class.

Ceded premiums decreased to $253.2 million for the three months ended September 30, 2004 from $285.2 million in the three months ended September 30, 2003. The decrease in ceded premiums is primarily related to reduced cessions under the Bermuda Re quota share agreements due to the decrease in gross written premiums and the absence of cessions, in 2004, under the corporate level aggregate reinsurance coverages.

Net written premiums decreased to $694.2 for the three months ended September 30, 2004, down 4.8% from $729.5 million for the three months ended September 30, 2003, reflecting the decrease in gross written premiums partially offset by the decrease in ceded written premiums.

Premium Revenues.     Net premiums earned increased to $688.1 million, or 0.6%, in the three months ended September 30, 2004 from $684.2 million in the three months ended September 30, 2003. Contributing to this increase was a 65% ($53.3 million) increase in the International operation, an 11.1% ($19.3 million) increase in the U.S. Insurance operation and a 1.5% ($1.4 million) increase in the Specialty Underwriting operation, partially offset by a 20.8% ($70.1 million) decrease in the U.S. Reinsurance operation. All of these changes reflect period to period changes in net written premiums and business mix, together with normal variability in earnings patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets, but also as individual contracts renew or non-renew, almost always with changes in coverage, structure, prices and/or terms, and as new contracts are accepted with coverages, structures, prices and/or terms different from those of expiring contracts. As premium reporting, earnings, loss and commission characteristics derive from the provisions of individual contracts, the continuous turnover of individual contracts, arising from both strategic shifts and day to day underwriting, can and does introduce appreciable background variability in various underwriting line items.

Expenses.    Incurred losses and LAE increased by 13.0% to $569.9 million in the three months ended September 30, 2004 from $504.3 million in the three months ended September 30, 2003. The increase in incurred losses and LAE was principally attributable to the increase in estimated

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catastrophe losses due to property catastrophe events including hurricanes Charley, Frances, Ivan and Jeanne, partially offset by net favorable prior period reserve adjustments.

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

Incurred losses and LAE for the three months ended September 30, 2004 reflected ceded losses and LAE of $272.0 million, which includes $46.7 million in ceded catastrophe losses compared to ceded losses and LAE in the three months ended September 30, 2003 of $170.3 million. The increase in ceded losses was primarily the result of an increase in cessions to Bermuda Re under the Mt. McKinley loss portfolio transfer and increases in premiums earned subject to the quota share agreements.

Incurred losses and LAE include catastrophe losses, which include the impact of both current period events and favorable and adverse development on prior period events, and are net of reinsurance. Individual catastrophe losses are reported net of specific reinsurance, but before recoveries under corporate level reinsurance and potential incurred but not reported (“IBNR”) reserve offsets. A catastrophe is a property event with expected reported losses of at least $5.0 million before corporate level reinsurance and taxes. Catastrophe losses, net of contract specific cessions, were $154.5 million in the three months ended September 30, 2004, principally due to $186.8 million of estimated aggregate losses from hurricanes Charley, Frances, Ivan, and Jeanne and Pacific typhoon activity, partially offset by a $30.6 million reserve reduction related to the World Trade Center events. Catastrophe losses, net of contract specific cessions, were $11.3 million in the three months ended September 30, 2003.

Net favorable prior period reserve adjustments for the three months ended September 30, 2004 were $19.9 million compared to net adverse prior period reserve adjustments of $48.2 million for the three months ended September 30, 2003. The favorable reserve adjustments for the three months ended September 30, 2004 included net favorable non-asbestos and environmental (“A&E”) adjustments of $21.1 million, partially offset by net adverse development on A&E reserve adjustments of $1.2 million. For the three months ended September 30, 2003, adverse reserve adjustments included A&E adjustments of $5.2 million, and non-A&E adjustments of $43.0 million.

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The U.S. Reinsurance segment accounted for $24.7 million of favorable net prior period reserve adjustments for the three months ended September 30, 2004 and $26.7 million of net adverse prior period reserve adjustments for the three months ended September 30, 2003. Asbestos exposures accounted for $1.2 million and $5.2 million for the three months ended September 30, 2004 and 2003, respectively. The favorable development for the three months ended September 30, 2004 was principally due to a $34.8 million reserve reduction related to the catastrophe losses from the World Trade Center events. Non-A&E adverse development for the three months ended September 30, 2003 principally reflected adjustments to professional liability and casualty business classes.

The U.S. Insurance segment reflected $3.1 million and $8.3 million of net adverse prior period reserve adjustments for the three months ended September 30, 2004 and 2003, respectively, reflecting minor reserve adjustments.

The Specialty Underwriting segment had $2.8 million and $3.0 million of net adverse prior period reserve adjustments for the three months ended September 30, 2004 and 2003, respectively, principally related to catastrophe loss development on the marine and aviation classes of business in 2004 and loss development on the surety class of business in 2003.

The International segment had $1.0 million of net favorable prior period reserve adjustments for the three months ended September 30, 2004 and net adverse prior period reserve adjustments of $5.0 million for the three months ended September 30, 2003.

The segment components of the increase in incurred losses and LAE in the three months ended September 30, 2004 from the three months ended September 30, 2003 were a 113.1% ($54.0 million) increase in the International operation, a 22.0% ($12.9 million) increase in the Specialty operation and a 0.7% ($1.8 million) increase in the U.S. Reinsurance operation, partially offset by a 2.4% ($3.2 million) decrease in the U.S. Insurance operation. These changes generally reflect variability in premiums earned due to increases in premiums written subject to the quota share agreements, changes in the loss expectation assumptions for business written and the net prior period reserve development and catastrophe losses discussed above. Incurred losses and LAE for each operation were also impacted by variability relating to changes in mix of business by class and type.

The Company’s loss and LAE ratio, which is calculated by dividing incurred losses and LAE by net premiums earned, increased by 9.1 percentage points to 82.8% in the three months ended September 30, 2004 from 73.7% in the three months ended September 30, 2003, reflecting the impact of the changes in premiums earned and incurred losses and LAE discussed above.

The following table shows the loss ratios for each of the Company’s operating segments for the three months ended September 30, 2004 and 2003. The loss ratios for all operations were impacted by the factors noted above.

             
Segment Loss Ratios
Segment       20 04   20 03
U.S. Reinsurance       100 .5%   79 .0%
U.S. Insurance       66 .7%   75 .9%
Specialty Underwriting       76 .9%   64 .0%
International       75 .2%   58 .2%

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Segment underwriting expenses increased by 1.1% to $162.5 million in the three months ended September 30, 2004 from $160.8 million in the three months ended September 30, 2003. Commission, brokerage, taxes and fees decreased by $0.2 million, primarily due to changes in the mix of business and commission rates. Segment other underwriting expenses increased by $1.9 million. Contributing to the increase in expenses was a 73.7% ($14.6 million) increase in the International operation, a 16.1% ($4.9 million) increase in the U.S. Insurance operation and a 10.9% ($2.7 million) increase in the Specialty Underwriting operation, principally offset by a 23.9% ($20.5 million) decrease in the U.S. Reinsurance operation. The changes for each operation’s expenses principally resulted from changes in commission expenses related to changes in premium volume and business mix by class and type and, in some cases, changes in the use of reinsurance, including with Bermuda Re, and the underwriting performance of the underlying business. The Company’s expense ratio, which is calculated by dividing underwriting expenses by net premiums earned, was 23.7% for each of the three months ended September 30, 2004 and 2003.

The Company’s combined ratio, which is the sum of the loss and expense ratios, increased by 9.1 percentage points to 106.5% in the three months ended September 30, 2004 compared to 97.4% in the three months ended September 30, 2003, reflecting the increase in the loss and expense ratios as previously discussed.

The following table shows the combined ratios for each of the Company’s operating segments for the three months ended September 30, 2004 and 2003. The combined ratios for all operations were impacted by the loss and expense ratio variability noted above.

             
Segment Combined Ratios
Segment       20 04   20 03
U.S. Reinsurance       124 .9%   104 .5%
U.S. Insurance       85 .0%   93 .4%
Specialty Underwriting       106 .6%   91 .1%
International       100 .5%   82 .3%

Investment Results.     Net investment income increased 15.0% to $81.2 million for three months ended September 30, 2004 from $70.6 million in the three months ended September 30, 2003, principally reflecting the effects of investing $1,050.8 million of cash flow from operations for the twelve months ended September 30, 2004 as well as $320.0 of net proceeds from the issuance of junior subordinated debt securities in March 2004, all partially offset by the effects of the lower interest rate environment and a $6.0 million decrease from the impact of the UK branch sale. Additionally, $5.4 million included in 2004 net investment income is an atypical increase in the carrying value of a limited partnership investment.

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

        20 04   20 03
Imbedded pre-tax yield of cash and invested assets at    
  September 30, 2004 and September 30, 2003       4 .5%   4 .7%
Imbedded after-tax yield of cash and invested assets at    
  September 30, 2004 and September 30, 2003       3 .7%   3 .9%
Annualized pre-tax yield on average cash and invested    
  assets for the three months ended September 30, 2004 and 2003       4 .9%   5 .0%
Annualized after-tax yield on average cash and invested    
  assets for the three months ended September 30, 2004 and 2003       3 .9%   4 .0%

Net realized capital gains were $9.4 million for the three months ended September 30, 2004, reflecting realized capital gains on the Company’s investments of $10.2 million, partially offset by $0.8 million of realized capital losses. Net realized capital losses of $11.8 million in the three months ended September 30, 2003 reflected realized capital losses on the Company’s investments of $22.5 million, which included $1.2 million relating to write-downs in the value of securities deemed to be impaired on an other than temporary basis and $21.1 million related to the impairment on interest only strips in accordance with EITF 99-20, partially offset by $10.6 million of realized capital gains, which included $5.3 million of realized capital gains on the interest only strips.

The Company has in its product portfolio a credit default swap, which it no longer offers. This product meets the definition of a derivative under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Investments and Hedging Activities” (“FAS 133”). There was no net derivative expense from this credit default transaction for each of the three months ended September 30, 2004 and 2003.

Other expense for the three months ended September 30, 2004 was $30.4 million compared to other income of $0.6 million for the three months ended September 30, 2003. This change was primarily due to a deferred gain on a retroactive reinsurance agreement, in accordance with FAS 113, to Bermuda Re.

Interest expense for the three months ended September 30, 2004 and 2003 was $19.4 million and $14.3 million, respectively. Interest expense for the three months ended September 30, 2004 included $9.7 million relating to the senior notes, $9.4 million relating to the junior subordinated debt securities and $0.3 million relating to borrowings under the senior revolving credit agreements (“Credit Facility”). Interest expense for the three months ended September 30, 2003 included $9.7 million relating to the senior notes, $4.2 million relating to the junior subordinated debt securities and $0.3 million relating to borrowings under the Credit Facility. The increase in interest expense for the junior subordinated debt securities is due to the additional issuance of $320 million of debt securities in March 2004.

Income Taxes.     The Company recognized income tax benefit of $11.7 million in the three months ended September 30, 2004 compared to an income tax expense of $10.5 million in the three months ended September 30, 2003. The decrease in taxes generally reflects the impact of the third quarter catastrophe losses on the underwriting results, partially offset by the impact of additional taxable net investment income and taxable realized capital gains. Additionally, in

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conjunction with the transfer of the Company’s UK branch to Bermuda Re, there were various tax issues giving rise to net expenses and benefits, affecting the variability between years.

Net Income.     Net income was $7.7 million in the three months ended September 30, 2004 compared to net income of $60.5 million in the three months ended September 30, 2003, reflecting a decrease in underwriting results due to the third quarter 2004 catastrophe losses, partially offset by an improvement in investment income and realized capital gains and decreased income taxes.

Nine Months Ended September 30, 2004 compared to Nine Months Ended September 30, 2003

Premiums.     Gross written premiums increased 1.6% to $2,832.3 million in the nine months ended September 30, 2004 from $2,786.7 million in the nine months ended September 30, 2003, as the Company took advantage of the generally attractive rates, terms and conditions available in its markets, including selected growth opportunities, while continuing to maintain a disciplined underwriting approach.

Premium growth areas included a 57.3% ($186.7 million) increase in the International operations, primarily due to a $133.0 million increase in international business written through the Miami and New Jersey offices representing primarily Latin American business, a $38.7 million increase in Asian business and a $16.6 million increase in Canadian business. The U.S. Insurance operation grew 13.6% ($110.2 million) principally as a result of a $166.0 million increase in program business other than workers’ compensation, partially offset by a $55.8 million decrease in workers’ compensation business, which was primarily due to increased competition. The effect of the previously noted cancellation of the Company’s largest California workers’ compensation agency arrangement will impact this segment although not until the quarter ending December 31, 2004 and subsequent quarters. The Specialty Underwriting operation decreased 10.5% ($41.2 million), resulting primarily from a $62.1 million decrease in A&H business, partially offset by an increase in marine and aviation business of $11.1 million and an increase in surety business of $9.8 million. The U.S. Reinsurance operation decreased 16.7% ($210.1 million), principally relating to an $81.0 million decrease in treaty casualty business, a $57.9 decrease in treaty property business and a $56.5 million decrease in facultative business.

Ceded premiums decreased to $733.2 million for the nine months ended September 30, 2004 from $776.8 million for the nine months ended September 30, 2003. Ceded premiums decreased primarily due to the absence of cessions, in 2004, under the corporate level aggregate reinsurance coverages, partially offset by an increase in cessions under the Bermuda Re and Everest International quota share agreements.

Net written premiums increased by 4.4% to $2,099.1 million in the nine months ended September 30, 2004 from $2,009.9 million in the nine months ended September 30, 2003 reflecting the increase in gross written premiums, combined with the decrease in ceded premiums.

Premium Revenues.     Net premiums earned increased by 11.7% to $1,977.9 million in the nine months ended September 30, 2004 from $1,771.0 million in the nine months ended September 30, 2003. Contributing to this increase were a 90.7% ($166.0 million) increase in the International operation, an 8.1% ($41.2 million) increase in the U.S. Insurance operation and a

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3.2% ($24.9 million) increase in the U.S. Reinsurance operation, partially offset by an 8.5% ($25.1 million) decrease in the Specialty Underwriting operation. All of these changes reflect period to period changes in net written premiums and business mix, together with normal variability in earnings patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets, but also as individual contracts renew or non-renew, almost always with changes in coverage, structures, prices and/or terms, and as new contracts are accepted with coverages, structures, prices and/or terms different from those of expiring contracts. As premium reporting, earnings, loss and commission characteristics derive from the provisions of individual contracts, the continuous turnover of individual contracts, arising from both strategic shifts and day to day underwriting, can and does introduce appreciable background variability in various underwriting line items.

Expenses.     Incurred losses and LAE increased by 12.7% to $1,437.3 in the nine months ended September 30, 2004 from $1,275.5 million in the nine months ended September 30, 2003. The increase in incurred losses and LAE was principally attributable to the increase in net premiums earned, the impact of changes in the Company’s mix of business, the provision for estimated catastrophe losses from hurricanes Charley, Frances, Ivan and Jeanne and Pacific typhoons, and reserve adjustments for prior period losses.

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

Incurred losses and LAE for the nine months ended September 30, 2004 reflected ceded losses and LAE of $614.6 million compared to ceded losses and LAE for the nine months ended September 30, 2003 of $429.3 million. Ceded losses and LAE for the nine months ended September 30, 2004 and 2003 included $537.7 million and $317.4 million, respectively, of ceded losses relating to the quota share reinsurance transactions between Everest Re on the one hand and Bermuda Re and Everest International on the other hand.

Incurred losses and LAE include catastrophe losses, which include the impact of both current period events and favorable and unfavorable development on prior period events, and are net of reinsurance. Individual catastrophe losses are reported net of specific reinsurance, but before recoveries under corporate level reinsurance and potential IBNR reserve offsets. A catastrophe is a property event with expected reported losses of at least $5.0 million before corporate level

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reinsurance and taxes. Catastrophe losses, net of contract specific cessions, were $157.0 million in the nine months ended September 30, 2004, relating principally to aggregate estimated losses of $186.8 million from hurricanes Charley, Frances, Ivan, and Jeanne and Pacific typhoons, which were partially offset by $30.2 million of reserve reductions related to the World Trade Center events, compared to $30.9 million in the nine months ended September 30, 2003.

Net adverse prior period reserve adjustments for the nine months ended September 30, 2004 were $1.6 million compared to net adverse prior period reserve adjustments of $115.9 million for the nine months ended September 30, 2003. The adverse reserve adjustments for the nine months ended September 30, 2004 included A&E adjustments of $8.4 million and net favorable prior period reserve adjustments on the non-A&E exposures, primarily due to favorable development of $30.2 million related to the World Trade Center events, partially offset by reserve strengthening in insurance classes. For the nine months ended September 30, 2003, reserve adjustments included $13.6 million related to A&E and $102.3 million on non-A&E lines of business, principally all of which related to casualty reinsurance and insurance.

The U.S. Reinsurance segment accounted for $14.1 million favorable net prior period reserve adjustments for the nine months ended September 30, 2004, which included $34.8 million of favorable development due to the reserve reduction related to the catastrophe losses from the World Trade Center events, and net adverse prior period reserve adjustments of $79.6 million for the nine months ended September 30, 2003. Asbestos exposures accounted for $8.4 million and $13.6 million of adverse development for the nine months ended September 30, 2004 and 2003, respectively. The non-A&E development in 2003 was principally attributable to professional liability and casualty business classes.

The U.S. Insurance segment reflected $21.2 million and $8.3 million of net adverse prior period reserve adjustments for the nine months ended September 30, 2004 and 2003, respectively. The September 30, 2004 adverse prior period reserve adjustments were principally due to casualty classes relating to accident years 2000 through 2002.

The Specialty Underwriting segment had $4.9 million of favorable prior period reserve adjustments for the nine months ended September 30, 2004, principally related to favorable net prior period reserve adjustments in the marine, aviation and A&H business lines, and net adverse prior period reserve adjustments of $18.0 million for the nine months ended September 30, 2003, principally related to the surety line of business.

The International segment had $0.6 million of favorable prior period reserve adjustments for the nine months ended September 30, 2004 and $10.0 million of net adverse prior period reserve adjustments for the nine months ended September 30, 2003.

The segment components of the increase in incurred losses and LAE for the nine months ended September 30, 2004 from the nine months ended September 30, 2003 were an 99.6% ($105.8 million) increase in the International operation, an 8.8% ($52.3 million) increase in the U.S. Reinsurance operation and a 7.8% ($28.9 million) increase in the U.S. Insurance operation, partially offset by a 12.5% ($25.3 million) decrease in the Specialty Underwriting operation. These changes generally reflect variability in premiums earned, changes in the loss expectation assumptions for businesses written and the net prior period reserve development discussed above. Incurred losses and LAE for each operation were also impacted by variability relating to changes in mix of business by class and type.

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The Company’s loss and LAE ratio, which is calculated by dividing incurred losses and LAE by net premiums earned, increased by 0.7 percentage points to 72.7% in the nine months ended September 30, 2004 from 72.0% in the nine months ended September 30, 2003, reflecting the impact of the changes in premiums earned and incurred losses and LAE discussed above, as well as changes in business mix.

The following table shows the loss ratios for each of the Company’s operating segments for the nine months ended September 30, 2004 and 2003. The loss ratios for all operations were impacted by the factors noted above.

             
Segment Loss Ratios
Segment       20 04   20 03
U.S. Reinsurance       80 .1%   75 .9%
U.S. Insurance       72 .8%   73 .0%
Specialty Underwriting       65 .6%   68 .6%
International       60 .8%   58 .1%

Segment underwriting expenses increased by 4.9% to $456.7 million in the nine months ended September 30, 2004 from $435.4 million in the nine months ended September 30, 2003. Commission, brokerage, taxes and fees increased by $12.0 million, principally reflecting an increase in premium volume and changes in the mix of business. Segment other underwriting expenses increased by $9.3 million as the Company continues to expand operations to support its increased business volume. Contributing to the segment underwriting expense increases were a 96.4% ($40.7 million) increase in the International operation and a 3.9% ($8.0 million) increase in the U.S. Reinsurance operation, partially offset by a 20.9% ($22.4 million) decrease in the Insurance operations and a 6.1% ($5.1 million) decrease in the Specialty Underwriting operation. The changes for each operation’s expenses principally resulted from changes in commission expenses related to changes in premium volume and business mix by class and type and, in some cases, changes in the use of reinsurance, including with Bermuda Re, and the underwriting performance of the underlying business. The Company’s expense ratio, which is calculated by dividing underwriting expenses by net premiums earned, was 23.1% for the nine months ended September 30, 2004 compared to 24.8% for the nine months ended September 30, 2003.

The Company’s combined ratio, which is the sum of the loss and expense ratios, decreased by 1.0 percentage points to 95.8% in the nine months ended September 30, 2004 compared to 96.8% in the nine months ended September 30, 2003.

The following table shows the combined ratios for each of the Company’s operating segments for the nine months ended September 30, 2004 and 2003. The combined ratios for all operations were impacted by the loss and expense ratio variability noted above.

             
Segment Combined Ratios
Segment       20 04   20 03
U.S. Reinsurance       106 .1%   101 .8%
U.S. Insurance       88 .3%   94 .1%
Specialty Underwriting       94 .3%   96 .5%
International       84 .5%   81 .1%

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Investment Results.     Net investment income increased 14.9% to $242.4 million in the nine months ended September 30, 2004 from $211.0 million in the nine months ended September 30, 2003, principally reflecting the effects of investing $1,050.8 million of cash flow from operations for the twelve months ended September 30, 2004 as well as $320.0 of net proceeds from the issuance of junior subordinated debt securities in March 2004, all partially offset by a $ 6.0 million decrease from the impact of the sale of the UK branch, and also reflect the effects of the generally lower interest rate environment. The increase also reflected $29.7 million representing an atypical increase in the carrying value of a limited partnership investment.

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

        20 04   20 03
Imbedded pre-tax yield of cash and invested assets at    
  September 30, 2004 and December 31, 2003       4 .5%   4 .7%
Imbedded after-tax yield of cash and invested assets at    
  September 30, 2004 and December 31, 2003       3 .7%   3 .9%
Annualized pre-tax yield on average cash and invested    
  assets for the nine months ended September 30, 2004 and 2003       5 .0%   5 .2%
Annualized after-tax yield on average cash and invested    
  assets for the nine months ended September 30, 2004 and 2003       3 .9%   4 .2%

Net realized capital gains of $59.8 million in the nine months ended September 30, 2004 reflected realized capital gains on the Company’s investments of $105.4 million, including $77.6 million on the sale of interest only strip investments, partially offset by $45.5 million of realized capital losses, which included $43.9 million related to the write-downs in the value of interest only strips deemed to be impaired on an other than temporary basis in accordance with EITF 99-20, prior to liquidation of the interest only strip portfolio during the second quarter of 2004. Net realized capital losses were $23.9 million in the nine months ended September 30, 2003, reflecting realized capital losses on the Company’s investments of $41.4 million, which included $15.3 million relating to write downs in the value of securities deemed to be impaired on an other than temporary basis, and $21.1 million related to the impairment on interest only strips in accordance with EITF 99-20, partially offset by $17.5 million of realized capital gains, which included $5.3 million realized capital gains on the interest only strip investments.

The Company has in its product portfolio a credit default swap, which it no longer offers. This product meets the definition of a derivative under FAS 133. There was no net derivative expense from this credit default transaction for the nine months ended September 30, 2004 and 2003.

Other expense for the nine months ended September 30, 2004 was $74.3 million compared to other income of $1.2 million for the nine months ended September 30, 2003. This change was primarily due to a deferred gain on a retroactive reinsurance agreement, in accordance with FAS 113, to Bermuda Re.

Interest expense for the nine months ended September 30, 2004 and 2003 was $53.2 million and $43.0 million, respectively. Interest expense for the nine months ended September 30, 2004 included $29.2 million relating to the senior notes, $23.0 million relating to the junior subordinated debt securities and $1.0 million relating to borrowings under the revolving credit facility. Interest expense for the nine months ended September 30, 2003 included $29.2 million

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relating to the senior notes, $12.7 million relating to the junior subordinated debt securities and $1.0 million relating to borrowings under the revolving credit facility.

Income Taxes.     The Company recognized income tax expense of $57.7 million compared to $45.8 million for the nine months ended September 30, 2004 and 2003, respectively. The increase in taxes generally reflects the impact of improved net investment income and realized capital gains, partially offset by a decrease in underwriting related to increased catastrophe losses. Additionally, in conjunction with the transfer of the Company’s UK branch to Bermuda Re there were various tax issues giving rise to net expenses and benefits, affecting the variability between years.

Net Income.     Net income was $174.8 million in the nine months ended September 30, 2004 compared to net income of $176.0 million in the nine months ended September 30, 2003, reflecting improved investment income and realized capital gains results, partially offset by a decrease in underwriting results and increased income taxes.

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

The Company’s current investment strategy seeks to maximize after-tax income through a high quality, diversified, taxable and tax-preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity. The Company’s mix of taxable and tax-preferenced investments is adjusted continuously, consistent with its current and projected operating results, market conditions and the Company’s tax position. The fixed maturities in the investment portfolio are comprised of non-trading available for sale securities. Additionally, the Company invests in equity securities, which it believes will enhance the risk-adjusted total return of the investment portfolio. The Company has also engaged in a small number of credit default swaps.

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

The Company’s $7.1 billion investment portfolio is principally comprised of fixed maturity securities, which are subject to interest rate risk and foreign currency rate risk, and equity securities, which are subject to equity price risk. The impact of these risks in the investment portfolio is generally mitigated by changes in the value of operating assets and liabilities and their associated income statement impact.

Interest rate risk is the potential change in value of the fixed maturity portfolio, including short-term investments, due to change in market interest rates. In a declining interest rate environment, it includes prepayment risk on the $511.2 million of mortgage-backed securities in the $6,020.9

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million fixed maturity portfolio. Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.

The table below displays the potential impact of market value fluctuations and after-tax unrealized appreciation on the fixed maturity portfolio as of September 30, 2004 based on parallel 200 basis point shifts in interest rates up and down in 100 basis point increments. For legal entities with a U.S. dollar functional currency, this modeling was performed on each security individually. To generate appropriate price estimates on mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account. For legal entities with a non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios. All amounts are in U.S. dollars and are presented in millions.

As of September 30, 2004
Interest Rate Shift in Basis Points
           -200        -100       0       100        200
Total Market Value     $ 7,323 .7 $ 6,890 .1 $ 6,448 .5 $ 6,012 .2 $ 5,606 .3
Market Value Change from Base (%)       13.6 %   6.8 %   0.0 %   -6.8 %   -13.1 %
Change in Unrealized Appreciation    
After-tax from Base ($)     $ 568 .9 $ 287 .0 $   - $ (283 .6) $ (547 .4)

The Company had $6,681.8 million and $6,227.1 million of reserves for losses and adjustment expenses as of September 30, 2004 and December 31, 2003. These amounts are recorded at their nominal or estimated ultimate payment amount, as opposed to fair value, which would reflect a discount adjustment to reflect the time value of money. Since losses are paid out over a period of time, the fair value of the reserves is less than the nominal value. As interest rates rise, the fair value of the reserves decreases and conversely, if interest rates decline, the fair value will increase. These movements are the opposite of the interest rate impacts on the fair value of investments since reserves are future obligations. While the difference between fair value and nominal value is not reflected in the Company’s financial statements, the Company’ financial results will benefit over time as income is earned on the investment portfolio until the claims are paid. The Company’s loss and loss reserve obligations have an expected duration reasonably consistent with the Company’s fixed income portfolio, and approximately equal such assets. The existence of such obligations, and the variable differential between ultimate and fair value, provides substantial mitigation of the economic effects of interest rate variability even though such mitigation is not reflected in the Company’s financial statements.

Foreign currency rate risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Each of the Company’s non-U.S. (“foreign”) operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines. Generally, the Company prefers to maintain the capital of its foreign operations in U.S. dollar assets, although this varies by regulatory jurisdiction in accordance with market needs. Each foreign operation may conduct business in its local currency as well as the currency of other countries in which it operates. The primary foreign currency exposures for these foreign operations are the Canadian Dollar, the British Pound Sterling and the Euro. The Company mitigates foreign exchange exposure by a general matching of the currency and duration of its assets to its corresponding operating liabilities. In

43

accordance with Financial Accounting Standards Board Statement No. 52, the Company translates the assets, liabilities and income of non-U.S. dollar functional currency legal entities to the U.S. dollar. This translation amount is reported as a component of other comprehensive income. As of September 30, 2004 there has been no material change in exposure to foreign exchange rates as compared to March 31, 2004.

Equity risk is the potential change in market value of the common stock and preferred stock portfolios arising from changing equity prices. The Company invests in high quality common and preferred stocks that are traded on the major exchanges in the U.S. and funds investing in such securities. The primary objective in managing the equity portfolio is to provide long-term capital growth through market appreciation and income.

As of September 30, 2004
Change in Equity Values in Percent
    -20%     -10%     0%   10%     20%  
Market Value of the Equity Portfolio $ 364.2   $ 409.8   $ 455.3 $ 500.8   $ 546.4  
 
After-tax Change in Unrealized    
  Appreciation $ (59.2 ) $ (29.6 ) $ - $ 29.6   $ 59.2  

Safe Harbor Disclosure.    This report contains forward-looking statements within the meaning of the U.S. federal securities laws. The Company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the federal securities laws. In some cases, these statements can be identified by the use of forward-looking words such as “may”, “will”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”, “potential” and “intend”. Forward-looking statements contained in this report include information regarding the Company’s reserves for losses and LAE, including reserves for A&E claims, the adequacy of the Company’s provision for uncollectible balances, estimates of the Company’s catastrophe exposure, and the effects of catastrophic events on the Company’s financial statements and the ability of the Company’s subsidiaries to pay dividends. Forward-looking statements only reflect the Company’s expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from the Company’s expectations. Important factors that could cause the Company’s actual results to be materially different from its expectations include the uncertainties that surround the estimating of reserves for losses and LAE, those discussed in Note 4 of Notes to Consolidated Financial Statements (unaudited) included in this report and the risks described under the caption “Risk Factors” in the Company’s most recent Annual Report on Form 10-K, Part II, Item 7. The Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

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Part I – Item 3.

EVEREST REINSURANCE HOLDINGS, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

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

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Part I – Item 4.

EVEREST REINSURANCE HOLDINGS, INC.
CONTROLS AND PROCEDURES

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

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EVEREST REINSURANCE HOLDINGS, INC.
OTHER INFORMATION

Part II – Item 1. Legal Proceedings

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

In all such matters, the Company believes that its positions are legally and commercially reasonable. The Company also regularly evaluates those positions, and where appropriate, establishes or adjusts insurance reserves to reflect its evaluation. The Company’s aggregate reserves take into account the possibility that the Company may not ultimately prevail in each and every disputed matter. The Company believes its aggregate reserves reduce the potential that an adverse resolution of one or more of these matters, at any point in time, would have a material impact on the Company’s financial condition or results of operations. However, there can be no assurance that adverse resolutions of such matters in any one period or in the aggregate will not result in a material adverse effect on the Company’s results of operations.

Part II - Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

None

Part II – Item 3. Defaults Upon Senior Securities

None

Part II– Item 4. Submission of Matters to a Vote of Security Holders

None

Part II – Item 5. Other Information

None

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Part II – Item 6. Exhibits and Reports on Form 8-K

(a) Exhibit Index:

  Exhibit No. Description

  31.1 Section 302 Certification of Joseph V. Taranto

  31.2 Section 302 Certification of Stephen L. Limauro

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


(b) Reports on Form 8-K:

  None

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Everest Reinsurance Holdings, Inc.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  Everest Reinsurance Holdings, Inc.
  (Registrant)
   
   
  /s/ STEPHEN L. LIMAURO                     
 
  Stephen L. Limauro
  Executive Vice President and
    Chief Financial Officer
   
  (Duly Authorized Officer and Principal
  Financial Officer)













Dated: November 15, 2004