Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Financial Statements and Schedules.

The financial statements and schedules listed in the accompanying Index to Financial Statements and Schedules on page F-1 are filed as part of this report.

Exhibits.

The exhibits listed on the accompanying Index to Exhibits on page E-1 are filed as part of this report except that the certifications in Exhibit 32 are being furnished to the SEC, rather than filed with the SEC, as permitted under applicable SEC rules.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on February 29, 2012.

	EVEREST RE GROUP, LTD.


	By:	/S/ JOSEPH V. TARANTO
		Joseph V. Taranto
		(Chairman and Chief Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/S/ JOSEPH V. TARANTO	Chairman and Chief Executive Officer and Director (Principal Executive Officer)	February 29, 2012
Joseph V. Taranto

/S/ DOMINIC J. ADDESSO	President and Chief Financial Officer	February 29, 2012
Dominic J. Addesso

/S/ KEITH T. SHOEMAKER	Comptroller (Principal Accounting Officer)	February 29, 2012
Keith T. Shoemaker

/S/ MARTIN ABRAHAMS	Director	February 29, 2012
Martin Abrahams

/S/ KENNETH J. DUFFY	Director	February 29, 2012
Kenneth J. Duffy

/S/ JOHN R. DUNNE	Director	February 29, 2012
John R. Dunne

/S/ WILLIAM F. GALTNEY, JR.	Director	February 29, 2012
William F. Galtney, Jr.

/S/ JOHN P. PHELAN	Director	February 29, 2012
John P. Phelan

/S/ ROGER M. SINGER	Director	February 29, 2012
Roger M. Singer

/S/ JOHN A. WEBER	Director	February 29, 2012
John A. Weber

INDEX TO EXHIBITS

Exhibit No.

	2.	1	Agreement and Plan of Merger among Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd. and Everest Re Merger Corporation, incorporated herein by reference to Exhibit 2.1 to the Registration Statement on Form S-4 (No. 333-87361)

	3.	1	Memorandum of Association of Everest Re Group, Ltd., incorporated herein by reference to Exhibit 3.1 to the Registration Statement on Form S-4 (No. 333-87361)

	3.	2	Bye-Laws of Everest Re Group, Ltd., incorporated herein by reference to exhibit 3.2 to the Everest Re Group, Ltd., Quarterly Report for Form 10-Q for the quarter ended June 30, 2011 (the “second quarter 2011 10-Q”)

	4.	1	Specimen Everest Re Group, Ltd. common share certificate, incorporated herein by reference to Exhibit 4.1 of the Registration Statement on Form S-4 (No. 333-87361)

	4.	2	Indenture, dated March 14, 2000, between Everest Reinsurance Holdings, Inc. and The Chase Manhattan Bank (now known as JPMorgan Chase Bank), as Trustee, incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K filed on March 15, 2000

	4.	3	Second Supplemental Indenture relating to the 8.75% Senior Notes due March 15, 2010, dated March 14, 2000, between Everest Reinsurance Holdings, Inc. and The Chase Manhattan Bank, as Trustee, incorporated herein by reference to Exhibit 4.3 to the Everest Reinsurance Holdings, Inc. Form 8-K filed on March 15, 2000

	4.	4	Junior Subordinated Indenture, dated November 14, 2002, between Everest Reinsurance Holdings, Inc. and JPMorgan Chase Bank as Trustee, incorporated herein by reference to Exhibit 4.5 to the Registration Statement on Form S-3 (No. 333-106595)

	4.	5	Second Supplemental Indenture relating to Holdings 6.20% Junior Subordinated Debt Securities due March 29, 2034, dated as of March 29, 2004, among Holdings, Group and JPMorgan Chase Bank, as Trustee, incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K filed on March 30, 2004 (the “March 30, 2004 8-K”)

	4.	6	Amended and Restated Trust Agreement of Everest Re Capital Trust II, dated as of March 29, 2004, incorporated herein by reference to Exhibit 4.2 to the March 30, 2004 8-K

	4.	7	Guarantee Agreement, dated as of March 29, 2004, between Holdings and JPMorgan Chase Bank, incorporated herein by reference to Exhibit 4.3 to the March 30, 2004 8-K

	4.	8	Expense Agreement, dated as of March 29, 2004, between Holdings and Everest Re Capital Trust, incorporated herein by reference to Exhibit 4.4 to the March 30, 2004 8-K

	4.	9	Third Supplemental Indenture relating to Holdings 5.40% Senior Notes due October 15, 2014, dated as of October 12, 2004, among Holdings and JPMorgan Chase Bank, as Trustee, incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K filed on October 12, 2004

	*10.	1	Everest Re Group, Ltd. Annual Incentive Plan effective January 1, 1999, incorporated herein by reference to Exhibit 10.1 to Everest Reinsurance Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 1998 (the “1998 10-K”)

E-1


*10.	2	Everest Re Group, Ltd. 1995 Stock Option Plan for Non-Employee Directors, incorporated herein by reference to Exhibit 4.3 to the Registration Statement on Form S-8 (No. 333-05771)

*10.	3	Form of Stock Option Agreement (Version 1) to be entered into between Everest Re Group, Ltd. and participants in the 1995 Stock Option Plan for Non-Employee Directors, incorporated herein by reference to Exhibit 10.17 to the 1995 10-K

*10.	4	Form of Stock Option Agreement (Version 2) to be entered into between Everest Re Group, Ltd. and participants in the 1995 Stock Option Plan for Non-Employee Directors, incorporated herein by reference to Exhibit 10.18 to the 1995 10-K

*10.	5	Form of Stock Option Agreement for Non-Employee Directors, incorporated herein by reference to Exhibit 10.34 to the 1999 10-K

*10.	6	Senior Executive Change of Control Plan, incorporated herein by reference to Exhibit 10.24 to Everest Reinsurance Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 1998

*10.	7	Executive Performance Annual Incentive Plan adopted by shareholders on May 20, 1999, incorporated herein by reference to Exhibit 10.26 to the second quarter 1999 10-Q


10.	8		Stock Purchase Agreement between The Prudential Insurance Company of America and Everest Reinsurance Holdings, Inc. for the sale of common stock of Gibraltar Casualty Company dated February 24, 2000, incorporated herein by reference to Exhibit 10.32 to the 1999 10-K

10.	9		Amendment No. 1 to Stock Purchase Agreement between The Prudential Insurance Company of America and Everest Reinsurance Holdings, Inc. for the sale of common stock of Gibraltar Casualty Company dated August 8, 2000, incorporated herein by reference to Exhibit 10.1 to the Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended June 30, 2000

10.	10		Proportional Excess of Loss Reinsurance Agreement entered into between Gibraltar Casualty Company and Prudential Property and Casualty Insurance Company, incorporated herein by reference to Exhibit 10.24 to Everest Re Group, Ltd. Annual Report on Form 10-K for the year ended December 31, 2000 (the “2000 10-K”)

10.	11		Guarantee Agreement made by The Prudential Insurance Company of America in favor of Gibraltar Casualty Company, incorporated herein by reference to Exhibit 10.25 to the 2000 10-K

*10.	12	Everest Re Group, Ltd. 2003 Non-Employee Director Equity Compensation Plan, incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-8 (No. 333-105483)

*10.	13	Description of non-employee director compensation arrangements, incorporated herein by reference to Exhibit 10.46 to Everest Re Group, Ltd., Report on Form 10-K for the year ended December 31, 2005

*10.	14	Form of Non-Qualified Stock Option Award Agreement under the Everest Re Group, Ltd. 2003 Non-Employee Director Equity Compensation Plan, incorporated herein by reference to Exhibit 10.47 to Everest Re Group, Ltd., Report on Form 10-K for the year ended December 31, 2004

E-2

*10.	15	Amendment of Everest Re Group, Ltd. 2003 Non-Employee Director Equity Compensation Plan adopted by shareholders at the annual general meeting on May 25, 2005, incorporated herein by reference to Appendix B to the 2005 Proxy Statement filed on April 14, 2005

*10.	16	Amendment of Executive Performance Annual Incentive Plan adopted by shareholders at the annual general meeting on May 25, 2005, incorporated herein by reference to Appendix C to the 2005 Proxy Statement filed on April 14, 2005

*10.	17	Form of Restricted Stock Award Agreement under the Everest Re Group, Ltd. 2003 Non-Employee Director Equity Compensation Plan, incorporated by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on September 22, 2005

10.	18	Credit Agreement, dated August 23, 2006, between Everest Reinsurance Holdings, Inc., the lenders named therein and Citibank, National Association, as administrative agent, providing for a $150.0 million five year revolving credit facility, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. This new agreement replaces the October 10, 2003 three year senior revolving credit facility which expired on October 10, 2006

10.	19	Credit Agreement, dated July 27, 2007, among Everest Re Group, Ltd., Everest Reinsurance (Bermuda), Ltd. and Everest International Reinsurance, Ltd., certain lenders party thereto and Wachovia Bank, N.A. as administrative agent, incorporated herein by reference to Exhibit 10.1 Form 8-K filed on July 27, 2007

10.	20	Completion of Tender Offer relating to Everest Reinsurance Holdings, Inc. 6.60% Fixed to Floating Rate Long Term Subordinated Notes (LoTSSM) dated March 19, 2009, incorporated herein by reference to Exhibit 99.1 to Everest Re Group, Ltd. Form 8-K filed on March 31, 2009

*10.	21	Everest Re Group, Ltd. 2009 Stock Option and Restricted Stock Plan for Non-Employee Directors incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. second quarter 2009 10-Q

*10.	22	Employment Agreement between Everest Reinsurance (Bermuda), Ltd. and Mark S. deSaram, dated October 7, 2010, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on October 12, 2010

*10.	23	Mutual Agreement and General Release and Waiver between Everest Global Services, Inc. and Ralph E. Jones III, dated October 7, 2010, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed in October 12, 2010

*10.	24	Everest Re Group, Ltd. 2010 Stock Incentive Plan for employees is incorporated herein by reference to exhibit 10.2 to Everest Re Group, Ltd. Form S-8 filed on September 30, 2010

*10.	25	Employment Agreement between Everest Global Services, Inc., Everest Reinsurance Holdings, Inc. and Joseph V. Taranto, dated January 1, 2011, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on March 31, 2011

*10.	26	Change of Control Agreement between and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated January 1, 2011, incorporated herein by reference to Exhibit 10.2 to Everest Re Group, Ltd. Form 8-K filed on March 31, 2011

*10.	27	Amendment of Executive Performance Annual Incentive Plan adopted by shareholders at the annual general meeting on May 18, 2011, incorporated herein by reference to Appendix B to the 2011 Proxy Statement filed on April 15, 2011

E-3

*10.	28	Employment Agreement between Everest Global Services, Inc., Everest Reinsurance Holdings, Inc. and Dominic J. Addesso, dated June 16, 2011, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on June 20, 2011

*10.	29	Employment Agreement between Everest Global Services, Inc., Everest Reinsurance Holdings, Inc. and Joseph V. Taranto, dated January 1, 2011, This employment supersedes the prior agreement between registrant and Joseph V. Taranto dated March 25, 2011. This new agreement dated January 1, 2011, incorporated herein by reference to Exhibit 10.2 to Everest Re Group, Ltd. Form 8-K filed on June 20, 2011

10.	30	Credit Agreement, dated August 15, 2011, between Everest Reinsurance Holdings, Inc., the lenders named therein and Citibank, National Association, as administrative agent, providing for a $150.0 million three year revolving credit facility, filed herewith. This new agreement replaces the August 23, 2006 five year senior revolving credit facility

21.	1	Subsidiaries of the registrant, filed herewith

23.	1	Consent of PricewaterhouseCoopers LLP, filed herewith

31.	1	Section 302 Certification of Joseph V. Taranto, filed herewith

31.	2	Section 302 Certification of Dominic J. Addesso, filed herewith

32.	1	Section 906 Certification of Joseph V. Taranto and Dominic J. Addesso, furnished herewith

101.	INS	XBRL Instance Document

101.	SCH	XBRL Taxonomy Extension Schema

101.	CAL	XBRL Taxonomy Extension Calculation Linkbase

101.	DEF	XBRL Taxonomy Extension Definition Linkbase

101	LAB	XBRL Taxonomy Extension Label Linkbase

101.	PRE	XBRL Taxonomy Extension Presentation Linkbase


* Management contract or compensatory plan or arrangement.

E-4

EVEREST RE GROUP, LTD.


INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

			Pages

Report of Independent Registered Public Accounting Firm			F-2

Consolidated Balance Sheets at December 31, 2011 and 2010			F-4

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended
	December 31, 2011, 2010 and 2009		F-5

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended
	December 31, 2011, 2010 and 2009		F-6

Consolidated Statements of Cash Flows for the Years Ended
	December 31, 2011, 2010 and 2009		F-7

Notes to Consolidated Financial Statements			F-8

Schedules

I	Summary of Investments Other Than Investments in Related Parties at December 31, 2011		S-1

II	Condensed Financial Information of Registrant:

		Balance Sheets as of December 31, 2011 and 2010	S-2

		Statements of Operations for the Years Ended December 31, 2011, 2010 and 2009	S-3

		Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009	S-4

III	Supplementary Insurance Information for the Years Ended
		December 31, 2011, 2010 and 2009	S-5

IV	Reinsurance for the Years Ended December 31, 2011, 2010 and 2009		S-6

Schedules other than those listed above are omitted for the reason that they are not applicable or the information is otherwise contained in the Financial Statements.

F-1

Index

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

of Everest Re Group, Ltd.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Everest Re Group, Ltd. and its subsidiaries (the “Company”) at December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for other-than temporary impairment of debt securities in 2009.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

F-2

Index

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP

New York, New York

February 29, 2012

F-3

Index

EVEREST RE GROUP, LTD.

CONSOLIDATED BALANCE SHEETS

	December 31,
(Dollars and share amounts in thousands, except par value per share)	2011			2010

ASSETS:
Fixed maturities - available for sale, at market value	$	12,293,524		$	12,450,469
(amortized cost: 2011, $11,731,173; 2010, $12,011,336)
Fixed maturities - available for sale, at fair value		113,606			180,482
Equity securities - available for sale, at market value (cost: 2011, $463,620; 2010, $363,283)		448,930			363,736
Equity securities - available for sale, at fair value		1,249,106			721,449
Short-term investments		685,332			785,279
Other invested assets (cost: 2011, $558,232; 2010, $603,681)		558,232			605,196
Cash		448,651			258,408
Total investments and cash		15,797,381			15,365,019
Accrued investment income		130,193			148,990
Premiums receivable		1,077,548			844,832
Reinsurance receivables		580,339			684,718
Funds held by reinsureds		267,295			379,616
Deferred acquisition costs		378,026			383,769
Prepaid reinsurance premiums		85,409			133,007
Deferred tax asset		332,783			149,101
Federal income taxes recoverable		41,623			124,215
Other assets		202,958			170,931
TOTAL ASSETS	$	18,893,555		$	18,384,198

LIABILITIES:
Reserve for losses and loss adjustment expenses	$	10,123,215		$	9,340,183
Future policy benefit reserve		67,187			63,002
Unearned premium reserve		1,412,778			1,455,219
Funds held under reinsurance treaties		2,528			99,213
Commission reserves		55,103			45,936
Other net payable to reinsurers		51,564			47,519
Revolving credit borrowings		-			50,000
5.4% Senior notes due 10/15/2014		249,858			249,812
6.6% Long term notes due 5/1/2067		238,354			238,351
Junior subordinated debt securities payable		329,897			329,897
Accrued interest on debt and borrowings		4,781			4,793
Equity index put option liability		69,729			58,467
Other liabilities		217,186			118,289
Total liabilities		12,822,180			12,100,681

Commitments and contingencies (Note 16)

SHAREHOLDERS' EQUITY:
Preferred shares, par value: $0.01; 50,000 shares authorized;
no shares issued and outstanding		-			-
Common shares, par value: $0.01; 200,000 shares authorized; (2011) 66,455
and (2010) 66,017 outstanding before treasury shares		665			660
Additional paid-in capital		1,892,988			1,863,031
Accumulated other comprehensive income (loss), net of deferred income tax expense
(benefit) of $112,969 at 2011 and $102,868 at 2010		366,978			332,258
Treasury shares, at cost; 12,719 shares (2011) and 11,589 shares (2010)		(1,073,970	)		(981,480	)
Retained earnings		4,884,714			5,069,048
Total shareholders' equity		6,071,375			6,283,517
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	18,893,555		$	18,384,198

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

F-4

Index

EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

	Years Ended December 31,
(Dollars in thousands, except per share amounts)	2011			2010			2009

REVENUES:
Premiums earned	$	4,101,347		$	3,934,625		$	3,894,098
Net investment income		620,041			653,463			547,793
Net realized capital gains (losses):
Other-than-temporary impairments on fixed maturity securities		(16,223	)		(2,975	)		(13,210	)
Other-than-temporary impairments on fixed maturity securities
transferred to other comprehensive income (loss)		-			-			-
Other net realized capital gains (losses)		23,146			104,886			10,898
Total net realized capital gains (losses)		6,923			101,911			(2,312	)
Realized gain on debt repurchase		-			-			78,271
Net derivative gain (loss)		(11,261	)		(1,119	)		3,204
Other income (expense)		(23,089	)		16,927			(22,476	)
Total revenues		4,693,961			4,705,807			4,498,578

CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses		3,726,204			2,945,712			2,374,058
Commission, brokerage, taxes and fees		950,521			931,855			928,333
Other underwriting expenses		182,403			166,258			167,178
Corporate expenses		16,461			14,914			17,607
Interest, fees and bond issue cost amortization expense		52,319			55,830			72,081
Total claims and expenses		4,927,908			4,114,569			3,559,257

INCOME (LOSS) BEFORE TAXES		(233,947	)		591,238			939,321
Income tax expense (benefit)		(153,461	)		(19,516	)		132,332

NET INCOME (LOSS)	$	(80,486	)	$	610,754		$	806,989
Other comprehensive income (loss), net of tax		34,720			60,220			621,201

COMPREHENSIVE INCOME (LOSS)	$	(45,766	)	$	670,974		$	1,428,190

EARNINGS PER COMMON SHARE:
Basic	$	(1.49	)	$	10.73		$	13.26
Diluted		(1.49	)		10.70			13.22
Dividends declared		1.92			1.92			1.92

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

F-5

Index

EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY

	Years Ended December 31,
(Dollars in thousands, except share and dividends per share amounts)	2011			2010			2009

COMMON SHARES (shares outstanding):
Balance, beginning of period		54,428,168			59,317,741			61,414,027
Issued during the period, net		437,427			175,999			266,981
Treasury shares acquired		(1,130,044	)		(5,065,572	)		(2,363,267	)
Balance, end of period		53,735,551			54,428,168			59,317,741

COMMON SHARES (par value):
Balance, beginning of period	$	660		$	658		$	656
Issued during the period, net		5			2			2
Balance, end of period		665			660			658

ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period		1,863,031			1,845,181			1,824,552
Share-based compensation plans		29,957			17,850			20,592
Other		-			-			37
Balance, end of period		1,892,988			1,863,031			1,845,181

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
NET OF DEFERRED INCOME TAXES:
Balance, beginning of period		332,258			272,038			(291,851	)
Cumulative adjustment of initial adoption (1), net of tax		-			-			(57,312	)
Net increase (decrease) during the period		34,720			60,220			621,201
Balance, end of period		366,978			332,258			272,038

RETAINED EARNINGS:
Balance, beginning of period		5,069,048			4,566,771			3,819,327
Cumulative adjustment of initial adoption (1), net of tax		-			-			57,312
Net income (loss)		(80,486	)		610,754			806,989
Dividends declared ($1.92 per share in 2011, 2010 and 2009)		(103,848	)		(108,477	)		(116,857	)
Balance, end of period		4,884,714			5,069,048			4,566,771

TREASURY SHARES AT COST:
Balance, beginning of period		(981,480	)		(582,926	)		(392,329	)
Purchase of treasury shares		(92,490	)		(398,554	)		(190,597	)
Balance, end of period		(1,073,970	)		(981,480	)		(582,926	)

TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD	$	6,071,375		$	6,283,517		$	6,101,722

(1)The cumulative adjustment to accumulated other comprehensive income (loss), net of deferred income taxes, and retained earnings, represents
the effect of initially adopting new guidance for other-than-temporary impairments of debt securities.

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

F-6

Index

EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
(Dollars in thousands)	2011			2010			2009

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(80,486	)	$	610,754		$	806,989
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease (increase) in premiums receivable		(235,560	)		132,986			(52,966	)
Decrease (increase) in funds held by reinsureds, net		18,236			1,573			(25,271	)
Decrease (increase) in reinsurance receivables		97,549			(62,954	)		54,674
Decrease (increase) in deferred tax asset		(194,029	)		22,023			147,071
Decrease (increase) in prepaid reinsurance premiums		46,374			(25,281	)		(24,161	)
Increase (decrease) in reserve for losses and loss adjustment expenses		826,230			420,748			(66,177	)
Increase (decrease) in future policy benefit reserve		4,185			(1,534	)		(1,636	)
Increase (decrease) in unearned premiums		(39,822	)		36,883			64,892
Change in equity adjustments in limited partnerships		(56,549	)		(71,493	)		20,575
Change in other assets and liabilities, net		214,701			(104,276	)		(109,004	)
Non-cash compensation expense		17,693			14,786			13,347
Amortization of bond premium (accrual of bond discount)		47,872			46,095			32,172
Amortization of underwriting discount on senior notes		49			76			192
Realized gain on debt repurchase		-			-			(78,271	)
Net realized capital (gains) losses		(6,923	)		(101,911	)		2,312
Net cash provided by (used in) operating activities		659,520			918,475			784,738

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities matured/called - available for sale, at market value		1,702,973			1,717,659			1,203,548
Proceeds from fixed maturities matured/called - available for sale, at fair value		12,775			-			15,358
Proceeds from fixed maturities sold - available for sale, at market value		1,732,246			1,632,719			311,273
Proceeds from fixed maturities sold - available for sale, at fair value		65,158			20,237			14,777
Proceeds from equity securities sold - available for sale, at market value		27,207			3,037			24,159
Proceeds from equity securities sold - available for sale, at fair value		247,227			234,112			43,496
Distributions from other invested assets		166,273			79,849			182,952
Cost of fixed maturities acquired - available for sale, at market value		(3,238,113	)		(2,766,212	)		(3,051,012	)
Cost of fixed maturities acquired - available for sale, at fair value		(27,481	)		(134,324	)		(27,555	)
Cost of equity securities acquired - available for sale, at market value		(127,837	)		(353,265	)		-
Cost of equity securities acquired - available for sale, at fair value		(755,734	)		(514,092	)		(265,275	)
Cost of other invested assets acquired		(64,832	)		(66,408	)		(62,554	)
Cost of businesses acquired		(63,100	)		-			-
Net change in short-term investments		100,969			(110,241	)		1,228,032
Net change in unsettled securities transactions		13,563			(13,084	)		10,445
Net cash provided by (used in) investing activities		(208,706	)		(270,013	)		(372,356	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Common shares issued during the period, net		12,269			3,066			7,284
Purchase of treasury shares		(92,490	)		(398,554	)		(190,597	)
Revolving credit borrowings		(50,000	)		50,000			-
Net cost of debt repurchase		-			-			(83,026	)
Net cost of senior notes maturing		-			(200,000	)		-
Dividends paid to shareholders		(103,848	)		(108,477	)		(116,857	)
Net cash provided by (used in) financing activities		(234,069	)		(653,965	)		(383,196	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		(26,502	)		16,313			12,718

Net increase (decrease) in cash		190,243			10,810			41,904
Cash, beginning of period		258,408			247,598			205,694
Cash, end of period	$	448,651		$	258,408		$	247,598

SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid (recovered)	$	(44,537	)	$	(30,978	)	$	111,831
Interest paid		51,647			60,198			72,454

Non-cash transaction:
Net assets acquired and liabilities assumed from business acquisitions		19,130			-			-

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

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Index

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2011, 2010 and 2009

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Business and Basis of Presentation.

Everest Re Group, Ltd. (“Group”), a Bermuda company, through its subsidiaries, principally provides reinsurance and insurance in the U.S., Bermuda and international markets. As used in this document, “Company” means Group and its subsidiaries. On December 30, 2008, Group contributed Everest Reinsurance Holdings, Inc. (“Holdings”) and its subsidiaries to its Irish holding company, Everest Underwriting Group (Ireland), Limited (“Holdings Ireland”).

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The statements include all of the following domestic and foreign direct and indirect subsidiaries of Group: Everest International Reinsurance, Ltd. (“Everest International”), Everest Global Services, Inc. (“Global Services”), Everest Reinsurance (Bermuda), Ltd. (“Bermuda Re”), Everest Re Advisors, Ltd., Everest Advisors (UK), Ltd., Holdings Ireland, Everest Reinsurance Company (Ireland) Limited (“Ireland Re”), Everest Insurance Company of Canada (“Everest Canada”), Premiere Insurance Underwriting Services (“Premiere”), Holdings, Heartland Crop Insurance, Inc. (“Heartland”), Mt. McKinley Insurance Company (“Mt. McKinley”), Mt. McKinley Managers, L.L.C., Workcare Southeast, Inc., Workcare Southeast of Georgia, Inc., Everest Reinsurance Company (“Everest Re”), Everest National Insurance Company (“Everest National”), Everest Reinsurance Company Ltda. (Brazil), Mt. Whitney Securities, Inc., Everest Indemnity Insurance Company (“Everest Indemnity”) and Everest Security Insurance Company (“Everest Security”). All amounts are reported in U.S. dollars.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (and disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate actual results could differ, possibly materially, from those estimates.

All intercompany accounts and transactions have been eliminated.

Certain reclassifications and format changes have been made to prior years’ amounts to conform to the 2011 presentation.

B. Investments.

Fixed maturity and equity security investments available for sale, at market value, reflect unrealized appreciation and depreciation, as a result of temporary changes in market value during the period, in shareholders’ equity, net of income taxes in “accumulated other comprehensive income (loss)” in the consolidated balance sheets. Fixed maturity and equity securities carried at fair value reflect fair value re-measurements as net realized capital gains and losses in the consolidated statements of operations and comprehensive income (loss). The Company records changes in fair value for its fixed maturities available for sale, at market value through shareholders’ equity, net of taxes in accumulated other comprehensive income (loss) since cash flows from these investments will be primarily used to settle its reserve for losses and loss adjustment expense liabilities. The Company anticipates holding these investments for an extended period as the cash flow from interest and maturities will fund the projected payout of these liabilities. Fixed maturities carried at fair value represent a portfolio of foreign denominated fixed maturity securities, which will be used to settle loss and loss adjustment reserves in the same currency, and a portfolio of convertible bond securities, which have characteristics similar to equity securities. The Company carries all of its equity securities at fair value except for mutual fund investments whose underlying investments are comprised of fixed maturity securities. For equity securities, available for sale, at fair value, the Company reflects changes in value as net realized capital gains and losses since these securities may be sold in the near term depending on financial market conditions. Interest income on all fixed maturities and dividend income on all equity securities are included as part of net investment income in the consolidated statements of operations and comprehensive income (loss). Unrealized losses on fixed maturities, which are

F-8

Index

deemed other-than-temporary and related to the credit quality of a security, are charged to net income (loss) as net realized capital losses. Short-term investments are stated at cost, which approximates market value. Realized gains or losses on sales of investments are determined on the basis of identified cost. For non-publicly traded securities, market prices are determined through the use of pricing models that evaluate securities relative to the U.S. Treasury yield curve, taking into account the issue type, credit quality, and cash flow characteristics of each security. For publicly traded securities, market value is based on quoted market prices or valuation models that use observable market inputs. When a sector of the financial markets is inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value. Retrospective adjustments are employed to recalculate the values of asset-backed securities. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used to effect the calculation of projected and prepayments for pass-through security types. Other invested assets include limited partnerships, rabbi trusts and an affiliated entity. Limited partnerships and the affiliated entity are accounted for under the equity method of accounting, which can be recorded on a monthly or quarterly lag.

C. Uncollectible Receivable Balances.

The Company provides reserves for uncollectible reinsurance recoverable and premium receivable balances based on management’s assessment of the collectability of the outstanding balances. Such reserves are presented in the table below for the periods indicated.

		Years Ended December 31,
(Dollars in thousands)		2011				2010
Reinsurance receivables and premium receivables		$	33,796			$	34,496

D. Deferred Acquisition Costs.

Acquisition costs, consisting principally of commissions and brokerage expenses and certain premium taxes and fees incurred at the time a contract or policy is issued and that vary with and are directly related to the Company’s reinsurance and insurance business, are deferred and amortized over the period in which the related premiums are earned. Deferred acquisition costs are limited to their estimated realizable value by line of business based on the related unearned premiums, anticipated claims and claim expenses and anticipated investment income. Deferred acquisition costs amortized to income are presented in the table below for the periods indicated.

		Years Ended December 31,
(Dollars in thousands)		2011				2010				2009
Deferred acquisition costs		$	950,521			$	931,855			$	928,333

The present value of in force annuity business is included in deferred acquisition costs. This value is amortized over the expected life of the business from the time of acquisition. The amortization each year is a function of the gross profits each year in relation to the total gross profits expected over the life of the business, discounted at an assumed net credited rate.

E. Reserve for Losses and Loss Adjustment Expenses.

The reserve for losses and loss adjustment expenses (“LAE”) is based on individual case estimates and reports received from ceding companies. A provision is included for losses and LAE incurred but not reported (“IBNR”) based on past experience. A provision is also included for certain potential liabilities relating to asbestos and environmental (“A&E”) exposures, which liabilities cannot be estimated using traditional reserving techniques. See also Note 3. The reserves are reviewed periodically and any changes in estimates are reflected in earnings in the period the adjustment is made. The Company’s loss and LAE reserves represent management’s best estimate of the ultimate liability. Loss and LAE reserves are presented gross of reinsurance receivables and incurred losses and LAE are presented net of reinsurance.

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Index

Accruals for commissions are established for reinsurance contracts that provide for the stated commission percentage to increase or decrease based on the loss experience of the contract. Changes in estimates for such arrangements are recorded as commission expense. Commission accruals for contracts with adjustable features are estimated based on expected loss and LAE.

F. Future Policy Benefit Reserve.

Liabilities for future policy benefits on annuity policies are carried at their accumulated values. Reserves for policy benefits include mortality claims in the process of settlement and IBNR claims. Actual experience in a particular period may fluctuate from expected results.

G. Premium Revenues.

Written premiums are earned ratably over the periods of the related insurance and reinsurance contracts. Unearned premium reserves are established relative to the unexpired contract period. Such reserves are established based upon reports received from ceding companies or estimated using pro rata methods based on statistical data. Reinstatement premiums represent additional premium received on reinsurance coverages, most prevalently catastrophe related, when limits have been depleted under the original reinsurance contract and additional coverage is granted. Written and earned premiums and the related costs, which have not yet been reported to the Company, are estimated and accrued. Premiums are net of ceded reinsurance.

Payout annuity premiums are recognized as revenue over the premium-paying period of the policies.

H. Prepaid Reinsurance Premiums.

Prepaid reinsurance premiums represent unearned premium reserves ceded to other reinsurers. Prepaid reinsurance premiums for any foreign reinsurers comprising more than 10% of the outstanding balance at December 31, 2011 were collateralized either through a trust arrangement or letters of credit, thereby limiting the credit risk to the Company.

I. Income Taxes.

Holdings and its wholly-owned subsidiaries file a consolidated U.S. federal income tax return. Foreign branches of subsidiaries file local tax returns as required. Group and subsidiaries not included in Holdings’ consolidated tax return file separate company U.S. federal income tax returns as required. Holdings Ireland files an Irish income tax return. The UK branch of Bermuda Re files a UK income tax return. Deferred income taxes have been recorded to recognize the tax effect of temporary differences between the financial reporting and income tax bases of assets and liabilities, which arise because of differences between GAAP and income tax accounting rules.

J. Foreign Currency.

Assets and liabilities relating to foreign operations are translated into U.S. dollars at the exchange rates in effect at the balance sheet date; revenues and expenses are translated into U.S. dollars using average exchange rates in effect during the reporting period. Gains and losses resulting from translating foreign currency financial statements, net of deferred income taxes, are excluded from net income (loss) and accumulated in shareholders’ equity. Gains and losses resulting from foreign currency transactions, other than debt securities available for sale, are recorded through the consolidated statements of operations and comprehensive income (loss) in other income (expense). Gains and losses resulting from changes in the foreign currency exchange rates on debt securities, available for sale at market value, are recorded in the consolidated balance sheets in accumulated other comprehensive income (loss) as unrealized appreciation (depreciation) and any losses which are deemed other-than-temporary are changed to net income (loss) as net realized capital loss.

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Index

K. Earnings Per Common Share.

Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that would occur if options granted under various share-based compensation plans were exercised resulting in the issuance of common shares that would participate in the earnings of the entity.

Net income (loss) per common share has been computed as per below, based upon weighted average common basic and dilutive shares outstanding.

		Years Ended December 31,
(Dollars in thousands, except per share amounts)		2011			2010			2009
Net income (loss) per share:
Numerator
Net income (loss)		$	(80,486	)	$	610,754		$	806,989
Less: dividends declared-common shares and nonvested common shares			(103,848	)		(108,477	)		(116,856	)
Undistributed earnings			(184,334	)		502,277			690,133
Percentage allocated to common shareholders (1)			99.3	%		99.5	%		99.7	%
			(183,134	)		499,882			687,729
Add: dividends declared-common shareholders			103,150			107,926			116,477
Numerator for basic and diluted earnings per common share		$	(79,984	)	$	607,808		$	804,207

Denominator
Denominator for basic earnings per weighted-average common shares			53,792			56,630			60,661
Effect of dilutive securities:
Options			124			156			187
Denominator for diluted earnings per adjusted weighted-average common shares			53,916			56,786			60,847

Per common share net income (loss)
Basic		$	(1.49	)	$	10.73		$	13.26
Diluted		$	(1.49	)	$	10.70		$	13.22

(1)	Basic weighted-average common shares outstanding		53,792			56,630			60,661
	Basic weighted-average common shares outstanding and nonvested common shares expected to vest		54,145			56,902			60,873
	Percentage allocated to common shareholders		99.3	%		99.5	%		99.7	%
(Some amounts may not reconcile due to rounding.)

The table below presents the options to purchase common shares that were outstanding, but were not included in the computation of earnings per diluted share as they were anti-dilutive, for the periods indicated:

	Years Ended December 31,
	2011		2010		2009
Anti-dilutive options	1,490,730		1,873,070		1,613,450

All outstanding options expire on or between September 26, 2012 and May 18, 2021.

L. Segmentation.

The Company, through its subsidiaries, operates in four segments: U.S. Reinsurance, Insurance, International and Bermuda. See also Note 19.

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Index

M. Derivatives.

The Company sold seven equity index put option contracts, based on two indices, in 2001 and 2005, which are outstanding. The Company sold these equity index put options as insurance products with the intent of achieving a profit. These equity index put option contracts meet the definition of a derivative under FASB guidance and the Company’s position in these equity index put option contracts is unhedged. Accordingly, these equity index put option contracts are carried at fair value in the consolidated balance sheets with changes in fair value recorded in the consolidated statements of operations and comprehensive income (loss).

The fair value of the equity index put options can be found in the Company’s consolidated balance sheets as follows:

(Dollars in thousands)
Derivatives not designated as	Location of fair value	At December 31,
hedging instruments	in balance sheets	2011		2010

Equity index put option contracts	Equity index put option liability	$	69,729	$	58,467
Total		$	69,729	$	58,467

The change in fair value of the equity index put option contracts can be found in the Company’s statement of operations and comprehensive income (loss) as follows:

(Dollars in thousands)
Derivatives not designated as	Location of gain (loss) in statements of	For the Years Ended December 31,
hedging instruments	operations and comprehensive income (loss)	2011			2010			2009

Equity index put option contracts	Net derivative gain (loss)	$	(11,261	)	$	(1,119	)	$	3,204
Total		$	(11,261	)	$	(1,119	)	$	3,204

N. Deposit Assets and Liabilities.

In the normal course of its operations, the Company may enter into contracts that do not meet risk transfer provisions. Such contracts are accounted for using the deposit accounting method and are included in other liabilities in the Company’s consolidated balance sheets. For such contracts, the Company originally records deposit liabilities for an amount equivalent to the assets received. Actuarial studies are used to estimate the final liabilities under such contracts with any change reflected in the consolidated statements of operations and comprehensive income (loss).

O. Share-Based Compensation.

Share-based compensation option or restricted share awards are fair valued at the grant date and expensed over the vesting period of the award. The tax benefit on the recorded expense is deferred until the time the award is exercised or vests (becomes unrestricted). See Note 17.

P. Application of Recently Issued Accounting Standard Changes.

Financial Accounting Standards Board Launched Accounting Codification. In June 2009, Financial Accounting Standards Board (“FASB”) issued authoritative guidance establishing the FASB Accounting Standards CodificationTM (“Codification”) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification have become non-authoritative.

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Index

Following the Codification, the FASB will no longer issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.

GAAP is not intended to be changed as a result of the FASB’s Codification, but it will change the way the guidance is organized and presented. As a result, these changes have a significant impact on how companies reference GAAP in their financial statements and in the accounting policies for financial statements issued for interim and annual periods ending after September 15, 2009. The Company’s adoption of this guidance impacts the way the Company references U.S. GAAP accounting standards in the financial statements and Notes to Consolidated Financial Statements.

Intangibles-Goodwill or Other. In September 2011, the FASB amended the authoritative guidance for disclosures on Goodwill Impairment. The amendment allows an entity first to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis in determining whether it is necessary to perform the two-step goodwill impairment test. This guidance is effective for periods beginning after December 15, 2011. The Company will adopt this guidance as of January 1, 2012.

Presentation of Comprehensive Income. In June 2011, FASB issued amendments to existing guidance to provide two alternatives for the presentation of comprehensive income. Components of net income and comprehensive income will either be presented within a single, continuous financial statement or be presented in two separate but consecutive financial statements. The guidance is effective for reporting periods beginning after December 15, 2011. The Company will adopt this guidance as of January 1, 2012 and expects to present net income and comprehensive income in a single, continuous financial statement.

Common Fair Value Measurement. In May 2011, FASB issued amendments to existing guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. The amendments change wording used to describe many GAAP fair value measurement requirements and disclosures. FASB does not intend for the amendments to cause a change in application of fair value accounting guidance. The guidance is effective for reporting periods beginning after December 15, 2011. The Company will adopt this guidance prospectively as of January 1, 2012.

Treatment of Insurance Contract Acquisition Costs. In October 2010, the FASB issued authoritative guidance for the accounting for costs associated with acquiring or renewing insurance contracts. The guidance identifies the incremental direct costs of contract acquisition and costs directly related to acquisition activities that should be capitalized. This guidance is effective for reporting periods beginning after December 15, 2011. The Company will adopt this guidance as of January 1, 2012 and estimates that $13,492 thousand of acquisition costs will no longer be capitalized during 2012.

Subsequent Events. In May 2009, the FASB issued authoritative guidance for subsequent events, which was later modified in February 2010, that addresses the accounting for and disclosure of subsequent events not addressed in other applicable U.S. GAAP. The Company implemented the new disclosure requirement beginning with the second quarter of 2009 and included it in the Notes to Consolidated Interim Financial Statements.

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Index

Improving Disclosures About Fair Value Measurements. In January 2010, the FASB amended the authoritative guidance for disclosures on fair value measurements. Effective for interim and annual reporting periods beginning after December 15, 2009, the guidance requires a new separate disclosure for: significant transfers in and out of Level 1 and 2 and the reasons for the transfers; and provided clarification on existing disclosures to include: fair value measurement disclosures by class of assets and liabilities and disclosure on valuation techniques and inputs used to measure fair value that fall in either Level 2 or Level 3. The Company implemented this guidance effective January 1, 2010. Effective for interim and annual reporting periods beginning after December 15, 2010, the guidance requires another new separate disclosure in regards to Level 3 fair value measurements in that, the period activity will present separately information about purchases, sales, issuances and settlements. Comparative disclosures shall be required only for periods ending after initial adoption. The Company implemented this guidance beginning with the third quarter of 2010.

Other-Than-Temporary Impairments on Investment Securities. In April 2009, the FASB revised the authoritative guidance for the recognition and presentation of other-than-temporary impairments. This new guidance amends the recognition guidance for other-than-temporary impairments of debt securities and expands the financial statement disclosures for other-than-temporary impairments on debt and equity securities. For available for sale debt securities that the Company has no intent to sell and more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment would be recognized in earnings, while the rest of the fair value loss would be recognized in accumulated other comprehensive income (loss). The Company adopted this guidance effective April 1, 2009. Upon adoption the Company recognized a cumulative-effect adjustment increase in retained earnings and decrease in accumulated other comprehensive income (loss) as follows:

(Dollars in thousands)
Cumulative-effect adjustment, gross	$	65,658
Tax		(8,346	)
Cumulative-effect adjustment, net	$	57,312

Measurement of Fair Value in Inactive Markets. In April 2009, the FASB revised the authoritative guidance for fair value measurements and disclosures, which reaffirms that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. It also reaffirms the need to use judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. There was no impact to the Company’s financial statements upon adoption.

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Index

INVESTMENTS

The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, fixed maturity and equity security investments, carried at market value, are as follows for the periods indicated:

	At December 31, 2011
	Amortized		Unrealized		Unrealized			Market
(Dollars in thousands)	Cost		Appreciation		Depreciation			Value
Fixed maturity securities
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	284,514	$	16,407	$	(287	)	$	300,634
Obligations of U.S. states and political subdivisions		1,558,615		102,815		(525	)		1,660,905
Corporate securities		3,495,761		197,914		(27,054	)		3,666,621
Asset-backed securities		186,936		7,020		(550	)		193,406
Mortgage-backed securities
Commercial		310,387		20,942		(9,902	)		321,427
Agency residential		2,198,937		86,722		(3,066	)		2,282,593
Non-agency residential		53,365		499		(775	)		53,089
Foreign government securities		1,555,707		120,900		(8,389	)		1,668,218
Foreign corporate securities		2,086,951		91,869		(32,189	)		2,146,631
Total fixed maturity securities	$	11,731,173	$	645,088	$	(82,737	)	$	12,293,524
Equity securities	$	463,620	$	4,060	$	(18,750	)	$	448,930

	At December 31, 2010
	Amortized		Unrealized		Unrealized			Market
(Dollars in thousands)	Cost		Appreciation		Depreciation			Value
Fixed maturity securities
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	394,690	$	12,772	$	(5,655	)	$	401,807
Obligations of U.S. states and political subdivisions		2,809,514		116,920		(24,929	)		2,901,505
Corporate securities		2,916,977		168,687		(16,518	)		3,069,146
Asset-backed securities		210,717		7,799		(215	)		218,301
Mortgage-backed securities
Commercial		324,922		17,751		(5,454	)		337,219
Agency residential		2,018,384		76,367		(1,469	)		2,093,282
Non-agency residential		76,259		1,205		(1,723	)		75,741
Foreign government securities		1,584,355		79,661		(25,668	)		1,638,348
Foreign corporate securities		1,675,518		71,268		(31,666	)		1,715,120
Total fixed maturity securities	$	12,011,336	$	552,430	$	(113,297	)	$	12,450,469
Equity securities	$	363,283	$	3,039	$	(2,586	)	$	363,736

The $1,668,218 thousand of foreign government securities at December 31, 2011 included $756,833 thousand of European sovereign securities. Approximately 59%, 21% and 8% represented securities held in the governments of the United Kingdom, France and Austria, respectively. No other countries represented more than 5% of the European sovereign securities. The Company held no sovereign securities of Portugal, Italy, Ireland, Greece or Spain at December 31, 2011.

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Index

In accordance with FASB guidance, the Company reclassified the non-credit portion of other-than-temporary impairments from retained earnings into accumulated other comprehensive income (loss), on April 1, 2009. The table below presents the pre-tax cumulative unrealized appreciation (depreciation) on those corporate securities, for the periods indicated:

		At December 31,
(Dollars in thousands)		2011				2010
Pre-tax cumulative unrealized appreciation (depreciation)		$	2,567			$	1,743

The amortized cost and market value of fixed maturity securities are shown in the following table by contractual maturity. Mortgage-backed securities are generally more likely to be prepaid than other fixed maturity securities. As the stated maturity of such securities may not be indicative of actual maturities, the totals for mortgage-backed and asset-backed securities are shown separately.

	At December 31, 2011				At December 31, 2010
	Amortized		Market		Amortized		Market
(Dollars in thousands)	Cost		Value		Cost		Value
Fixed maturity securities – available for sale:
Due in one year or less	$	494,098	$	494,911	$	572,985	$	580,528
Due after one year through five years		5,052,484		5,268,748		3,911,482		4,057,230
Due after five years through ten years		2,188,080		2,325,142		2,564,948		2,686,005
Due after ten years		1,246,886		1,354,208		2,331,639		2,402,163
Asset-backed securities		186,936		193,406		210,717		218,301
Mortgage-backed securities:
Commercial		310,387		321,427		324,922		337,219
Agency residential		2,198,937		2,282,593		2,018,384		2,093,282
Non-agency residential		53,365		53,089		76,259		75,741
Total fixed maturity securities	$	11,731,173	$	12,293,524	$	12,011,336	$	12,450,469

The changes in net unrealized appreciation (depreciation) for the Company’s investments are derived from the following sources for the periods indicated:

	Years Ended December 31,
(Dollars in thousands)	2011			2010
Increase (decrease) during the period between the market value and cost
of investments carried at market value, and deferred taxes thereon:
Fixed maturity securities	$	122,393		$	40,095
Fixed maturity securities, other-than-temporary impairment		824			7,831
Equity securities		(15,143	)		(1,878	)
Other invested assets		(1,515	)		2,389
Change in unrealized appreciation (depreciation), pre-tax		106,559			48,437
Deferred tax benefit (expense)		(26,484	)		10,726
Deferred tax benefit (expense), other-than-temporary impairment		66			1,001
Change in unrealized appreciation (depreciation),
net of deferred taxes, included in shareholders’ equity	$	80,141		$	60,164

The Company frequently reviews all of its fixed maturity, available for sale securities for declines in market value and focuses its attention on securities whose fair value has fallen below 80% of their amortized cost at the time of review. The Company then assesses whether the decline in value is temporary or other-than-temporary. In making its assessment, the Company evaluates the current market and interest rate environment as well as specific issuer information. Generally, a change in a security’s value caused by a change in the market, interest rate or foreign exchange environment does not constitute an other-than-temporary impairment, but rather a temporary decline in market value. Temporary declines in market value are recorded as unrealized losses in accumulated other comprehensive income (loss). If the Company determines that the decline is other-than-temporary and the Company does not have the intent to sell the security; and it is more likely than not that the Company will not have to sell the security before recovery of

F-16

Index

its cost basis, the carrying value of the investment is written down to fair value. The fair value adjustment that is credit or foreign exchange related is recorded in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss). The fair value adjustment that is non-credit related is recorded as a component of other comprehensive income (loss), net of tax, and is included in accumulated other comprehensive income (loss) in the Company’s consolidated balance sheets. The Company’s assessments are based on the issuers current and expected future financial position, timeliness with respect to interest and/or principal payments, speed of repayments and any applicable credit enhancements or breakeven constant default rates on mortgage-backed and asset-backed securities, as well as relevant information provided by rating agencies, investment advisors and analysts.

The majority of the Company’s equity securities available for sale at market value are primarily comprised of mutual fund investments whose underlying securities consist of fixed maturity securities. When a fund’s value reflects an unrealized loss, the Company assesses whether the decline in value is temporary or other-than-temporary. In making its assessment, the Company considers the composition of its portfolios and their related markets, reports received from the portfolio managers and discussions with portfolio managers. If the Company determines that the declines are temporary and it has the ability and intent to continue to hold the investments, then the declines are recorded as unrealized losses in accumulated other comprehensive income (loss). If declines are deemed to be other-than-temporary, then the carrying value of the investment is written down to fair value and recorded in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss).

Retrospective adjustments are employed to recalculate the values of asset-backed securities. All of the Company’s asset-backed and mortgage-backed securities have a pass-through structure. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used in the calculation of projected and prepayments for pass-through security types.

The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:

	Duration of Unrealized Loss at December 31, 2011 By Security Type
	Less than 12 months					Greater than 12 months					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
(Dollars in thousands)	Market Value		Depreciation			Market Value		Depreciation			Market Value		Depreciation
Fixed maturity securities - available for sale
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	-	$	-		$	3,452	$	(287	)	$	3,452	$	(287	)
Obligations of U.S. states and political subdivisions		-		-			7,518		(525	)		7,518		(525	)
Corporate securities		512,255		(14,962	)		120,064		(12,092	)		632,319		(27,054	)
Asset-backed securities		20,839		(339	)		3,655		(211	)		24,494		(550	)
Mortgage-backed securities
Commercial		9,292		(1,267	)		54,535		(8,635	)		63,827		(9,902	)
Agency residential		253,171		(2,524	)		43,894		(542	)		297,065		(3,066	)
Non-agency residential		1,542		(19	)		35,679		(756	)		37,221		(775	)
Foreign government securities		39,534		(1,035	)		132,977		(7,354	)		172,511		(8,389	)
Foreign corporate securities		278,949		(12,287	)		259,641		(19,902	)		538,590		(32,189	)
Total fixed maturity securities	$	1,115,582	$	(32,433	)	$	661,415	$	(50,304	)	$	1,776,997	$	(82,737	)
Equity securities		108,939		(8,499	)		204,466		(10,251	)		313,405		(18,750	)
Total	$	1,224,521	$	(40,932	)	$	865,881	$	(60,555	)	$	2,090,402	$	(101,487	)

F-17

Index

	Duration of Unrealized Loss at December 31, 2011 By Maturity
	Less than 12 months					Greater than 12 months					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
(Dollars in thousands)	Market Value		Depreciation			Market Value		Depreciation			Market Value		Depreciation
Fixed maturity securities
Due in one year or less	$	26,581	$	(326	)	$	72,083	$	(8,953	)	$	98,664	$	(9,279	)
Due in one year through five years		421,995		(12,001	)		256,698		(15,635	)		678,693		(27,636	)
Due in five years through ten years		337,232		(13,019	)		159,476		(8,264	)		496,708		(21,283	)
Due after ten years		44,930		(2,938	)		35,395		(7,308	)		80,325		(10,246	)
Asset-backed securities		20,839		(339	)		3,655		(211	)		24,494		(550	)
Mortgage-backed securities		264,005		(3,810	)		134,108		(9,933	)		398,113		(13,743	)
Total fixed maturity securities	$	1,115,582	$	(32,433	)	$	661,415	$	(50,304	)	$	1,776,997	$	(82,737	)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2011 were $2,090,402 thousand and $101,487 thousand, respectively. There were no unrealized losses on a single issuer that exceeded 0.04% of the market value of the fixed maturity securities at December 31, 2011. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $32,433 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities. Of these unrealized losses, $17,207 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $50,304 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to domestic and foreign corporate securities, foreign government securities and commercial mortgage-backed securities. Of these unrealized losses, $34,840 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. All of the unrealized losses related to foreign corporate and foreign government securities are due to temporary currency exchange rate movements as opposed to market value movements. The non-investment grade securities with unrealized losses were mainly comprised of corporate and commercial mortgage-backed securities. The gross unrealized depreciation for mortgage-backed securities included $322 thousand related to sub-prime and alt-A loans. In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations. The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments. The unrealized losses related to equity securities represent temporary declines in value of mutual fund investments where the underlying investments are comprised of emerging market debt fixed maturities.

The Company, given the size of its investment portfolio and capital position, does not have the intent to sell these securities; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis. In addition, all securities currently in an unrealized loss position are current with respect to principal and interest payments.

F-18

Index

	Duration of Unrealized Loss at December 31, 2010 By Security Type
	Less than 12 months					Greater than 12 months					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
(Dollars in thousands)	Market Value		Depreciation			Market Value		Depreciation			Market Value		Depreciation
Fixed maturity securities - available for sale
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	70,193	$	(2,425	)	$	43,264	$	(3,230	)	$	113,457	$	(5,655	)
Obligations of U.S. states and political subdivisions		336,522		(9,520	)		171,812		(15,409	)		508,334		(24,929	)
Corporate securities		186,898		(5,077	)		107,520		(11,441	)		294,418		(16,518	)
Asset-backed securities		7,816		(92	)		2,408		(123	)		10,224		(215	)
Mortgage-backed securities
Commercial		962		(25	)		58,036		(5,429	)		58,998		(5,454	)
Agency residential		208,930		(1,236	)		614		(233	)		209,544		(1,469	)
Non-agency residential		-		-			44,341		(1,723	)		44,341		(1,723	)
Foreign government securities		194,113		(6,416	)		203,913		(19,252	)		398,026		(25,668	)
Foreign corporate securities		309,627		(9,452	)		198,161		(22,214	)		507,788		(31,666	)
Total fixed maturity securities	$	1,315,061	$	(34,243	)	$	830,069	$	(79,054	)	$	2,145,130	$	(113,297	)
Equity securities		273,378		(2,584	)		13		(2	)		273,391		(2,586	)
Total	$	1,588,439	$	(36,827	)	$	830,082	$	(79,056	)	$	2,418,521	$	(115,883	)

	Duration of Unrealized Loss at December 31, 2010 By Maturity
	Less than 12 months					Greater than 12 months					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
(Dollars in thousands)	Market Value		Depreciation			Market Value		Depreciation			Market Value		Depreciation
Fixed maturity securities
Due in one year or less	$	24,854	$	(450	)	$	55,204	$	(9,061	)	$	80,058	$	(9,511	)
Due in one year through five years		313,179		(11,829	)		224,770		(19,685	)		537,949		(31,514	)
Due in five years through ten years		358,468		(9,538	)		144,264		(12,624	)		502,732		(22,162	)
Due after ten years		400,852		(11,073	)		300,432		(30,176	)		701,284		(41,249	)
Asset-backed securities		7,816		(92	)		2,408		(123	)		10,224		(215	)
Mortgage-backed securities		209,892		(1,261	)		102,991		(7,385	)		312,883		(8,646	)
Total fixed maturity securities	$	1,315,061	$	(34,243	)	$	830,069	$	(79,054	)	$	2,145,130	$	(113,297	)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2010 were $2,418,521 thousand and $115,883 thousand, respectively. There were no unrealized losses on a single issuer that exceeded 0.08% of the market value of the fixed maturity securities at December 31, 2010. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $34,243 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of highly rated municipal, foreign government and domestic and foreign corporate securities. Of these unrealized losses, $33,463 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $79,054 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to highly rated municipal, foreign government, domestic and foreign corporate securities and commercial mortgage-backed securities. Of these unrealized losses, $66,514 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The non-investment grade securities with unrealized losses were mainly comprised of corporate and commercial mortgage-backed securities. The gross unrealized depreciation for mortgage-backed securities included $210 thousand related to sub-prime and alt-A loans. In all instances, there were

F-19

Index

no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations. The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.

The components of net investment income are presented in the table below for the periods indicated:

	Years Ended December 31,
(Dollars in thousands)	2011			2010			2009
Fixed maturity securities	$	521,991		$	581,870		$	570,798
Equity securities		57,573			12,200			3,574
Short-term investments and cash		1,281			151			5,965
Other invested assets
Limited partnerships		56,851			70,740			(19,022	)
Other		2,741			1,274			74
Total gross investment income		640,437			666,235			561,389
Interest debited (credited) and other investment expense		(20,396	)		(12,772	)		(13,596	)
Total net investment income	$	620,041		$	653,463		$	547,793

The Company records results from limited partnership investments on the equity method of accounting with changes in value reported through net investment income. Due to the timing of receiving financial information from these partnerships, the results are generally reported on a one month or quarter lag. If the Company determines there has been a significant decline in value of a limited partnership during this lag period, a loss will be recorded in the period in which the Company indentifies the decline.

The Company had contractual commitments to invest up to an additional $159,312 thousand in limited partnerships at December 31, 2011. These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2016.

The components of net realized capital gains (losses) are presented in the table below for the periods indicated:

	Years Ended December 31,
(Dollars in thousands)	2011			2010			2009
Fixed maturity securities, market value:
Other-than-temporary impairments	$	(16,223	)	$	(2,975	)	$	(13,210	)
Gains (losses) from sales		20,378			27,491			(45,666	)
Fixed maturity securities, fair value:
Gains (losses) from sales		(905	)		775			682
Gains (losses) from fair value adjustments		(15,518	)		15,091			9,337
Equity securities, market value:
Gains (losses) from sales		38			77			8,087
Equity securities, fair value:
Gains (losses) from sales		8,021			6,136			7,510
Gains (losses) from fair value adjustments		11,130			55,308			30,908
Short-term investments gain (loss)		2			8			40
Total net realized capital gains (losses)	$	6,923		$	101,911		$	(2,312	)

The Company recorded as net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss) both fair value re-measurements and write-downs in the value of securities deemed to be impaired on an other-than-temporary basis as displayed in the table above. The Company had no other-than-temporary impaired securities where the impairment had both a credit and non-credit component.

F-20

Index

The proceeds and split between gross gains and losses, from sales of fixed maturity and equity securities, are presented in the table below for the periods indicated:

	Years Ended December 31,
(Dollars in thousands)	2011			2010			2009
Proceeds from sales of fixed maturity securities	$	1,797,404		$	1,652,956		$	326,050
Gross gains from sales		86,519			141,038			20,576
Gross losses from sales		(67,046	)		(112,772	)		(65,560	)

Proceeds from sales of equity securities	$	274,434		$	237,149		$	67,655
Gross gains from sales		16,325			11,562			16,483
Gross losses from sales		(8,266	)		(5,349	)		(886	)

Securities with a carrying value amount of $1,410,030 thousand at December 31, 2011 were on deposit with various state or governmental insurance departments in compliance with insurance laws.

RESERVE FOR LOSSES, LAE AND FUTURE POLICY BENEFIT RESERVE

Reserves for losses and LAE.

Activity in the reserve for losses and LAE is summarized for the periods indicated:

	At December 31,
(Dollars in thousands)	2011			2010			2009
Gross reserves at January 1	$	9,340,183		$	8,937,858		$	8,840,660
Less reinsurance recoverables		(689,445	)		(641,269	)		(690,509	)
Net reserves at January 1		8,650,738			8,296,589			8,150,151

Incurred related to:
Current year		3,722,513			2,976,578			2,245,220
Prior years		3,691			(30,866	)		128,838
Total incurred losses and LAE		3,726,204			2,945,712			2,374,058

Paid related to:
Current year		810,530			568,330			388,172
Prior years		2,008,307			1,988,749			1,997,216
Total paid losses and LAE		2,818,837			2,557,079			2,385,388

Foreign exchange/translation adjustment		(15,888	)		(34,484	)		157,768

Net reserves at December 31		9,542,217			8,650,738			8,296,589
Plus reinsurance recoverables		580,998			689,445			641,269
Gross reserves at December 31	$	10,123,215		$	9,340,183		$	8,937,858

Prior years’ reserves increased by $3,691 thousand, decreased by $30,866 thousand and increased by $128,838 thousand for the years ended December 31, 2011, 2010 and 2009, respectively. The increase for 2011 was attributable to a $113,833 thousand increase in insurance and U.S. reinsurance business, primarily related to development on contractors’ liability, excess casualty and California workers compensation reserves, partially offset by the $110,142 thousand decrease in non-US reinsurance business, primarily related to favorable development on non-catastrophe property reserves.

The decrease for 2010 was attributable to a $140,760 thousand decrease in non-US reinsurance business (Bermuda and International), partially offset by the $109,894 thousand increase in insurance and U.S. reinsurance business. The decrease in the non-U.S. reinsurance business was due to reserve studies that indicated net favorable reserve development, as well as reductions in loss estimates for prior year catastrophes. The increase in the US reinsurance is primarily due to reserve strengthening in casualty lines for construction liability claims and the increase in the insurance business is due to reserve strengthening on several terminated programs.

F-21

Index

The increase for 2009 was attributable to a $59,019 thousand increase in the insurance business, primarily contractor liability exposures and $69,819 thousand in the reinsurance business, in both domestic and international, as a result of losses from sub-prime exposures and property, partially offset by favorable development on other casualty lines.

Reinsurance Receivables. Reinsurance receivables for both paid and recoverable on unpaid losses totaled $580,339 thousand and $684,718 thousand at December 31, 2011 and 2010, respectively. At December 31, 2011, $213,601 thousand, or 36.8% was receivable from C.V. Starr (Bermuda); $66,268 thousand, or 11.4%, was receivable from Transatlantic Reinsurance Company; $56,895 thousand, or 9.8%, was receivable from Berkley Insurance Company and $39,852 thousand, or 6.9%, was receivable from Munich Reinsurance Company. The receivable from C.V. Starr is fully collateralized by a trust agreement. No other retrocessionaire accounted for more than 5% of our receivables.

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

The Company’s reserves include an estimate of the Company’s ultimate liability for A&E claims. The Company’s A&E liabilities emanate from Mt. McKinley’s direct insurance business and Everest Re’s assumed reinsurance business. All of the contracts of insurance and reinsurance under which the Company has received claims during the past three years expired more than 20 years ago. There are significant uncertainties surrounding the Company’s reserves for its A&E losses.

A&E exposures represent a separate exposure group for monitoring and evaluating reserve adequacy. The following table summarizes incurred losses with respect to A&E reserves on both a gross and net of reinsurance basis for the periods indicated:

	At December 31,
(Dollars in thousands)	2011			2010			2009
Gross basis:
Beginning of period reserves	$	554,790		$	638,674		$	786,843
Incurred losses		752			-			-
Paid losses		(55,631	)		(83,884	)		(148,169	)
End of period reserves	$	499,911		$	554,790		$	638,674

Net basis:
Beginning of period reserves	$	532,906		$	613,121		$	749,070
Incurred losses		764			-			429
Paid losses		(53,510	)		(80,215	)		(136,378	)
End of period reserves	$	480,160		$	532,906		$	613,121

At December 31, 2011, the gross reserves for A&E losses were comprised of $145,571 thousand representing case reserves reported by ceding companies, $102,934 thousand representing additional case reserves established by the Company on assumed reinsurance claims, $40,555 thousand representing case reserves established by the Company on direct excess insurance claims, including Mt. McKinley, and $210,851 thousand representing IBNR reserves.

With respect to asbestos only, at December 31, 2011, the Company had gross asbestos loss reserves of $479,729 thousand, or 96.0%, of total A&E reserves, of which $382,334 thousand was for assumed business and $97,395 thousand was for direct business.

F-22

Index

Future Policy Benefit Reserve.

Activity in the reserve for future policy benefits is summarized for the periods indicated:

	At December 31,
(Dollars in thousands)	2011			2010			2009
Balance at beginning of year	$	63,002		$	64,536		$	66,172
Liabilities assumed		176			172			324
Adjustments to reserves		8,449			2,944			8,835
Benefits paid in the current year		(4,440	)		(4,650	)		(10,795	)
Balance at end of year	$	67,187		$	63,002		$	64,536

FAIR VALUE

The Company’s fixed maturity and equity securities are primarily managed by third party investment asset managers. The investment asset managers obtain prices from nationally recognized pricing services. These services seek to utilize market data and observations in their evaluation process. They use pricing applications that vary by asset class and incorporate available market information and when fixed maturity securities do not trade on a daily basis the services will apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. In addition, they use model processes, such as the Option Adjusted Spread model to develop prepayment and interest rate scenarios for securities that have prepayment features.

In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers. The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers. In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices. In addition, the Company continually performs analytical reviews of price changes and tests the prices on a random basis to an independent pricing source. No material variances were noted during these price validation procedures. In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value. The Company made no such adjustments at December 31, 2011 and 2010.

The Company internally manages a small public equity portfolio which had a fair value at December 31, 2011 of $168,227 thousand and all prices were obtained from publically published sources.

Equity securities in U.S. denominated currency are categorized as Level 1, Quoted Prices in Active Markets for Identical Assets, since the securities are actively traded on an exchange and prices are based on quoted prices from the exchange. Equity securities traded on foreign exchanges are categorized as Level 2 due to potential foreign exchange adjustments to fair or market value.

Fixed maturity securities are generally categorized as Level 2, Significant Other Observable Inputs, since a particular security may not have traded but the pricing services are able to use valuation models with observable market inputs such as interest rate yield curves and prices for similar fixed maturity securities in terms of issuer, maturity and seniority. Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk) are categorized as Level 3, Significant Unobservable Inputs. These securities include broker priced securities and the Company’s equity index put option contracts.

F-23

Index

The Company sold six equity index put option contracts, based on the Standard & Poor’s 500 (“S&P 500”) index, for total consideration, net of commissions, of $22,530 thousand. At December 31, 2011, fair value for these equity index put option contracts was $62,425 thousand. These equity index put option contracts each have a single exercise date, with maturities ranging from 12 to 30 years and strike prices ranging from $1,141.21 to $1,540.63. No amounts will be payable under these equity index put option contracts if the S&P 500 index is at, or above, the strike prices on the exercise dates, which fall between June 2017 and March 2031. If the S&P 500 index is lower than the strike price on the applicable exercise date, the amount due would vary proportionately with the percentage by which the index is below the strike price. Based on historical index volatilities and trends and the December 31, 2011 S&P 500 index value, the Company estimates the probability that each equity index put option contract of the S&P 500 index falling below the strike price on the exercise date to be less than 47%. The theoretical maximum payouts under the equity index put option contracts would occur if on each of the exercise dates the S&P 500 index value were zero. At December 31, 2011, the present value of these theoretical maximum payouts using a 6% discount factor was $285,390 thousand.

The Company sold one equity index put option contract based on the FTSE 100 index for total consideration, net of commissions, of $6,706 thousand. At December 31, 2011, fair value for this equity index put option contract was $7,303 thousand. This equity index put option contract has an exercise date of July 2020 and a strike price of ₤5,989.75. No amount will be payable under this equity index put option contract if the FTSE 100 index is at, or above, the strike price on the exercise date. If the FTSE 100 index is lower than the strike price on the exercise date, the amount due will vary proportionately with the percentage by which the index is below the strike price. Based on historical index volatilities and trends and the December 31, 2011 FTSE 100 index value, the Company estimates the probability that the equity index put option contract of the FTSE 100 index will fall below the strike price on the exercise date to be less than 44%. The theoretical maximum payout under the equity index put option contract would occur if on the exercise date the FTSE 100 index value was zero. At December 31, 2011, the present value of the theoretical maximum payout using a 6% discount factor and current exchange rate was $30,800 thousand.

The Company’s equity index put option contracts contain provisions that require collateralization of the fair value, as calculated by the counterparty, above a specified threshold, which is based on the Company’s financial strength ratings (Moody’s Investors Service, Inc.) and/or debt ratings (Standard & Poor’s Ratings Services). The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position on December 31, 2011, was $69,729 thousand for which the Company had posted collateral with a market value of $49,189 thousand. If on December 31, 2011, the Company’s ratings were such that the collateral threshold was zero, the Company’s collateral requirement would increase by $55,000 thousand.

The fair value was calculated using an industry accepted option pricing model, Black-Scholes, which used the following assumptions:

	At December 31, 2011
		Contract
	Contracts	based on
	based on	FTSE 100
	S & P 500 Index	Index
Equity index	1,257.6	5,572.3
Interest rate	3.09% to 4.37%	3.76%
Time to maturity	5.4 to 19.3 yrs	8.6 yrs
Volatility	22.4% to 25.1%	24.7%

F-24

Index

The following table presents the fair value measurement levels for all assets and liabilities, which the Company has recorded at fair value (fair and market value) as of the periods indicated:

			Fair Value Measurement Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(Dollars in thousands)	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Assets:
Fixed maturities, market value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	300,634	$	-	$	300,634	$	-
Obligations of U.S. States and political subdivisions		1,660,905		-		1,660,905		-
Corporate securities		3,666,621		-		3,666,621		-
Asset-backed securities		193,406		-		176,469		16,937
Mortgage-backed securities
Commercial		321,427		-		321,427		-
Agency residential		2,282,593		-		2,282,593		-
Non-agency residential		53,089		-		52,603		486
Foreign government securities		1,668,218		-		1,668,218		-
Foreign corporate securities		2,146,631		-		2,143,587		3,044
Total fixed maturities, market value		12,293,524		-		12,273,057		20,467

Fixed maturities, fair value		113,606		-		113,606		-
Equity securities, market value		448,930		433,278		15,652		-
Equity securities, fair value		1,249,106		1,133,011		116,095		-

Liabilities:
Equity index put option contracts	$	69,729	$	-	$	-	$	69,729

There were no significant transfers between Level 1 and Level 2 for the twelve months ended December 31, 2011.

F-25

Index

The following table presents the fair value measurement levels for all assets and liabilities, which the Company has recorded at fair value (fair and market value) as of the periods indicated:

			Fair Value Measurement Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(Dollars in thousands)	December 31, 2010		(Level 1)		(Level 2)		(Level 3)
Assets:
Fixed maturities, market value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	401,807	$	-	$	401,807	$	-
Obligations of U.S. States and political subdivisions		2,901,505		-		2,901,505		-
Corporate securities		3,069,146		-		3,069,146		-
Asset-backed securities		218,301		-		217,306		995
Mortgage-backed securities
Commercial		337,219		-		337,219		-
Agency residential		2,093,282		-		2,093,282		-
Non-agency residential		75,741		-		74,241		1,500
Foreign government securities		1,638,348		-		1,638,348		-
Foreign corporate securities		1,715,120		-		1,710,704		4,416
Total fixed maturities, market value		12,450,469		-		12,443,558		6,911

Fixed maturities, fair value		180,482		-		180,482		-
Equity securities, market value		363,736		363,736		-		-
Equity securities, fair value		721,449		721,449		-		-

Liabilities:
Equity index put option contracts	$	58,467	$	-	$	-	$	58,467

The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs by asset type, for the periods indicated:

	December 31, 2011												December 31, 2010
	Asset-backed			Foreign			Non-agency						Corporate			Asset-backed			Foreign		Non-agency
(Dollars in thousands)	Securities			Corporate			RMBS			Total			Securities			Securities			Corporate		RMBS			Total
Beginning balance	$	995		$	4,416		$	1,500		$	6,911		$	9,900		$	6,268		$	-	$	1,394		$	17,563
Total gains or (losses) (realized/unrealized)
Included in earnings (or changes in net assets)		193			(8	)		634			819			(1	)		(258	)		2		408			151
Included in other comprehensive income (loss)		(714	)		(80	)		(230	)		(1,024	)		101			2,098			325		287			2,811
Purchases, issuances and settlements		16,470			3,131			(1,070	)		18,531			(10,000	)		(7,140	)		4,089		(589	)		(13,640	)
Transfers in and/or (out) of Level 3		(7	)		(4,415	)		(348	)		(4,770	)		-			26			-		-			26
Ending balance	$	16,937		$	3,044		$	486		$	20,467		$	-		$	995		$	4,416	$	1,500		$	6,911

The amount of total gains or losses for the period included
in earnings (or changes in net assets) attributable to the
change in unrealized gains or losses relating to assets
still held at the reporting date	$	-		$	-		$	-		$	-		$	-		$	-		$	-	$	-		$	-

(Some amounts may not reconcile due to rounding.)

F-26

Index

The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs for equity index put option contracts, for the periods indicated:

	Years Ended December 31,
(Dollars in thousands)	2011		2010
Liabilities:
Balance, beginning of period	$	58,467	$	57,349
Total (gains) or losses (realized/unrealized)
Included in earnings (or changes in net assets)		11,261		1,119
Included in other comprehensive income (loss)		-		-
Purchases, issuances and settlements		-		-
Transfers in and/or (out) of Level 3		-		-
Balance, end of period	$	69,729	$	58,467

The amount of total gains or losses for the period included in earnings
(or changes in net assets) attributable to the change in unrealized
gains or losses relating to liabilities still held at the reporting date	$	-	$	-

(Some amounts may not reconcile due to rounding.)

CREDIT FACILITIES

The Company has three credit facilities for a total commitment of up to $1,300,000 thousand, providing for the issuance of letters of credit and/or unsecured revolving credit lines. The following table presents the costs incurred in connection with the three credit facilities for the periods indicated:

		Years Ended December 31,
(Dollars in thousands)		2011				2010				2009
Credit facility fees incurred		$	2,211			$	2,034			$	1,892

The terms and outstanding amounts for each facility are discussed below:

Group Credit Facility

Effective July 27, 2007, Group, Bermuda Re and Everest International entered into a five year, $850,000 thousand senior credit facility with a syndicate of lenders referred to as the “Group Credit Facility”. Wells Fargo Corporation (“Wells Fargo Bank”) is the administrative agent for the Group Credit Facility, which consists of two tranches. Tranche one provides up to $350,000 thousand of unsecured revolving credit for liquidity and general corporate purposes, and for the issuance of unsecured standby letters of credit. The interest on the revolving loans shall, at the Company’s option, be 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 (a) the prime commercial lending rate established by Wells Fargo Bank or (b) the Federal Funds Rate plus 0.5% per annum. The amount of margin and the fees payable for the Group Credit Facility depends on Group’s senior unsecured debt rating. Tranche two exclusively provides up to $500,000 thousand for the issuance of standby letters of credit on a collateralized basis.

The Group Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1 and to maintain a minimum net worth. Minimum net worth is an amount equal to the sum of $3,575,381 thousand plus 25% of consolidated net income for each of Group’s fiscal quarters, for which statements are available ending on or after January 1, 2007 and for which consolidated net income is positive, plus 25% of any increase in consolidated net worth during such period attributable to the issuance of ordinary and preferred shares, which at December 31, 2011, was $4,292,517 thousand. As of December 31, 2011, the Company was in compliance with all Group Credit Facility covenants.

F-27

Index

The following table summarizes the outstanding letters of credit and/or borrowings for the periods indicated:

(Dollars in thousands)		At December 31, 2011					At December 31, 2010
Bank		Commitment		In Use		Date of Expiry	Commitment		In Use		Date of Expiry
Wells Fargo Bank Group Credit Facility	Tranche One	$	350,000	$	-		$	350,000	$	-
	Tranche Two		500,000		446,327	12/31/2012		500,000		406,427	12/31/2011
					127	9/30/2012				-
Total Wells Fargo Bank Group Credit Facility		$	850,000	$	446,454		$	850,000	$	406,427

Holdings Credit Facility

Effective August 15, 2011, Holdings entered into a new three year, $150,000 thousand unsecured revolving credit facility with a syndicate of lenders, replacing the August 23, 2006 five year senior revolving credit facility. Both the August 15, 2011 and August 23, 2006 revolving credit agreements, which have similar terms, are referred to as the “Holdings Credit Facility”. Citibank N.A. is the administrative agent for the Holdings Credit Facility. The Holdings Credit Facility may be used for liquidity and general corporate purposes. The Holdings Credit Facility provides for the borrowing of up to $150,000 thousand with interest at a rate selected by Holdings equal to either, (1) the Base Rate (as defined below) or (2) a periodic fixed rate equal to the Eurodollar Rate plus an applicable margin. The Base Rate means a fluctuating interest rate per annum in effect from time to time to be equal to the higher of (a) the rate of interest publicly announced by Citibank as its base rate, (b) 0.5% per annum above the Federal Funds Rate or (c) 1% above the one month LIBOR, in each case plus the applicable margin. The amount of margin and the fees payable for the Holdings Credit Facility depends upon Holdings’ senior unsecured debt rating.

The Holdings Credit Facility requires Holdings to maintain a debt to capital ratio of not greater than 0.35 to 1 and Everest Re to maintain its statutory surplus at $1,875,000 thousand plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2010, which at December 31, 2011, was $1,898,936 thousand. As of December 31, 2011, Holdings was in compliance with all Holdings Credit Facility covenants.

The following table summarizes outstanding letters of credit and/or borrowings for the periods indicated:

(Dollars in thousands)	At December 31, 2011						At December 31, 2010
Bank	Commitment		In Use		Date of Loan	Maturity/Expiry Date	Commitment		In Use		Date of Loan	Maturity/Expiry Date
Citibank Holdings Credit Facility	$	150,000	$	-			$	150,000	$	50,000	12/16/2010	1/18/2011
Total revolving credit borrowings				-						50,000
Total letters of credit				5,020		12/31/2012				9,527		12/31/2011

Total Citibank Holdings Credit Facility	$	150,000	$	5,020			$	150,000	$	59,527

Bermuda Re Letter of Credit Facility

Bermuda Re has a $300,000 thousand letter of credit issuance facility with Citibank N.A. referred to as the “Bermuda Re Letter of Credit Facility”, which commitment is reconfirmed annually. The Bermuda Re Letter of Credit Facility provides for the issuance of up to $300,000 thousand of secured letters of credit to collateralize reinsurance obligations as a non-admitted reinsurer. The interest on drawn letters of credit shall be (A) 0.20% per annum of the principal amount of issued standard letters of credit (expiry of 15 months or less) and (B) 0.25% per annum of the principal amount of issued extended tenor letters of credit (expiry maximum of up to 60 months). The commitment fee on undrawn credit shall be 0.10% per annum.

F-28

Index

The following table summarizes the outstanding letters of credit for the periods indicated:

(Dollars in thousands)	At December 31, 2011					At December 31, 2010
Bank	Commitment		In Use		Date of Expiry	Commitment		In Use		Date of Expiry
Citibank Bilateral Letter of Credit Agreement	$	300,000	$	3,352	11/24/2012	$	300,000	$	2,291	11/24/2011
				80,770	12/31/2012				79,681	12/31/2011
				85	7/15/2013				36,462	1/31/2011
				889	2/15/2014				340	6/15/2011
				4,773	12/31/2014				25,581	6/30/2014
				25,510	6/30/2015				11,580	9/30/2014
				8,642	9/30/2015				72,398	12/31/2014
				10,088	11/22/2015				-
				60,752	12/31/2015				-
Total Citibank Bilateral Agreement	$	300,000	$	194,861		$	300,000	$	228,333

SENIOR NOTES

The table below displays Holdings’ outstanding senior notes. Market value is based on quoted market prices.

					December 31, 2011				December 31, 2010
					Consolidated Balance				Consolidated Balance
(Dollars in thousands)	Date Issued	Date Due	Principal Amounts		Sheet Amount		Market Value		Sheet Amount		Market Value
5.40% Senior notes	10/12/2004	10/15/2014	$	250,000	$	249,858	$	251,370	$	249,812	$	267,500
8.75% Senior notes (matured and paid on March 15, 2010)	03/14/2000	03/15/2010	$	200,000	$	-	$	-	$	-	$	-

Interest expense incurred in connection with these senior notes is as follows for the periods indicated:

		Years Ended December 31,
(Dollars in thousands)		2011				2010				2009
Interest expense incurred		$	13,546			$	17,219			$	31,190

LONG TERM SUBORDINATED NOTES

The table below displays Holdings’ outstanding fixed to floating rate long term subordinated notes. Market value is based on quoted market prices.

				Maturity Date		December 31, 2011				December 31, 2010
		Original				Consolidated Balance				Consolidated Balance
(Dollars in thousands)	Date Issued	Principal Amount		Scheduled	Final	Sheet Amount		Market Value		Sheet Amount		Market Value
6.6% Long term subordinated notes	04/26/2007	$	400,000	05/15/2037	05/01/2067	$	238,354	$	210,195	$	238,351	$	227,825

During the fixed rate interest period from May 3, 2007 through May 14, 2017, interest will be at the annual rate of 6.6%, payable semi-annually in arrears on November 15 and May 15 of each year, commencing on November 15, 2007, subject to Holdings’ right to defer interest on one or more occasions for up to ten consecutive years. During the floating rate interest period from May 15, 2017 through maturity, interest will be based on the 3 month LIBOR plus 238.5 basis points, reset quarterly, payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, subject to Holdings’ right to defer interest on one or more occasions for up to ten consecutive years. Deferred interest will accumulate interest at the applicable rate compounded semi-annually for periods prior to May 15, 2017, and compounded quarterly for periods from and including May 15, 2017.

Holdings can redeem the long term subordinated notes prior to May 15, 2017, in whole but not in part at the applicable redemption price, which will equal the greater of (a) 100% of the principal amount being redeemed and (b) the present value of the principal payment on May 15, 2017 and scheduled payments of interest that would have accrued from the redemption date to May 15, 2017 on the long term subordinated notes being redeemed, discounted to the redemption date on a semi-annual basis at a discount rate equal to

F-29

Index

the treasury rate plus an applicable spread of either 0.25% or 0.50%, in each case plus accrued and unpaid interest. Holdings may redeem the long term subordinated notes on or after May 15, 2017, in whole or in part at 100% of the principal amount plus accrued and unpaid interest; however, redemption on or after the scheduled maturity date and prior to May 1, 2047 is subject to a replacement capital covenant. This covenant is for the benefit of certain senior note holders and it mandates that Holdings receive proceeds from the sale of another subordinated debt issue, of at least similar size, before it may redeem the subordinated notes.

On March 19, 2009, Group announced the commencement of a cash tender offer for any and all of the 6.60% fixed to floating rate long term subordinated notes. Upon expiration of the tender offer, the Company had reduced its outstanding debt by $161,441 thousand, which resulted in a pre-tax gain on debt repurchase of $78,271 thousand.

Interest expense incurred in connection with these long term subordinated notes is as follows for the periods indicated:

		Years Ended December 31,
(Dollars in thousands)		2011				2010				2009
Interest expense incurred		$	15,748			$	15,748			$	18,322

JUNIOR SUBORDINATED DEBT SECURITIES PAYABLE

The following table displays Holdings’ outstanding junior subordinated debt securities due to Everest Re Capital Trust II (“Capital Trust II”), a wholly-owned finance subsidiary of Holdings. Fair value is primarily based on the quoted market price of the related trust preferred securities.

					December 31, 2011				December 31, 2010
					Consolidated Balance				Consolidated Balance
(Dollars in thousands)	Date Issued	Date Due	Amount Issued		Sheet Amount		Fair Value		Sheet Amount		Fair Value
6.20% Junior subordinated debt securities	03/29/2004	03/29/2034	$	329,897	$	329,897	$	326,313	$	329,897	$	294,825

Holdings may redeem the junior subordinated debt securities before their maturity at 100% of their principal amount plus accrued interest as of the date of redemption. The securities may be redeemed, 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 a determination that the Trust may become subject to tax or the Investment Company Act.

Interest expense incurred in connection with these junior subordinated debt securities is as follows for the periods indicated:

		Years Ended December 31,
(Dollars in thousands)		2011				2010				2009
Interest expense incurred		$	20,454			$	20,454			$	20,454

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

Capital Trust II will redeem all of the outstanding trust preferred securities when the junior subordinated debt securities are paid at maturity on March 29, 2034. The Company may elect to redeem the junior subordinated debt securities, in whole or in part, at any time on or after March 30, 2009. If such an early redemption occurs, the outstanding trust preferred securities would also be proportionately redeemed.

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

F-30

Index

those subsidiaries can pay dividends or make loans or advances to Holdings that exceed certain statutory thresholds. In addition, the terms of Holdings Credit Facility (discussed in Note 5) 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, 2011, $2,108,692 thousand of the $2,766,266 thousand in net assets of Holdings’ consolidated subsidiaries were subject to the foregoing regulatory restrictions.

TRUST AGREEMENTS

Certain subsidiaries of Group, principally Bermuda Re, a Bermuda insurance company and direct subsidiary of Group, have established trust agreements, which effectively use the Company’s investments as collateral, as security for assumed losses payable to certain non-affiliated ceding companies. At December 31, 2011, the total amount on deposit in trust accounts was $89,476 thousand.

OPERATING LEASE AGREEMENTS

The future minimum rental commitments, exclusive of cost escalation clauses, at December 31, 2011, for all of the Company’s operating leases with remaining non-cancelable terms in excess of one year are as follows:

(Dollars in thousands)
2012	$	11,914
2013		11,624
2014		9,973
2015		9,962
2016		9,954
Thereafter		33,986
Net commitments	$	87,413

All of these leases, the expiration terms of which range from 2013 to 2020, are for the rental of office space. Rental expense was $14,148 thousand, $13,124 thousand and $11,815 thousand for the years ended December 31, 2011, 2010 and 2009, respectively.

INCOME TAXES

Under Bermuda law, no income or capital gains taxes are imposed on Group and its Bermuda subsidiaries. The Minister of Finance of Bermuda has assured Group and its Bermuda subsidiaries that, pursuant to The Exempted Undertakings Tax Protection Amendment Act of 2011, they will be exempt until 2035 from imposition of any such taxes.

All the income of Group's non-Bermuda subsidiaries is subject to the applicable federal, foreign, state and local taxes on corporations. Additionally, the income of foreign branches of the Company's insurance operating companies, in particular the UK branch of Bermuda Re, is subject to various income taxes. The provision for income taxes in the consolidated statement of operations and comprehensive income (loss) has been determined in accordance with the individual income of each entity and the respective applicable tax laws. The provision reflects the permanent differences between financial and taxable income relevant to each entity. The significant components of the provision are as follows for the periods indicated:

	Years Ended December 31,
(Dollars in thousands)	2011			2010			2009
Current tax expense (benefit):
U.S.	$	27,257		$	(57,073	)	$	(25,964	)
Non-U.S.		14,388			35,056			29,445
Total current tax expense (benefit)		41,645			(22,016	)		3,481
Total deferred U.S. tax expense (benefit)		(195,106	)		2,500			128,851
Total income tax expense (benefit)	$	(153,461	)	$	(19,516	)	$	132,332

(Some amounts may not reconcile due to rounding.)

F-31

Index

The weighted average expected tax provision has been calculated using the pre-tax income (loss) in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. Reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate for the periods indicated is provided below:

	Years Ended December 31,
(Dollars in thousands)	2011					2010					2009
	U.S.			Non-U.S.		U.S.			Non-U.S.		U.S.			Non-U.S.
Pre-tax income (loss)	$	(395,206	)	$	161,260	$	141,142		$	450,097	$	422,027		$	517,294

Expected tax provision at the applicable statutory rate(s)		(138,322	)		12,216		49,436			33,716		147,758			28,600
Increase (decrease) in taxes resulting from:
Tax exempt income		(33,672	)		-		(56,457	)		-		(60,378	)		-
Dividend received deduction		(6,893	)		-		(2,784	)		-		(1,409	)		-
Proration		5,080			-		8,510			-		9,139			-
Tax audit settlement		(710	)		-		(48,867	)		-		(9,690	)		-
Other		6,668			2,172		(4,410	)		1,340		17,467			845
Total income tax provision	$	(167,849	)	$	14,388	$	(54,572	)	$	35,056	$	102,887		$	29,445

During the fourth quarter of 2011, the Company identified an understatement in its Deferred tax asset account of $12,232 thousand. The understatement resulted from differences between filed and recorded amounts that had accumulated over several prior periods. The Company corrected this understatement in its 2011 financial statements, resulting in an additional $12,232 thousand income tax benefit included in the income tax expense (benefit) caption in the Consolidated Statements of Operations and Comprehensive Income (Loss) and increased net income for the same amount for the year ended December 31, 2011 and for the fourth quarter 2011. The Company also increased its Deferred tax asset in its Consolidated Balance Sheets by the same amount. The Company believes that this out of period adjustment is immaterial to its full year 2011 financial statements, its fourth quarter 2011 financial statements, and to all prior periods. As such, the Company has not restated any prior period amounts.

Deferred income taxes reflect the tax effect of the temporary differences between the value of assets and liabilities for financial statement purposes and such values as measured by the U.S. tax laws and regulations. The principal items making up the net deferred income tax asset are as follows for the periods indicated:

	Years Ended December 31,
(Dollars in thousands)	2011		2010
Deferred tax assets:
Loss reserve	$	183,883	$	177,237
Net operating loss carryforward		167,089		-
Foreign tax credits		74,253		55,026
Unearned premium reserve		43,020		46,146
Unfunded pension liability		29,903		14,045
Alternative minimum tax credits		21,438		41,693
Deferred expenses		19,351		17,447
Deferred compensation		15,437		14,189
Uncollectible reinsurance reserve		5,675		5,675
Investment impairments		4,620		4,129
Other assets		17,724		14,254
Total deferred tax assets		582,393		389,841

Deferred tax liabilities:
Net unrealized investment gains		79,450		56,095
Deferred acquisition costs		58,571		64,487
Net unrealized foreign currency gains		46,738		45,251
Net fair value income		29,633		29,002
Gain on tender of debt		27,395		27,395
Bond market discount		2,183		2,609
Other liabilities		5,640		15,901
Total deferred tax liabilities		249,610		240,740

Net deferred tax assets	$	332,783	$	149,101

F-32

Index

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

(Dollars in thousands)	2011		2010			2009
Balance at January 1	$	23,773	$	29,010		$	34,366
Additions based on tax positions related to the current year		8,139		7,119			6,997
Additions for tax positions of prior years		-		-			-
Reductions for tax positions of prior years		-		-			-
Settlements with taxing authorities		-		(12,356	)		(12,353	)
Lapses of applicable statutes of limitations		-		-			-
Balance at December 31	$	31,912	$	23,773		$	29,010

The entire amount of unrecognized tax benefits would affect the effective tax rate if recognized.

In 2010, the Company favorably settled a 2003 and 2004 IRS audit. During the years ended December 31, 2011 and 2010, the Company recorded a net overall tax benefit including accrued interest of $710 thousand and $25,920 thousand, respectively. In addition, in 2010, the Company was also able to take down a $12,356 thousand FIN 48 reserve that had been established regarding the 2003 and 2004 IRS audit. The Company is no longer subject to U.S. federal, state and local or foreign income tax examinations by tax authorities for years before 2007.

The Company recognizes accrued interest related to net unrecognized tax benefits and penalties in income taxes. During the years ended December 31, 2011, 2010, and 2009, the Company accrued and recognized a net expense/(benefit) of approximately $957 thousand, $(9,938) thousand and $1,563 thousand, respectively, in interest and penalties. Included within the 2010 net expense (benefit) of $(9,938) thousand is $(10,591) thousand of accrued interest related to the 2003 and 2004 IRS audit.

The Company is not aware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date.

For U.S. income tax purposes the Company has foreign tax credit carry forwards of $74,253 thousand that begin to expire in 2017 and net operating loss carryforwards of $477,397 thousand that begin to expire in 2030. In addition, for U.S. income tax purposes the Company has $21,438 thousand of Alternative Minimum Tax credits that do not expire. Management believes that it is more likely than not that the Company will realize the benefits of its net deferred tax assets and, accordingly, no valuation allowance has been recorded for the periods presented.

Tax benefits of $4,071 thousand and $629 thousand to share-based compensation deductions for stock options exercised in 2011 and 2010, respectively, are reflected in additional paid-in capital the shareholders' equity section of the consolidated balance sheets.

F-33

Index

REINSURANCE

The Company utilizes reinsurance agreements to reduce its exposure to large claims and catastrophic loss occurrences. These agreements provide for recovery from reinsurers of a portion of losses and LAE under certain circumstances without relieving the ceding company of its obligations to the policyholders. Losses and LAE incurred and premiums earned are reported after deduction for reinsurance. In the event that one or more of the reinsurers were unable to meet their obligations under these reinsurance agreements, the Company would not realize the full value of the reinsurance recoverable balances. The Company may hold partial collateral, including letters of credit and funds held, under these agreements. See also Note 1C and Note 3.

Premiums written and earned and incurred losses and LAE are comprised of the following for the periods indicated:

	Years Ended December 31,
(Dollars in thousands)	2011			2010			2009
Written premiums:
Direct	$	815,087		$	823,378		$	824,366
Assumed		3,471,087			3,377,341			3,304,589
Ceded		(177,275	)		(255,141	)		(199,194	)
Net written premiums	$	4,108,899		$	3,945,578		$	3,929,761

Premiums earned:
Direct	$	871,598		$	823,811		$	808,793
Assumed		3,454,622			3,340,977			3,255,849
Ceded		(224,873	)		(230,163	)		(170,544	)
Net premiums earned	$	4,101,347		$	3,934,625		$	3,894,098

Incurred losses and LAE:
Direct	$	744,017		$	708,212		$	655,263
Assumed		3,099,787			2,392,758			1,829,371
Ceded		(117,600	)		(155,258	)		(110,576	)
Net incurred losses and LAE	$	3,726,204		$	2,945,712		$	2,374,058

F-34

Index

COMPREHENSIVE INCOME (LOSS)

The following table presents the components of comprehensive income (loss) in the consolidated statements of operations for the periods indicated:

	Years Ended December 31,
(Dollars in thousands)	2011			2010			2009

Net income (loss)	$	(80,486	)	$	610,754		$	806,989
Other comprehensive income (loss), before tax:
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period
URA(D) of investments - temporary		109,928			65,199			550,356
URA(D) of investments - non-credit OTTI		824			7,831			35,563
URA(D) on securities arising during the period		110,752			73,030			585,919
Less: reclassification adjustment for realized losses (gains) included in net income (loss)		(4,193	)		(24,593	)		50,789
Total URA(D) on securities arising during the period		106,559			48,437			636,708
Foreign currency translation adjustments		(16,429	)		16,429			98,931
Pension adjustments		(45,310	)		(2,792	)		11,466
Total other comprehensive income (loss), before tax		44,820			62,074			747,105

Income tax benefit (expense) related to items of other comprehensive income (loss):
Tax benefit (expense) on URA(D) arising during the period
Tax benefit (expense) on URA(D) of investments - temporary		(21,248	)		(5,046	)		(91,259	)
Tax benefit (expense) on URA(D) of investments - non-credit OTTI		66			(1,002	)		(3,830	)
Tax benefit (expense) on URA(D) on securities arising during the period		(21,182	)		(6,048	)		(95,089	)
Tax reclassification due to realized losses (gains) included in net income (loss)		(5,236	)		17,775			(11,674	)
Total tax benefit (expense) from URA(D) arising during the period		(26,418	)		11,727			(106,763	)
Tax benefit (expense) from foreign currency translation		460			(14,558	)		(15,128	)
Tax benefit (expense) on pension		15,858			977			(4,013	)
Total income tax benefit (expense) related to items of other comprehensive income (loss):		(10,100	)		(1,854	)		(125,904	)
Other comprehensive income (loss), net of tax		34,720			60,220			621,201
Comprehensive income (loss)	$	(45,766	)	$	670,974		$	1,428,190

The following table presents the components of accumulated other comprehensive income (loss), net of tax, in the consolidated balance sheets for the periods indicated:

	Years Ended December 31,
(Dollars in thousands)	2011			2010
Beginning balance of URA (D) on securities	$	369,438		$	309,274
Current period change in URA (D) of investments - temporary		79,251			58,709
Current period change in URA (D) of investments - non-credit OTTI		890			1,455
Ending balance of URA (D) on securities		449,579			369,438

Beginning balance of foreign currency translation adjustments		(11,097	)		(12,968	)
Current period change in foreign currency translation adjustments		(15,969	)		1,871
Ending balance of foreign currency translation adjustments		(27,066	)		(11,097	)

Beginning balance of pension		(26,083	)		(24,268	)
Current period change in pension		(29,452	)		(1,815	)
Ending balance of pension		(55,535	)		(26,083	)

Ending balance of accumulated other comprehensive income (loss)	$	366,978		$	332,258

F-35

Index

EMPLOYEE BENEFIT PLANS

Defined Benefit Pension Plans.

The Company maintains both qualified and non-qualified defined benefit pension plans for its U.S. employees employed prior to April 1, 2010. Generally, the Company computes the benefits based on average earnings over a period prescribed by the plans and credited length of service. The Company’s non-qualified defined benefit pension plan, affected in October 1995, provides compensating pension benefits for participants whose benefits have been curtailed under the qualified plan due to Internal Revenue Code limitations.

Although not required to make contributions under IRS regulations, the following table summarizes the Company’s contributions to the defined benefit pension plans for the periods indicated:

		Years Ended December 31,
(Dollars in thousands)		2011				2010				2009
Company contributions		$	3,223			$	6,759			$	7,851

The following table summarizes the Company’s pension expense for the periods indicated:

		Years Ended December 31,
(Dollars in thousands)		2011				2010				2009
Pension expense		$	10,874			$	10,783			$	10,772

The following table summarizes the status of these defined benefit plans for U.S. employees for the periods indicated:

	Years Ended December 31,
(Dollars in thousands)	2011			2010
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	138,392		$	118,166
Service cost		7,548			6,944
Interest cost		7,702			7,052
Actuarial loss		26,802			14,631
Benefits paid		(5,080	)		(8,401	)
Projected benefit obligation at end of year		175,364			138,392

Change in plan assets:
Fair value of plan assets at beginning of year		114,470			100,728
Actual return on plan assets		(11,309	)		15,383
Actual contributions during the year		3,223			6,760
Benefits paid		(5,080	)		(8,401	)
Fair value of plan assets at end of year		101,304			114,470

Funded status at end of year	$	(74,060	)	$	(23,922	)

F-36

Index

Amounts recognized in the consolidated balance sheets for the periods indicated:

	At December 31,
(Dollars in thousands)	2011			2010
Other assets (due beyond one year)	$	-		$	952
Other liabilities (due within one year)		(3,497	)		(2,560	)
Other liabilities (due beyond one year)		(70,563	)		(22,314	)
Net amount recognized in the consolidated balance sheets	$	(74,060	)	$	(23,922	)

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) for the periods indicated:

	At December 31,
(Dollars in thousands)	2011			2010
Prior service cost	$	(168	)	$	(217	)
Accumulated income (loss)		(78,755	)		(36,219	)
Accumulated other comprehensive income (loss)	$	(78,923	)	$	(36,436	)

Other changes in other comprehensive income (loss) for the periods indicated are as follows:

	Years Ended December 31,
(Dollars in thousands)	2011			2010
Other comprehensive income (loss) at December 31, prior year	$	(36,436	)	$	(33,974	)
Net gain (loss) arising during period		(47,177	)		(7,220	)
Recognition of amortizations in net periodic benefit cost:
Prior service cost		49			49
Actuarial loss		4,641			4,709
Other comprehensive income (loss) at December 31, current year	$	(78,923	)	$	(36,436	)

Net periodic benefit cost for U.S. employees included the following components for the periods indicated:

	Years Ended December 31,
(Dollars in thousands)	2011			2010			2009
Service cost	$	7,548		$	6,944		$	6,015
Interest cost		7,702			7,052			6,385
Expected return on assets		(9,067	)		(7,971	)		(6,145	)
Amortization of actuarial loss from earlier periods		3,367			2,467			3,663
Amortization of unrecognized prior service cost		49			49			49
Settlement		1,275			2,242			805
Net periodic benefit cost	$	10,874		$	10,783		$	10,772

Other changes recognized in other comprehensive income (loss):
Other comprehensive income (loss) attributable to change from prior year		42,487			2,462

Total recognized in net periodic benefit cost and other
comprehensive income (loss)	$	53,361		$	13,244

(Some amounts may not reconcile due to rounding.)

The estimated transition obligation, actuarial loss and prior service cost that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next year are $0 thousand, $7,062 thousand and $49 thousand, respectively.

F-37

Index

The weighted average discount rates used to determine net periodic benefit cost for 2011, 2010 and 2009 were 5.60%, 6.10% and 6.25%, respectively. The rate of compensation increase used to determine the net periodic benefit cost for 2011, 2010 and 2009 was 4.0%. The expected long-term rate of return on plan assets for 2011, 2010 and 2009 was 8%, and was based on expected portfolio returns and allocations.

The weighted average discount rates used to determine the actuarial present value of the projected benefit obligation for year end 2011, 2010 and 2009 were 4.60%, 5.60% and 6.10%, respectively.

The following table summarizes the accumulated benefit obligation for the periods indicated:

	At December 31,
(Dollars in thousands)	2011		2010
Qualified Plan	$	118,981	$	91,254
Non-qualified Plan		21,231		19,141
Total	$	140,212	$	110,395

The following table displays the plans with projected benefit obligations in excess of plan assets for the periods indicated:

	At December 31,
(Dollars in thousands)	2011		2010
Qualified Plan
Projected benefit obligation	$	146,350	NA
Fair value of plan assets		101,304	NA
Non-qualified Plan
Projected benefit obligation	$	29,014	$	24,874
Fair value of plan assets		-		-

The following table displays the plans with accumulated benefit obligations in excess of plan assets for the periods indicated:

	At December 31,
(Dollars in thousands)	2011		2010
Qualified Plan
Accumulated benefit obligation	$	118,981	NA
Fair value of plan assets		101,304	NA
Non-qualified Plan
Accumulated benefit obligation	$	21,231	$	19,141
Fair value of plan assets		-		-

The following table displays the expected benefit payments in the periods indicated:

(Dollars in thousands)
2012	$	6,068
2013		7,459
2014		7,464
2015		6,913
2016		6,994
Next 5 years		39,715

Plan assets consist of shares in investment trusts with approximately 64%, 33% and 3% of the underlying assets consisting of equity securities, fixed maturities and cash, respectively. The Company manages the qualified plan investments for U.S. employees. The assets in the plan consist of debt and equity mutual funds. Due to the long term nature of the plan, the target asset allocation has historically been 70% equities and 30% bonds.

F-38

Index

The following tables present the fair value measurement levels for the qualified plan assets at fair value for the periods indicated:

			Fair Value Measurement Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(Dollars in thousands)	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash	$	317	$	317	$	-	$	-
Short-term investments, which approximates fair value (a)		3,109		3,109		-		-
Mutual funds, fair value
Fixed income (b)		33,573		33,573		-		-
Equities (c)		55,423		55,423		-		-
Multi-strategy equity fund, fair value (d)		7,891		-		-		7,891
Private equity limited partnership		991		-		-		991
Total	$	101,304	$	92,422	$	-	$	8,882

(a)	This category includes high quality, short-term money market instruments, which are issued and payable in U.S. dollars.

(b)	This category includes three fixed income funds, which invest in investment grade securities of corporations, governments and government agencies with approximately half in U.S. securities and half in international securities.

(c)	This category includes eight funds, which invest in small, mid and multi-cap equity securities including common stocks, securities convertible into common stock and securities with common stock characteristics, such as rights and warrants, with approximately three-fourths in U.S. equities and one-fourth in international equities.

(d)	This category consists of a privately held fund of U.S. and international equity funds and may include currency hedges for the foreign funds. The fair value is provided by the external investment manager.

			Fair Value Measurement Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(Dollars in thousands)	December 31, 2010		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash	$	356	$	356	$	-	$	-
Short-term investments, which approximates fair value (a)		2,728		2,728		-		-
Mutual funds, fair value
Fixed income (b)		35,334		35,334		-		-
Equities (c)		65,793		65,793		-		-
Multi-strategy equity fund, fair value (d)		10,259		-		-		10,259
Total	$	114,470	$	104,211	$	-	$	10,259

(Some amounts may not reconcile due to rounding.)

(a)	This category includes high quality, short-term money market instruments, which are issued and payable in U.S. dollars.

(b)	This category includes three fixed income funds, which invest in investment grade securities of corporations, governments and government agencies with approximately half in U.S. securities and half in international securities.

(c)	This category includes eight funds, which invest in small, mid and multi-cap equity securities including common stocks, securities convertible into common stock and securities with common stock characteristics, such as rights and warrants, with approximately three-fourths in U.S. equities and one-fourth in international equities.

(d)	This category consists of a privately held fund of U.S. and international equity funds and may include currency hedges for the foreign funds. The fair value is provided by the external investment manager.

F-39

Index

The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs for fixed maturity investments, for the period indicated:

	Year Ended December 31,
(Dollars in thousands)	2011			2010
Assets:
Balance, beginning of period	$	10,259		$	6,564
Actual return on plan assets:
Realized gains (losses)		21			7
Unrealized gains (losses)		(2,380	)		1,629
Purchases		1,200			2,000
Investment income earned on assets		(95	)		146
Sales		(123	)		(88	)
Transfers in and/or (out) of Level 3		-			-
Balance, end of period	$	8,882		$	10,259

The amount of total gains (losses) for the period included in changes in
net assets attributable to the change in unrealized gains (losses)
relating to assets still held at the reporting date	$	(2,401	)	$	2,149

(Some amounts may not reconcile due to rounding.)

The Company does not expect to make any contributions to the qualified plan in 2012.

Defined Contribution Plans.

The Company also maintains both qualified and non-qualified defined contribution plans (“Savings Plan” and “Non-Qualified Savings Plan”, respectively) covering U.S. employees. Under the plans, the Company contributes up to a maximum 3% of the participants’ compensation based on the contribution percentage of the employee. The Non-Qualified Savings Plan provides compensating savings plan benefits for participants whose benefits have been curtailed under the Savings Plan due to Internal Revenue Code limitations. In addition, effective for new hires (and rehires) on or after April 1, 2010, the Company will contribute between 3% and 8% of an employee’s earnings for each payroll period based on the employee’s age. These contributions will be 100% vested after three years.

The following table presents the Company’s incurred expenses related to these plans for the periods indicated:

		Years Ended December 31,
(Dollars in thousands)		2011				2010				2009
Incurred expenses		$	2,062			$	1,801			$	1,631

In addition, the Company maintains several defined contribution pension plans covering non-U.S. employees. Each non-U.S. office (Brazil, Canada, London, Belgium, Singapore, Ireland and Bermuda) maintains a separate plan for the non-U.S. employees working in that location. The Company contributes various amounts based on salary, age and/or years of service. The contributions as a percentage of salary for the branch offices range from 1.6% to 12.1%. The contributions are generally used to purchase pension benefits from local insurance providers. The following table presents the Company’s incurred expenses related to these plans for the periods indicated:

		Years Ended December 31,
(Dollars in thousands)		2011				2010				2009
Incurred expenses		$	1,031			$	995			$	828

F-40

Index

Post-Retirement Plan.

The Company sponsors a Retiree Health Plan for employees employed prior to April 1, 2010. This plan provides healthcare benefits for eligible retired employees (and their eligible dependants), who have elected coverage. The Company anticipates that most covered employees will become eligible for these benefits if they retire while working for the Company. The cost of these benefits is shared with the retiree. The Company accrues the post-retirement benefit expense during the period of the employee’s service.

The following medical cost trend rates were used to determine net cost and benefit obligations: a healthcare inflation rate for pre-Medicare claims of 7.9% in 2011 was assumed to decrease gradually to 4.5% in 2027 and then remain at that level; and a healthcare inflation rate for post-Medicare claims of 6.4% in 2011 was assumed to decrease gradually to 4.5% in 2027 then remain at that level.

Changes in the assumed healthcare cost trend can have a significant effect on the amounts reported for the healthcare plans. A one percent change in the rate would have the following effects on:

	Percentage		Percentage
	Point Increase		Point Decrease
(Dollars in thousands)	($ Impact)		($ Impact)
a. Effect on total service and interest cost components	$	286	$	(240	)
b. Effect on accumulated post-retirement benefit obligation		2,456		(2,089	)

The following table presents the post-retirement benefit expenses for the periods indicated:

		Years Ended December 31,
(Dollars in thousands)		2011				2010				2009
Post-retirement benefit expenses		$	2,258			$	1,947			$	1,769

The following table summarizes the status of this plan for the periods indicated:

	At December 31,
(Dollars in thousands)	2011			2010
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	16,754		$	14,919
Service cost		1,165			1,017
Interest cost		934			849
Actuarial loss		2,930			412
Excise tax cost		53			-
Benefits paid		(374	)		(443	)
Benefit obligation at end of year		21,462			16,754

Change in plan assets:
Fair value of plan assets at beginning of year		-			-
Employer contributions		374			443
Benefits paid		(374	)		(443	)
Fair value of plan assets at end of year		-			-

Funded status at end of year	$	(21,462	)	$	(16,754	)

Amounts recognized in the consolidated balance sheets for the periods indicated:

	At December 31,
(Dollars in thousands)	2011			2010
Other liabilities (due within one year)	$	(470	)	$	(377	)
Other liabilities (due beyond one year)		(20,992	)		(16,377	)
Net amount recognized in the consolidated balance sheets	$	(21,462	)	$	(16,754	)

F-41

Index

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) for the periods indicated:

	At December 31,
(Dollars in thousands)	2011			2010
Accumulated income (loss)	$	(6,516	)	$	(3,692	)
Accumulated other comprehensive income (loss)	$	(6,516	)	$	(3,692	)

Other changes in other comprehensive income (loss) for the periods indicated are as follows:

	Years Ended December 31,
(Dollars in thousands)	2011			2010
Other comprehensive income (loss) at December 31, prior year	$	(3,692	)	$	(3,361	)
Net gain (loss) arising during period		(2,983	)		(412	)
Recognition of amortizations in net periodic benefit cost:
Actuarial loss (gain)		159			81
Other comprehensive income (loss) at December 31, current year	$	(6,516	)	$	(3,692	)

Net periodic benefit cost included the following components for the periods indicated:

	Years Ended December 31,
(Dollars in thousands)	2011		2010		2009
Service cost	$	1,165	$	1,017	$	902
Interest cost		934		849		780
Net loss recognition		159		81		87
Net periodic cost	$	2,258	$	1,947	$	1,769

Other changes recognized in other comprehensive income (loss):
Other comprehensive gain (loss) attributable to change from prior year		2,823		331

Total recognized in net periodic benefit cost and
other comprehensive income (loss)	$	5,081	$	2,278

The estimated transition obligation, actuarial loss and prior service cost that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $0 thousand, $328 thousand and $0 thousand, respectively.

The weighted average discount rates used to determine net periodic benefit cost for 2011, 2010 and 2009 were 5.60%, 6.10% and 6.25%, respectively.

The weighted average discount rates used to determine the actuarial present value of the projected benefit obligation at year end 2011, 2010 and 2009 were 4.60%, 5.60% and 6.10%, respectively.

The following table displays the expected benefit payments in the years indicated:

(Dollars in thousands)
2012	$	469
2013		597
2014		717
2015		900
2016		1,048
Next 5 years		8,000

F-42

Index

DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION

Dividend Restrictions.

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

Under Bermuda law, Bermuda Re and Everest International are prohibited from declaring or making payment of a dividend if they fail to meet their minimum solvency margin or minimum liquidity ratio. As long term insurers, Bermuda Re and Everest International are also unable to declare or pay a dividend to anyone who is not a policyholder unless, after payment of the dividend, the value of the assets in their long term business fund, as certified by their approved actuary, exceeds their liabilities for long term business by at least the $250 thousand minimum solvency margin. Prior approval of the Bermuda Monetary Authority is required if Bermuda Re’s or Everest International’s dividend payments would exceed 25% of their prior year-end total statutory capital and surplus.

Under Irish corporate and regulatory law, Holdings Ireland and its subsidiaries are limited as to the dividends they can pay based on retained earnings and net income (loss) and/or capital and minimum solvency requirements.

Delaware law provides that an insurance company which is a member of an insurance holding company system and is domiciled in the state shall not pay dividends without giving prior notice to the Insurance Commissioner of Delaware and may not pay dividends without the approval of the Insurance Commissioner if the value of the proposed dividend, together with all other dividends and distributions made in the preceding twelve months, exceeds the greater of (1) 10% of statutory surplus or (2) net income, not including realized capital gains, each as reported in the prior year’s statutory annual statement. In addition, no dividend may be paid in excess of unassigned earned surplus. At December 31, 2011, Everest Re has $232,211 thousand available for payment of dividends in 2012 without the need for prior regulatory approval.

Statutory Financial Information.

Everest Re prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the National Association of Insurance Commissioners (“NAIC”) and the Delaware Insurance Department. Prescribed statutory accounting practices are set forth in the NAIC Accounting Practices and Procedures Manual. The capital and statutory surplus of Everest Re was $2,322,115 thousand and $2,527,519 thousand at December 31, 2011 and 2010, respectively. The statutory net loss of Everest Re was $326,400 thousand for the year ended December 31, 2011 and the statutory net income of Everest Re was $218,452 thousand and $442,735 thousand for the years ended December 31, 2010 and 2009, respectively.

Bermuda Re prepares its statutory financial statements in conformity with the accounting principles set forth in Bermuda in The Insurance Act 1978, amendments thereto and related regulations. The statutory capital and surplus of Bermuda Re was $2,736,599 thousand and $2,818,655 thousand at December 31, 2011 and 2010, respectively. The statutory net income of Bermuda Re was $97,359 thousand, $391,862 thousand and $441,748 thousand for the years ended December 31, 2011, 2010 and 2009, respectively.

CONTINGENCIES

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

F-43

Index

attempts by others to collect funds or enforce alleged rights. These disputes arise from time to time and are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation. In all such matters, the Company believes that its positions are legally and commercially reasonable. The Company considers the statuses of these proceedings when determining its reserves for unpaid loss and loss adjustment expenses.

Aside from litigation and arbitrations related to these insurance and reinsurance agreements, the Company is not a party to any other material litigation or arbitration.

In 1993 and prior, the Company had a business arrangement with The Prudential Insurance Company of America (“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”), was unable to make the annuity payments. The table below presents the estimated cost to replace all such annuities for which the Company was contingently liable for the periods indicated:

		At December 31,
(Dollars in thousands)		2011				2010
		$	143,447			$	150,560

Prior to its 1995 initial public offering, the Company purchased annuities from an unaffiliated life insurance company with an A+ (Superior) financial strength rating from A.M. Best to settle certain claim liabilities of the company. Should the life insurance company become unable to make the annuity payments, the Company would be liable for those claim liabilities. The table below presents the estimated cost to replace all such annuities for which the Company was contingently liable for the periods indicated:

		At December 31,
(Dollars in thousands)		2011				2010
		$	27,634			$	26,542

SHARE-BASED COMPENSATION PLANS

The Company has a 2010 Stock Incentive Plan (“2010 Employee Plan”), a 2002 Stock Incentive Plan (“2002 Employee Plan”), a 1995 Stock Incentive Plan (“1995 Employee Plan”), a 2009 Non-Employee Director Stock Option and Restricted Stock Plan (“2009 Director Plan”), a 2003 Non-Employee Director Equity Compensation Plan (“2003 Director Plan”) and a 1995 Stock Option Plan for Non-Employee Directors (“1995 Director Plan”). In addition, the Company has awarded options to non-employee directors in Board actions in 2001, 2000 and 1999.

Under the 2010 Employee Plan, 4,000,000 common shares have been authorized to be granted as non-qualified share options, incentive share options, share appreciation rights or restricted share and share awards to officers and key employees of the Company. At December 31, 2011, there were 3,464,709 remaining shares available to be granted under the 2010 Employee Plan. The 2010 Employee Plan replaced the 2002 Employee Plan, which replaced the 1995 Employee Plan; therefore, no further awards will be granted under the 2002 Employee Plan or the 1995 Employee Plan. Through December 31, 2011, only non-qualified share options and restricted share awards had been granted under the employee plans. Under the 2009 Director Plan, 37,439 common shares have been authorized to be granted as share options or restricted share awards to non-employee directors of the Company. At December 31, 2011, there were 35,192 remaining shares available to be granted under the 2009 Director Plan. The 2009 Director Plan replaced the 1995 Director Plan, which expired. Under the 2003 Director Plan, 500,000 common shares have been authorized to be granted as share options or share awards to non-employee directors of the Company. At December 31, 2011 there were 431,000 remaining shares available to be granted under the 2003 Director Plan.

F-44

Index

Board actions in 2001, 2000 and 1999, which were not approved by shareholders, awarded options to non-employee directors. The Board actions were designed to award non-employee directors, whose services are considered essential to the Company’s continued success, with the option to purchase common shares to increase their ownership interest in the Company and to align such interests with those of the shareholders of the Company. Under Board actions in 2001, 2000 and 1999; 40,000, 30,000 and 26,000 common shares, respectively, were granted as share options to non-employee directors of the Company.

Options and restricted shares granted under the 2010 Employee Plan, the 2002 Employee Plan and the 1995 Employee Plan vest at the earliest of 20% per year over five years or upon the expiration of any applicable employment agreement. Options granted under the 1995 Director Plan vested at 50% per year over two years. Options and restricted shares granted under the 2003 Director Plan generally vest at 33% per year over three years, unless an alternate vesting period is authorized by the Board. Options and restricted shares granted under the 2009 Director Plan will vest as provided in the award agreement. The 2001, 2000 and 1999 Board actions vest at 33% per year over three years. All options are exercisable at fair market value of the stock at the date of grant and expire ten years after the date of grant.

For share options and restricted shares granted under the 2010 Employee Plan, the 2002 Employee Plan, the 1995 Employee Plan, the 2009 Director Plan, the 2003 Director Plan and the 1995 Director Plan, share-based compensation expense recognized in the consolidated statements of operations and comprehensive income (loss) was $17,693 thousand, $14,726 thousand and $13,296 thousand for the years ended December 31, 2011, 2010 and 2009, respectively. The corresponding income tax benefit recorded in the consolidated statements of operations and comprehensive income (loss) for share-based compensation was $5,576 thousand, $4,391 thousand and $4,152 thousand for the years ended December 31, 2011, 2010 and 2009, respectively.

For the year ended December 31, 2011, share-based compensation awards granted were 226,700 restricted shares; and 345,600 options, granted on February 24, 2011 and May 18, 2011, with a grant exercise price of $86.62 and $90.49, respectively, per share and a per option fair value of $21.85 and $21.89, respectively. The fair value per option was calculated on the date of the grant using the Black-Scholes option valuation model. The following assumptions were used in calculating the fair value of the options granted:

	Years Ended December 31,
	2011	2010	2009
Weighted-average volatility	26.46%	26.82%	27.32%
Weighted-average dividend yield	2.00%	2.00%	2.00%
Weighted-average expected term	6.73 years	6.74 years	6.63 years
Weighted-average risk-free rate	2.80%	3.04%	2.13%

In 2008, the Company adopted the required FASB accounting guidance that recognizes, as an increase to additional paid-in capital, a realized income tax benefit from dividends, charged to retained earnings and paid to employees on equity classified non-vested equity shares. In addition, the amount recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. For the years ended December 31, 2011, 2010 and 2009, the Company recognized $217 thousand, $124 thousand and $99 thousand, respectively, of additional paid-in capital due to tax benefits from dividends on restricted shares.

F-45

Index

A summary of the option activity under the Company’s shareholder approved and non-approved plans as of December 31, 2011, 2010 and 2009, and changes during the year then ended is presented in the following tables:

Compensation plans approved by shareholders:

					Weighted-
			Weighted-		Average
			Average		Remaining		Aggregate
(Aggregate Intrinsic Value in thousands)			Exercise		Contractual		Intrinsic
Options	Shares		Price/Share		Term		Value
Outstanding at January 1, 2011		2,657,796	$	81.16
Granted		345,600		86.68
Exercised		477,320		66.12
Forfeited/Cancelled/Expired		209,800		88.91
Outstanding at December 31, 2011		2,316,276		84.39		6.0	$	12,121

Exercisable at December 31, 2011		1,229,481		84.94		4.4	$	7,920

					Weighted-
			Weighted-		Average
			Average		Remaining		Aggregate
(Aggregate Intrinsic Value in thousands)			Exercise		Contractual		Intrinsic
Options	Shares		Price/Share		Term		Value
Outstanding at January 1, 2010		2,418,756	$	79.86
Granted		384,890		84.63
Exercised		78,730		52.35
Forfeited/Cancelled/Expired		67,120		87.75
Outstanding at December 31, 2010		2,657,796		81.16		5.8	$	22,309

Exercisable at December 31, 2010		1,479,176		79.33		3.9	$	15,773

					Weighted-
			Weighted-		Average
			Average		Remaining		Aggregate
(Aggregate Intrinsic Value in thousands)			Exercise		Contractual		Intrinsic
Options	Shares		Price/Share		Term		Value
Outstanding at January 1, 2009		1,967,626	$	80.29
Granted		654,900		72.01
Exercised		138,170		43.55
Forfeited/Cancelled/Expired		65,600		91.06
Outstanding at December 31, 2009		2,418,756		79.86		6.2	$	26,186

Exercisable at December 31, 2009		1,251,276		75.78		4.2	$	17,304

F-46

Index

Compensation plans not approved by shareholders:

					Weighted-
			Weighted-		Average
			Average		Remaining		Aggregate
(Aggregate Intrinsic Value in thousands)			Exercise		Contractual		Intrinsic
Options	Shares		Price/Share		Term		Value
Outstanding at January 1, 2011		20,000	$	48.01
Granted		-		-
Exercised		20,000		48.01
Forfeited/Cancelled/Expired		-		-
Outstanding at December 31, 2011		-		-		0.0	$	-

Exercisable at December 31, 2011		-		-		0.0	$	-

					Weighted-
			Weighted-		Average
			Average		Remaining		Aggregate
(Aggregate Intrinsic Value in thousands)			Exercise		Contractual		Intrinsic
Options	Shares		Price/Share		Term		Value
Outstanding at January 1, 2010		37,500	$	43.48
Granted		-		-
Exercised		17,500		38.30
Forfeited/Cancelled/Expired		-		-
Outstanding at December 31, 2010		20,000		48.01		0.7	$	742

Exercisable at December 31, 2010		20,000		48.01		0.7	$	742

					Weighted-
			Weighted-		Average
			Average		Remaining		Aggregate
(Aggregate Intrinsic Value in thousands)			Exercise		Contractual		Intrinsic
Options	Shares		Price/Share		Term		Value
Outstanding at January 1, 2009		83,000	$	37.09
Granted		-		-
Exercised		45,500		31.83
Forfeited/Cancelled/Expired		-		-
Outstanding at December 31, 2009		37,500		43.48		1.4	$	1,592

Exercisable at December 31, 2009		37,500		43.48		1.4	$	1,592

The weighted-average grant-date fair value of options granted during the years 2011, 2010 and 2009 was $21.85, $22.06 and $17.54 per share, respectively. The aggregate intrinsic value (market price less exercise price) of options exercised during the years ended December 31, 2011, 2010 and 2009 was $11,845 thousand, $3,305 thousand and $7,547 thousand, respectively. The cash received from the exercised share options for the year ended December 31, 2011 was $32,519 thousand. The tax benefit realized from the options exercised for the year ended December 31, 2011 was $4,071 thousand.

F-47

Index

The following table summarizes information about share options outstanding for the period indicated:

		At December 31, 2011
		Options Outstanding						Options Exercisable
				Weighted-
				Average		Weighted-				Weighted-
		Number		Remaining		Average		Number		Average
Range of		Outstanding		Contractual		Exercise		Exercisable		Exercise
Exercise Prices		at 12/31/11		Life		Price		at 12/31/11		Price
$	53.1375 - $63.7650		93,450		0.7	$	55.60		93,450	$	55.60
$	63.7651 - $74.3925		765,036		5.4		72.54		445,896		73.14
$	74.3926 - $85.0200		334,990		8.1		84.63		69,095		84.63
$	85.0201 - $95.6475		547,850		7.0		89.98		214,550		95.13
$	95.6476 - $106.2750		574,950		5.6		99.36		406,490		99.30
			2,316,276		6.0		84.39		1,229,481		84.94

The following table summarizes the status of the Company’s non-vested shares and changes for the periods indicated:

	Years Ended December 31,
	2011				2010				2009
			Weighted-				Weighted-				Weighted-
			Average				Average				Average
			Grant Date				Grant Date				Grant Date
Restricted (non-vested) Shares	Shares		Fair Value		Shares		Fair Value		Shares		Fair Value
Outstanding at January 1,		250,125	$	84.09		200,446	$	82.45		139,662	$	96.39
Granted		226,700		86.15		150,055		84.66		131,700		73.25
Vested		69,872		85.61		58,376		86.62		39,216		95.83
Forfeited		34,500		83.39		42,000		74.79		31,700		89.06
Outstanding at December 31,		372,453		85.12		250,125		84.09		200,446		82.45

As of December 31, 2011, there was $22,648 thousand of total unrecognized compensation cost related to non-vested share-based compensation expense. That cost is expected to be recognized over a weighted-average period of 2.8 years. The total fair value of shares vested during the years ended December 31, 2011, 2010 and 2009, was $5,981 thousand, $5,057 thousand and $3,758 thousand, respectively. The tax benefit realized from the shares vested for the year ended December 31, 2011 was $1,714 thousand.

In addition to the 2010 Employee Plan, the 2002 Employee Plan, the 1995 Employee Plan, the 2009 Director Plan, the 2003 Director Plan and the 1995 Director Plan, Group issued 668 common shares in 2011, 0 common shares in 2010 and 488 common shares in 2009 to the Company’s non-employee directors as compensation for their service as directors. These issuances had aggregate values of approximately $56 thousand, $0 and $37 thousand, respectively.

Since its 1995 initial public offering, the Company has issued to certain key employees of the Company 977,980 restricted common shares, of which 160,160 restricted shares have been cancelled. The Company has issued to non-employee directors of the Company 58,157 restricted common shares, of which no restricted shares have been cancelled. The Company acquired 33,225, 4,531 and 12,489 common shares at a cost of $2,970 thousand, $397 thousand and $1,039 thousand in 2011, 2010 and 2009, respectively, from employees who chose to pay required withholding taxes with shares exercised or restricted shares vested. The Company acquired 201,287, 7,281 and 4,688 common shares at a cost of $17,951, $618 and $325 thousand in 2011, 2010 and 2009, respectively, from employees and non-employee directors who chose to pay the option grant price with shares.

F-48

Index

RELATED-PARTY TRANSACTIONS

During the normal course of business, the Company, through its affiliates, engages in reinsurance and brokerage and commission business transactions with companies controlled by or affiliated with one or more of its outside directors. Such transactions, individually and in the aggregate, are not material to the Company’s financial condition, results of operations and cash flows.

SEGMENT REPORTING

During the quarter ended September 30, 2011, the Company realigned its reporting segments to reflect recent changes in the type and volume of business written. The Company previously reported the results of Marine & Aviation, Surety, Accident and Health (“A&H”) Reinsurance and A&H Primary operations as a separate segment—Specialty Underwriting. The A&H primary business, which is a relatively new line of business for the Company, has increased significantly, representing approximately 2% of premiums earned and is projected to continue to grow. The A&H primary business is better aligned with the Insurance reporting segment based on the similarities of this business with those businesses already reflected in the Insurance segment. The other operating units included in the Specialty Underwriting segment would have encompassed less than 5% of the Company’s premiums earned and their volume is projected to remain less than 5%. As a result of the size of these remaining operating units and their similarity to the business reported within U.S. Reinsurance, they have been reclassified to the U.S. Reinsurance segment. There has been no change to the International and Bermuda reporting segments. The Company has restated all segment information for prior years to conform to the new reporting segment structure.

The U.S. Reinsurance operation writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and A&H business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies primarily within the U.S. The Insurance operation writes property and casualty insurance, including medical stop loss insurance, directly and through general agents, brokers and surplus lines brokers within the U.S. and Canada. The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and through offices in Brazil, Miami and New Jersey. The Bermuda operation provides reinsurance and insurance to worldwide property and casualty markets and reinsurance to life insurers through brokers and directly with ceding companies from its Bermuda office and reinsurance to the United Kingdom and European markets through its UK branch and Ireland Re.

These segments are managed independently, but conform with corporate guidelines with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results.

Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses. Underwriting results are measured using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned. The Company utilizes inter-affiliate reinsurance, although such reinsurance does not materially 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.

F-49

Index

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

U.S. Reinsurance	Years Ended December 31,
(Dollars in thousands)	2011			2010		2009
Gross written premiums	$	1,346,830		$	1,395,433	$	1,407,078
Net written premiums		1,344,273			1,392,637		1,397,182

Premiums earned	$	1,312,713		$	1,386,951	$	1,384,873
Incurred losses and LAE		1,034,111			900,938		738,134
Commission and brokerage		327,845			351,559		344,737
Other underwriting expenses		39,290			42,510		44,900
Underwriting gain (loss)	$	(88,533	)	$	91,944	$	257,102

Insurance	Years Ended December 31,
(Dollars in thousands)	2011			2010			2009
Gross written premiums	$	975,639		$	865,371		$	842,564
Net written premiums		820,519			620,301			656,178

Premiums earned	$	821,159		$	641,108		$	671,119
Incurred losses and LAE		705,914			536,753			538,626
Commission and brokerage		137,653			120,785			124,388
Other underwriting expenses		89,501			69,676			74,627
Underwriting gain (loss)	$	(111,909	)	$	(86,106	)	$	(66,522	)

International	Years Ended December 31,
(Dollars in thousands)	2011			2010			2009
Gross written premiums	$	1,238,444		$	1,206,953		$	1,084,476
Net written premiums		1,218,561			1,199,594			1,081,337

Premiums earned	$	1,244,492		$	1,168,130		$	1,053,538
Incurred losses and LAE		1,372,309			1,050,079			613,251
Commission and brokerage		310,992			288,423			267,121
Other underwriting expenses		27,307			27,646			23,083
Underwriting gain (loss)	$	(466,116	)	$	(198,018	)	$	150,083

Bermuda	Years Ended December 31,
(Dollars in thousands)	2011			2010		2009
Gross written premiums	$	725,261		$	732,962	$	794,837
Net written premiums		725,546			733,046		795,064

Premiums earned	$	722,983		$	738,436	$	784,568
Incurred losses and LAE		613,870			457,942		484,047
Commission and brokerage		174,031			171,088		192,087
Other underwriting expenses		26,305			26,426		24,568
Underwriting gain (loss)	$	(91,223	)	$	82,980	$	83,866

F-50

Index

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

	Years Ended December 31,
(Dollars in thousands)	2011			2010			2009
Underwriting gain (loss)	$	(757,781	)	$	(109,200	)	$	424,529
Net investment income		620,041			653,463			547,793
Net realized capital gains (losses)		6,923			101,911			(2,312	)
Realized gain on debt repurchase		-			-			78,271
Net derivative gain (loss)		(11,261	)		(1,119	)		3,204
Corporate expenses		(16,461	)		(14,914	)		(17,607	)
Interest, fee and bond issue cost amortization expense		(52,319	)		(55,830	)		(72,081	)
Other income (expense)		(23,089	)		16,927			(22,476	)
Income (loss) before taxes	$	(233,947	)	$	591,238		$	939,321

The Company produces business in the U.S., Bermuda and internationally. The net income deriving from and assets residing in the individual foreign countries in which the Company writes business are not identifiable in the Company’s financial records. Based on gross written premium, the table below presents the largest country, other than the U.S., in which the Company writes business, for the period indicated:

		Years Ended December 31,
(Dollars in thousands)		2011				2010				2009
United Kingdom		$	453,169			$	498,437			$	497,595

Approximately 24.8%, 22.3% and 22.4% of the Company’s gross written premiums in 2011, 2010 and 2009, respectively, were sourced through the Company’s largest intermediary.

ACQUISITIONS

During the first quarter of 2011, the Company made several acquisitions to expand its domestic and Canadian insurance operations. Below are descriptions of the transactions.

On January 2, 2011, the Company acquired the entire business and operations of Heartland of Topeka, Kansas for $55,000 thousand in cash, plus contingent payments in future periods based upon achievement of performance targets. Heartland is a managing general agent specializing in crop insurance.

On January 28, 2011, the Company acquired the entire business and operations of Premiere of Toronto, Canada. Premiere is a managing general agent specializing in entertainment and sports and leisure risks. On January 31, 2011, the Company acquired the renewal rights and operations of the financial lines business of Executive Risk Insurance Services, Ltd. (“Executive Risk”) of Toronto, Canada. The financial lines business of Executive Risk mainly underwrites Directors and Officers Liability, Fidelity, and Errors and Omissions Liability.

Overall, the Company recorded $35,068 thousand of goodwill and $26,903 thousand of intangible assets related to these acquisitions, which are reported as part of other assets within the consolidated balance sheets. All intangible assets recorded as part of these acquisitions will be amortized on a straight line basis over seven years.

SUBSEQUENT EVENTS

The Company has evaluated known recognized and non-recognized subsequent events. The Company does not have any subsequent events to report.

F-51

Index

UNAUDITED QUARTERLY FINANCIAL DATA

Summarized quarterly financial data for the periods indicated:

	2011
(Dollars in thousands, except per share amounts)	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter

Operating data:
Gross written premiums	$	1,064,929		$	987,865		$	1,128,506		$	1,104,874
Net written premiums		1,019,884			955,121			1,090,790			1,043,104

Premiums earned		1,011,446			1,039,835			1,044,338			1,005,728
Net investment income		178,705			158,618			156,465			126,253
Net realized capital gains (losses)		12,156			(4,845	)		(137,671	)		137,283
Total claims and underwriting expenses		1,531,189			1,019,060			998,117			1,310,762
Net income (loss)		(315,894	)		131,312			63,054			41,042

Earnings per common share:
Basic	$	(5.81	)	$	2.42		$	1.16		$	0.76
Diluted	$	(5.81	)	$	2.41		$	1.16		$	0.76

	2010
(Dollars in thousands, except per share amounts)	1st Quarter			2nd Quarter			3rd Quarter		4th Quarter

Operating data:
Gross written premiums	$	1,021,019		$	1,013,509		$	1,163,591	$	1,002,600
Net written premiums		969,253			948,970			1,085,225		942,130

Premiums earned		927,302			989,899			997,265		1,020,159
Net investment income		161,499			165,731			141,368		184,865
Net realized capital gains (losses)		72,718			(41,693	)		38,295		32,591
Total claims and underwriting expenses		1,158,462			922,188			956,597		1,006,578
Net income (loss)		(22,652	)		156,673			174,200		302,533

Earnings per common share:
Basic	$	(0.38	)	$	2.70		$	3.12	$	5.53
Diluted	$	(0.38	)	$	2.70		$	3.11	$	5.51

F-52

Index

SCHEDULE I — SUMMARY OF INVESTMENTS —
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2011

Column A	Column B		Column C		Column D
					Amount
					Shown in
			Market		Balance
(Dollars in thousands)	Cost		Value		Sheet
Fixed maturities-available for sale
Bonds:
U.S. government and government agencies	$	284,514	$	300,634	$	300,634
State, municipalities and political subdivisions		1,558,615		1,660,905		1,660,905
Foreign government securities		1,555,707		1,668,218		1,668,218
Foreign corporate securities		2,086,951		2,146,631		2,146,631
Public utilities		323,921		351,653		351,653
All other corporate bonds		3,319,466		3,471,858		3,471,858
Mortgage - backed securities:
Commercial		310,387		321,427		321,427
Agency residential		2,198,937		2,282,593		2,282,593
Non-agency residential		53,365		53,089		53,089
Redeemable preferred stock		39,310		36,516		36,516
Total fixed maturities-available for sale		11,731,173		12,293,524		12,293,524
Fixed maturities - available for sale at fair value (1)		113,859		113,606		113,606
Equity securities - available for sale at market value		463,620		448,930		448,930
Equity securities - available for sale at fair value (1)		1,164,187		1,249,106		1,249,106
Short-term investments		685,332		685,332		685,332
Other invested assets		558,232		558,232		558,232
Cash		448,651		448,651		448,651

Total investments and cash	$	15,165,054	$	15,797,381	$	15,797,381

(1) Original cost does not reflect fair value adjustments, which have been realized through the statements of operations and comprehensive income (loss).

S-1

Index

SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED BALANCE SHEETS


	December 31,
(Dollars and share amounts in thousands, except par value per share)	2011			2010

ASSETS:
Fixed maturities - available for sale, at market value	$	67,483		$	76,992
(amortized cost: 2011, $66,074; 2010, $76,168)
Short-term investments		42,370			72,550
Cash		262			49
Investment in subsidiaries, at equity in the underlying net assets		5,961,172			6,134,331
Accrued investment income		551			579
Receivable from subsidiaries		728			762
Other assets		219			5
TOTAL ASSETS	$	6,072,785		$	6,285,268

LIABILITIES:
Due to subsidiaries	$	878		$	688
Other liabilities		532			1,063
Total liabilities		1,410			1,751

SHAREHOLDERS' EQUITY:
Preferred shares, par value: $0.01; 50,000 shares authorized;
no shares issued and outstanding		-			-
Common shares, par value: $0.01; 200,000 shares authorized;
(2011) 66,455 and (2010) 66,017 issued		665			660
Additional paid-in capital		1,892,988			1,863,031
Accumulated other comprehensive income (loss), net of deferred income
tax expense (benefit) of $112,969 at 2011 and $102,868 at 2010		366,978			332,258
Treasury shares, at cost; 12,719 shares (2011) and 11,589 shares (2010)		(1,073,970	)		(981,480	)
Retained earnings		4,884,714			5,069,048
Total shareholders' equity		6,071,375			6,283,517
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	6,072,785		$	6,285,268

See notes to consolidated financial statements.

S-2

Index

SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS


	Years Ended December 31,
	2011			2010			2009
(Dollars in thousands)
REVENUES:
Net investment income	$	1,673		$	1,125		$	2,625
Net realized capital gains (losses)		-			7			(15,142	)
Other income (expense)		(505	)		(385	)		(406	)
Net income (loss) of subsidiaries		(71,233	)		618,906			829,335
Total revenues		(70,065	)		619,653			816,412

EXPENSES:
Other expenses		10,421			8,899			9,423
Total expenses		10,421			8,899			9,423

INCOME (LOSS) BEFORE TAXES		(80,486	)		610,754			806,988
Income tax expense (benefit)		-			-			-

NET INCOME (LOSS)	$	(80,486	)	$	610,754		$	806,988

See notes to consolidated financial statements.

S-3

Index

SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
(Dollars in thousands)	2011			2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(80,486	)	$	610,754		$	806,988
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in retained (earnings) deficit of subsidiaries		71,233			(618,906	)		(829,335	)
Dividends received from subsidiaries		190,000			215,000			350,000
Change in other assets and liabilities, net		(718	)		2,849			(1,619	)
Increase (decrease) in due to/from affiliates		224			(291	)		750
Amortization of bond premium (accrual of bond discount)		875			733			80
Realized capital losses (gains)		-			(7	)		15,142
Non-cash compensation expense		936			813			641
Net cash provided by (used in) operating activities		182,064			210,945			342,647

CASH FLOWS FROM INVESTING ACTIVITIES:
Additional investment in subsidiaries		(91,548	)		(28,619	)		(287,114	)
Proceeds from fixed maturities matured/called - available for sale, at market value		9,219			4,211			3,672
Proceeds from fixed maturities sold - available for sale, at market value		-			7			227,298
Cost of fixed maturities acquired - available for sale, at market value		-			(81,113	)		(20,577	)
Net change in short-term investments		30,180			4,774			(4,621	)
Net cash provided by (used in) investing activities		(52,149	)		(100,740	)		(81,342	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Common shares issued during the period, net		29,025			17,038			19,990
Purchase of treasury shares		(54,879	)		(18,963	)		(164,757	)
Dividends paid to shareholders		(103,848	)		(108,477	)		(116,856	)
Net cash provided by (used in) financing activities		(129,702	)		(110,402	)		(261,623	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		-			-			-

Net increase (decrease) in cash		213			(197	)		(318	)
Cash, beginning of period		49			246			564
Cash, end of period	$	262		$	49		$	246

Non-cash transaction:
Purchase of treasury shares by subsidiary	$	37,611		$	379,591		$	25,840

See notes to consolidated financial statements.

S-4

Index

SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION



Column A	Column B		Column C		Column D		Column E		Column F		Column G		Column H		Column I		Column J
			Reserve								Incurred
Geographic Area			for Losses								Loss and		Amortization
	Deferred		and Loss		Unearned				Net		Loss		of Deferred		Other		Net
	Acquisition		Adjustment		Premium		Premiums		Investment		Adjustment		Acquisition		Operating		Written
(Dollars in thousands)	Costs		Expenses		Reserves		Earned		Income		Expenses		Costs		Expenses		Premium
December 31, 2011
Domestic	$	257,155	$	6,104,930	$	979,490	$	2,133,872	$	263,608	$	1,740,025	$	465,498	$	128,791	$	2,164,792
International		72,856		2,145,726		263,373		1,244,492		51,232		1,372,309		310,992		27,307		1,218,561
Bermuda		48,015		1,872,559		169,915		722,983		305,201		613,870		174,031		26,305		725,546
Total	$	378,026	$	10,123,215	$	1,412,778	$	4,101,347	$	620,041	$	3,726,204	$	950,521	$	182,403	$	4,108,899

December 31, 2010
Domestic	$	258,688	$	5,944,708	$	998,755	$	2,028,059	$	307,274	$	1,437,691	$	472,344	$	112,186	$	2,012,938
International		79,385		1,665,932		288,721		1,168,130		44,088		1,050,079		288,423		27,646		1,199,594
Bermuda		45,696		1,729,543		167,743		738,436		302,101		457,942		171,088		26,426		733,046
Total	$	383,769	$	9,340,183	$	1,455,219	$	3,934,625	$	653,463	$	2,945,712	$	931,855	$	166,258	$	3,945,578

December 31, 2009
Domestic	$	249,833	$	5,952,679	$	988,901	$	2,055,992	$	224,468	$	1,276,760	$	469,125	$	119,527	$	2,053,360
International		68,561		1,305,798		250,419		1,053,538		37,681		613,251		267,121		23,083		1,081,337
Bermuda		43,952		1,679,381		176,082		784,568		285,644		484,047		192,087		24,568		795,064
Total	$	362,346	$	8,937,858	$	1,415,402	$	3,894,098	$	547,793	$	2,374,058	$	928,333	$	167,178	$	3,929,761

S-5

Index

SCHEDULE IV — REINSURANCE


Column A	Column B		Column C		Column D		Column E		Column F
			Ceded to		Assumed
	Gross		Other		from Other		Net		Assumed
(Dollars in thousands)	Amount		Companies		Companies		Amount		to Net

December 31, 2011
Total property and liability insurance
premiums earned	$	871,598	$	224,873	$	3,454,622	$	4,101,347		84.2	%

December 31, 2010
Total property and liability insurance
premiums earned	$	823,811	$	230,163	$	3,340,977	$	3,934,625		84.9	%

December 31, 2009
Total property and liability insurance
premiums earned	$	808,793	$	170,544	$	3,255,849	$	3,894,098		83.6	%

S-6

Previous: Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES