UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

Commission file number 000-33047

MAX CAPITAL GROUP LTD.

(Exact name of registrant as specified in its charter)

Bermuda	Not Applicable
(State of or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Max House

2 Front Street

Hamilton, HM 11

Bermuda

(441) 295-8800

(Address and telephone number, including area code, of registrant’s principal executive offices)

Securities Registered Pursuant to Section 12(b) of the Act:

Common Shares, Par Value $1.00 per share

Name of each exchange on which registered

The NASDAQ Stock Market LLC

Securities Registered Pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the SecuritiesAct.  Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x            Accelerated filer  ¨            Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.).  Yes  ¨    No  x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 29, 2007 was $1,401,488,505, based on the closing price of the registrant’s common shares on June 29, 2007, the last business day of the registrant’s most recently completed second fiscal quarter. Solely for the purpose of this calculation and for no other purpose, the non-affiliates of the registrant are assumed to be all shareholders of the registrant other than (i) directors of the registrant, (ii) executive officers of the registrant who are identified as “named executive officers” pursuant to Item 11 of this Form 10-K, (iii) any shareholder that beneficially owns 10% or more of the registrant’s common

shares and (iv) any shareholder that has one or more of its affiliates on the registrant’s board of directors. Such exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant.

The number of shares of the registrant’s common shares outstanding as of January 31, 2008 was 56,101,232.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the proxy statement for the registrant’s 2008 annual meeting of shareholders, to be filed subsequently with the Securities and Exchange Commission, or SEC, pursuant to Regulation 14A, are incorporated by reference in Part III of this Annual Report on Form 10-K.

TABLE OF CONTENTS

		Page
PART I
ITEM 1.	BUSINESS	4
ITEM 1A	RISK FACTORS	18
ITEM 1B	UNRESOLVED STAFF COMMENTS	33
ITEM 2.	PROPERTIES	34
ITEM 3.	LEGAL PROCEEDINGS	34
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	35
PART II
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	36
ITEM 6.	SELECTED FINANCIAL DATA	37
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	37
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	69
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	69
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	70
ITEM 9A.	CONTROLS AND PROCEDURES	70
ITEM 9B.	OTHER INFORMATION	70
PART III
ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE	71
ITEM 11.	EXECUTIVE COMPENSATION	71
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	71
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	71
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	71
PART IV
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	72

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PART I

ITEM 1. BUSINESS

Unless otherwise indicated or unless the context otherwise requires, all references in this Annual Report on Form 10-K to “we,” “us,” “our” and similar expressions are references to Max Capital Group Ltd. and its consolidated subsidiaries. Unless otherwise indicated or unless the context otherwise requires, all references in this annual report to entity names are as set forth in the following table:

Reference	Entity’s legal name	Direct parent company
Max Capital	Max Capital Group Ltd.
Max Bermuda	Max Bermuda Ltd.	Max Capital Group Ltd.
Max Europe	Collectively: Max Europe Holdings Limited, Max Re Europe Limited and Max Insurance Europe Limited
Max Europe Holdings	Max Europe Holdings Limited	Max Bermuda Ltd.
Max Re Europe	Max Re Europe Limited	Max Europe Holdings Limited
Max Insurance Europe	Max Insurance Europe Limited	Max Europe Holdings Limited
Max Diversified	Max Diversified Strategies Ltd.	Max Bermuda Ltd.
Max Managers	Max Managers Ltd.	Max Capital Group Ltd.
Max USA	Max USA Holdings Ltd.	Max Capital Group Ltd.
Max Specialty	Max Specialty Insurance Company	Max USA Holdings Ltd.
Max Specialty Services	Max Specialty Insurance Services Ltd.	Max USA Holdings Ltd.
Max California	Max California Insurance Services Ltd.	Max Specialty Insurance Services Ltd.
Max Managers USA	Max Managers USA Ltd.	Max USA Holdings Ltd.
MCS Ireland	Max Capital Services Limited	Max Capital Group Ltd.
MCS USA	Max Capital Services USA LLC	Max Capital Services Limited
MCS BDA	Max Capital Services BDA Ltd.	Max Capital Services Limited

We consider Max Bermuda, Max Re Europe, Max Insurance Europe and Max Specialty to be the operating subsidiaries of Max Capital.

Certain terms and financial measures used below are in accordance with U.S. generally accepted accounting principles, or GAAP. Certain terms and non-GAAP financial measures used below are defined in the “Glossary of Selected Insurance Industry Terms and non-GAAP financial measures” appearing on page 33 of this Form 10-K. We have included certain non-GAAP financial measures in this Form 10-K within the meaning of Regulation G. We have consistently provided these financial measurements in previous filings and we believe that these measurements are important to investors and other interested parties, and that investors and other such persons benefit from having a consistent basis of comparison with other companies within the industry. These measures may not be comparable to similarly titled measures used by companies outside the insurance industry. Investors are cautioned not to place undue reliance on these non-GAAP measures in assessing our overall financial performance.

Safe Harbor Disclosure

This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend that the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 apply to these forward-looking statements. Forward-looking statements are not statements of historical fact but rather reflect our current expectations, estimates and predictions about future results and events. These statements may use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “project” and similar expressions as they relate to us or our management. When we make forward-looking statements, we are basing them on management’s beliefs and assumptions, using information currently available to us. These forward-looking statements are subject to risks, uncertainties and assumptions. Factors that could cause such forward-looking statements not to be realized (which are described in more detail included or incorporated by reference herein and in documents filed by us with the SEC) include, but are not limited to:

• claims development;

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• general economic conditions and conditions specific to the reinsurance and insurance markets in which we operate;

• pricing competition;

• rating agency policies and practices;

• catastrophic events;

• the amount of underwriting capacity from time to time in the market;

• material fluctuations in interest rates;

• unexpected volatility associated with our alternative investments;

• tax and regulatory changes and conditions; and

• loss of key executives.

Other factors such as changes in U.S. and global financial and equity markets resulting from general economic conditions, market disruptions and significant interest rate fluctuations and changes in credit spreads may adversely impact our investments or impede our access to, or increase the cost of, financing our operations. We caution that the foregoing list of important factors is not intended to be, and is not, exhaustive. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. If one or more risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statements in this Form 10-K reflect our current view with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph.

General Description

We are a global provider of specialty insurance and reinsurance products for the property and casualty market, with underwriting operations based in Bermuda, Ireland and the United States. We underwrite a diversified portfolio of risks that encompass long-tail business, including but not limited to general liability, medical malpractice, professional liability and workers compensation risks, as well as short-tail business, including but not limited to property, property catastrophe, aviation and marine and energy risks. We also provide reinsurance for the life and annuity market when opportunities arise.

In continuation of our long-term strategic initiative to build our franchise, we acquired Max Specialty in April 2007 and expanded into the excess and surplus lines business in the United States. This segment operates across three divisions, brokerage, contract binding and marine, underwriting property, general liability and inland marine risks. We believe our platform will allow us to continue to utilize our capital efficiently by expanding our specialty insurance products as we target these niche markets.

To manage our reinsurance and insurance liability exposure, make our investment decisions and assess our overall enterprise risk, we model our underwriting and investing activities on an integrated basis. Our integrated risk management, as well as terms and conditions of our products, provides flexibility in making decisions regarding investments. Our investments comprise a high grade fixed maturities securities portfolio and an alternative investment portfolio that as of December 31, 2007 employed nine strategies invested in 35 underlying trading entities and one strategic reinsurance private equity investment. Our investment portfolio is designed to provide diversification and to generate positive returns while attempting to reduce the frequency and severity of loss outcomes. Based on fair values at December 31, 2007, the allocation of invested assets was 79.3% in cash and fixed maturities and 20.7% in alternative investments.

Our principal operating subsidiary is Max Bermuda. At December 31, 2007, Max Bermuda had $1,659.1 million of shareholders’ equity. We conduct our European activities through Max Europe Holdings and its operating subsidiaries, Max Re Europe and Max Insurance Europe. We conduct our U.S. operations through Max USA and its operating subsidiary, Max Specialty. We hold all material alternative investments in Max Diversified. During the fourth quarter of 2007, we began implementation of our global service companies initiative whereby we seek to improve the efficiency of certain corporate services across the group. Pursuant to this initiative, we formed MCS Ireland and its two subsidiaries, MCS USA and MCS BDA, to house those internal support services that will be provided across the group.

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Business Segments

We operate in the reinsurance and insurance business serving four segments: the property and casualty reinsurance segment, the property and casualty insurance segment, the U.S. excess and surplus lines insurance segment and the life and annuity reinsurance segment. The table below sets forth gross premiums written by type of risk for the years ended December 31, 2007, 2006 and 2005.

	2007				2006				2005
	Gross Premiums Written		Percentage of Total Premiums Written		Gross Premiums Written		Percentage of Total Premiums Written		Gross Premiums Written		Percentage of Total Premiums Written
	(in thousands)				(in thousands)				(in thousands)
Property and Casualty Reinsurance:
Accident and Health	$	—	0.0	%	$	7,585	0.9	%	$	7,790	0.6	%
Aviation		34,095	3.1			35,374	4.1			42,945	3.4
Excess Liability		16,716	1.6			66,876	7.7			39,878	3.2
Medical Malpractice		53,138	4.9			53,400	6.2			40,744	3.3
Other		7,016	0.7			660	0.1			8,196	0.7
Professional Liability		33,640	3.1			60,704	7.0			102,620	8.2
Property and Property Catastrophe		89,197	8.3			67,497	7.8			30,525	2.4
Marine & Energy		47,077	4.4			29,152	3.4			43,828	3.5
Whole Account		15,080	1.4			43,548	5.0			177,564	14.3
Workers’ Compensation		49,197	4.5			58,759	6.8			121,630	9.8
Total P&C Reinsurance		345,156	32.0			423,555	49.0			615,720	49.4
Property and Casualty Insurance:
Aviation		40,934	3.8			21,864	2.5			—	—
Excess Liability		131,515	12.2			162,786	18.8			176,946	14.2
Professional Liability		157,450	14.6			150,885	17.4			144,082	11.5
Property		53,027	4.9			61,059	7.1			34,268	2.8
Total P&C Insurance		382,926	35.5			396,594	45.8			355,296	28.5
U.S. Excess and Surplus Lines:
Property		34,721	3.2			—	0.0			—	0.0
General Liability		12,302	1.2			—	0.0			—	0.0
Marine		1,220	0.1			—	0.0			—	0.0
Total U.S. Excess and Surplus Lines Insurance		48,243	4.5			—	0.0			—	0.0
Aggregate Property and Casualty	$	776,325	72.0		$	820,149	94.8		$	971,016	77.9
Life and Annuity Reinsurance:
Annuity	$	299,261	27.8		$	41,059	4.8		$	235,012	18.9
Health		29	0.0			340	0.0			32,657	2.6
Life		2,671	0.2			3,649	0.4			7,346	0.6
Total L&A Reinsurance	$	301,961	28.0		$	45,048	5.2		$	275,015	22.1
Aggregate Property and Casualty, U.S. Excess and Surplus and Life and Annuity	$	1,078,286	100.0	%	$	865,197	100.0	%	$	1,246,031	100.0	%

Additional information about our business segments is set forth in Item 7—Management’s Discussion and Analysis and Note 19 to our audited consolidated financial statements included herein.

The majority of our clients are insurers, reinsurers and companies located in the United States. During the years ended December 31, 2007, 2006 and 2005, we derived approximately 55.0%, 64.0% and 65.2%, respectively, of gross premiums written from clients located in the United States. We also source business outside the United States, predominantly in Europe, which represented approximately 45.0%, 36.0% and 34.8% of gross premiums written for the years ended December 31, 2007, 2006 and 2005, respectively.

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Description of Business

We are a Bermuda headquartered provider of specialty property and casualty insurance and reinsurance and a provider of life and annuity reinsurance with approximately $1,583.9 million in consolidated shareholders’ equity as of December 31, 2007. We believe we differentiate ourselves from our competitors by underwriting a number of specialized reinsurance and insurance products covering exposures in several areas of both markets and, to a lesser extent, by targeting superior risk-adjusted returns from our diversified investment portfolio.

We model our assets and liabilities on an integrated basis to better manage our insurance and reinsurance liability exposure, structure our investment portfolio and assess our overall risk. We believe that our diversified products and exposure base, together with our integrated risk management, provide us with flexibility in making decisions regarding our investments. We invest our assets in both a portfolio of high grade fixed maturity securities and an alternative investment portfolio.

In 2006, we decided to reduce our target allocation to alternative investments to approximately 20% of total invested assets. Our investment allocation to alternative investments was 20.7% at December 31, 2007 compared to 23.5% at December 31, 2006. We made net redemptions of $195.0 million from our alternative investments during the year ended December 31, 2007.

Property and Casualty Reinsurance

We offer excess of loss and quota share, also known as proportional or pro rata, products in the property and casualty reinsurance market. Generally, we participate on reinsurance treaties with a number of other reinsurers, each with an allocated portion of the treaty and whereby the terms and conditions of the treaty are substantially the same for each reinsurer participating. Our balance between long-tail casualty business and short-tail property and aviation business has shifted in 2007 more towards property and aviation business than in 2006. Property and aviation business includes property, property catastrophe, marine and energy and aviation. Casualty business includes excess liability, medical malpractice, professional liability, and workers’ compensation. We also write whole account coverage, which provides coverage across a client’s multi-line portfolio of risk and may include both property and casualty business as described above. Our volume of casualty reinsurance decreased in 2007 largely as a result of the non-renewal of four contracts and the restructuring of two reinsurance contracts at renewal.

We typically write our property and casualty reinsurance products in the form of treaty reinsurance contracts, which are contractual arrangements that provide for automatic reinsuring of a type or category of risk underwritten by our clients. With treaty reinsurance contracts, we do not separately evaluate each of the individual risks assumed under the contracts and are largely dependent on the individual underwriting decisions made by the ceding client. Accordingly, we review and analyze the ceding client’s risk management and underwriting practices in deciding whether to provide treaty reinsurance and in our pricing of the treaty reinsurance contract.

With respect to excess of loss reinsurance, we indemnify the ceding client against all or a specified portion of losses and expenses in excess of a specified dollar or percentage amount. With respect to quota share reinsurance, we share the premiums as well as the losses and expenses in an agreed proportion with the ceding client. In both types of contracts, we may provide a ceding commission to the client. Our reinsurance products may include features such as contractual provisions that require our client to share in a portion of losses resulting from its ceded risks, may require payment of additional premium amounts if we incur greater losses than those projected at the time of the execution of the contract, may require reinstatement premium to restore the coverage after there has been a loss occurrence or may provide for refunds if the losses we incur are less than those projected at the time the contract is executed.

During the years ended December 31, 2007, 2006 and 2005, we wrote $255.9 million, $277.3 million and $431.9 million, respectively, or 74.2%, 65.5% and 70.1%, respectively, of property and casualty reinsurance gross premiums written on an excess of loss basis and $89.2 million, $146.3 million and $183.8 million, respectively, or 25.8%, 34.5% and 29.9%, respectively, of property and casualty reinsurance gross premiums written on a quota share basis.

Property and Casualty Insurance

We offer excess liability, professional lines, aviation and property insurance products, primarily to Fortune 1000 companies. Our excess liability products are excess umbrella liability insurance, excess product liability insurance, excess medical malpractice insurance and excess product recall insurance. Our professional lines products include errors and omissions insurance, employment practices liability insurance and directors and officers insurance. Our insurance products are underwritten in Bermuda and Ireland.

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We underwrite our insurance products on an individual risk basis, which, in many cases, includes holding an in-person meeting with the client in Bermuda or Ireland. For 2007, professional liability, excess liability, property and aviation accounted for 41.1%, 34.3%, 13.9% and 10.7% of insurance gross premiums written, respectively.

U.S. Excess and Surplus Lines Insurance

In 2007, we commenced operations in the United States writing excess and surplus lines insurance. Excess and surplus lines insurance is a segment of the U.S. insurance market that allows consumers to buy property and casualty insurance through non-admitted carriers. Risks placed in the excess and surplus lines insurance market are often insurance programs that cannot be filled in the conventional insurance markets due to a shortage of state-regulated insurance capacity. This market has significant flexibility regarding insurance rate and form regulations, enabling us to utilize our underwriting expertise to develop customized insurance solutions for our clients.

Our U.S.-based excess and surplus lines insurance platform uses wholesale brokerage and managing general agency, or contract binding, distribution channels to offer property and casualty risk classes. Our brokerage products include property catastrophe, property non-catastrophe, middle market property and inland marine insurance. Our contract binding products include property, casualty, inland marine, umbrella and general liability insurance. All our products are underwritten on an individual risk basis. A characteristic of this segment will be a higher volume of transactions with a lower average premium per transaction compared to our property and casualty reinsurance and insurance segments.

We began operations in the United States in April 2007 with offices in Richmond, Virginia, Atlanta, Georgia, San Francisco, California and Horsham, Pennsylvania. As of December 31, 2007, we were operating out of additional offices in Dallas, Texas and New York, New York. Currently, Max Specialty is licensed in Delaware and is approved to write business on a non-admitted basis in 46 other states.

Life and Annuity Reinsurance

Our life and annuity reinsurance products focus on existing blocks of business and typically take the form of co-insurance structures, where the risk is generally reinsured on the same basis as that of the original policy. In a co-insurance transaction, we receive a percentage of the gross premium charged to the policyholder by the client, less an expense allowance that we grant to the client, as the primary insurer. By accepting the transfer of liabilities and the related assets from our clients in these co-insurance transactions, we seek to enable these clients to achieve capital relief and improved returns on equity. We seek to write life and annuity reinsurance agreements with respect to individual and group disability, whole life, universal life, corporate owned life, term life, fixed annuities, annuities in payment and structured settlements.

The life reinsurance risks that we underwrite include mortality and investment risks and, to a lesser extent, early surrender and lapse risks. The annuity products that we underwrite include longevity and investment risks. The disability products that we underwrite include morbidity risk and, to a lesser extent, early surrender and lapse risks. Mortality risk measures the sensitivity of the insurance company’s liability to higher mortality rates than were assumed in setting the premium. Longevity risk measures the sensitivity of the insurance company’s liability to future mortality improvement being greater than expected. Morbidity risk measures the sensitivity of the insurance company’s liability for higher illness, sickness and disease rates than were assumed in setting the premium. Early surrender and lapse risks measure the sensitivity of the insurance company’s liability to early or changing policy surrender distributions.

Pricing of our life and annuity reinsurance products is based on actuarial models that incorporate a number of factors, including assumptions based on industry tables regarding mortality, longevity, morbidity, expenses, demographics, persistency, investment returns, certain macroeconomic factors, such as inflation, and certain regulatory factors, such as taxation and minimum surplus requirements.

Underwriting and Risk Management

We attempt to manage our underwriting exposures in both the property and casualty and life and annuity markets by diversifying across many underlying insureds with small policy limits per insured. Our largest underlying exposure in our property and casualty reinsurance segment in terms of existing loss reserves is workers’ compensation (including reinsurance written as such and workers’ compensation exposure embedded in other types of contracts such as whole account), which has attractive features of claims payments over many years and low statutorily defined cash payout amounts. Our largest

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underlying exposure in our property and casualty insurance segment in terms of existing loss reserves is professional liability. With respect to our life and annuity reinsurance products, we seek to reinsure blocks of business that have small underlying policy limits spread across a large population of insureds and to avoid high policy limit exposures.

The differential between premium volume and potential ultimate losses is smaller for our long-tail casualty business than for our short-tail property and aviation business. Short tail business represents approximately 38.7% of our property and casualty premium volume in the current year. Furthermore, our casualty business is less susceptible to the aggregation of losses from one or two major events. Our property and property catastrophe reinsurance business, aviation reinsurance business, marine reinsurance and marine and aviation insurance business is susceptible to large catastrophe events that may trigger losses to a number of our cedants. As a result, our short-tail property and aviation reinsurance and insurance business is our largest exposure in terms of potential adverse earnings impact from a single event or series of events. We have established a corporate policy of limiting the maximum impact of a property or aviation catastrophe event or series of property or aviation catastrophe events to 25% of opening shareholders’ equity on an annual basis for a modeled 1 in 250 year event.

We seek to reduce the volatility arising out of the underlying risks assumed through our written business by setting and maintaining contractual features that may include overall aggregate limits on liabilities, sub-limits on liabilities and attachment points for liabilities. Additionally, we seek to manage our property catastrophe reinsurance aggregation risk by utilizing internally developed catastrophe models that are based upon the results of commercially available products such as Risk Management Solutions, Inc., or RMS, and AIR Worldwide Corporation, or AIR. Further protection against volatility and aggregation risk is obtained through the purchase of reinsurance as described under “Retrocessional and Balance Sheet Protections.”

We manage the duration and volatility of our asset mix in relation to our liabilities in an attempt to manage our overall risk. We believe that our portfolio of underwriting risks benefits from diversification and we tailor our investment strategy accordingly. Because we now write predominantly traditional property and casualty insurance and reinsurance business, and as we have expanded our short-tail business, in 2006 we decided to decrease our target alternative investment allocation to represent approximately 20% of total invested assets, with the remaining invested assets allocated to cash and fixed maturities investments.

We use a series of proprietary and non-proprietary actuarial and financial models in order to analyze the underlying risk characteristics of our liabilities and assets. We conduct both contract-by-contract modeling as well as portfolio aggregation modeling and then analyze these modeled results on an integrated basis in an effort to determine the aggregation of our underwriting risk and investment risk and the ultimate impact that adverse events might have on our surplus.

We utilize dynamic financial analysis to examine the possible effects of future variables, such as the effect of inflation on the cost of losses, using multiple scenarios to predict the range of outcomes and prices of our products. In addition, we attempt to manage capital adequacy by incorporating value at risk and risk based capital analyses into our modeling. Through the use of dynamic financial analysis, we seek to measure the risk inherent in each underwriting transaction as well as our overall asset and liability risk, and the potential for adverse scenarios producing projected losses and potential adverse cash flow. Additionally, by employing a risk based capital analysis rather than using premium income as a measure of risk, we are able to obtain an estimate of the amount of capital to be allocated to each transaction and our overall asset and liability portfolio. We believe that our actuarial analysis of loss payment patterns enables us to generate meaningful projections of the total and interim cash flows of our overall liability portfolios, and use these projections to determine the profile of liquidity and investment returns required of our investment portfolio. We believe that this integrated approach allows us to optimize the use of our capital by providing a dynamic measurement of risk and return to evaluate competing reinsurance, insurance and investment opportunities.

Due Diligence

We perform due diligence as we believe appropriate on transactions that we consider underwriting, and perform regular monitoring and periodic due diligence on the transactions that we complete. Generally, we complement our internal skills with reputable third party service providers, including actuaries, attorneys, claim adjusters and other professionals. These third parties perform on-site client due diligence on our behalf and assist us in modeling transactions and provide legal advice on contract documentation.

Retrocessional and Balance Sheet Protections

As part of our underwriting process, we reinsure or retrocede portions of certain risks for which we have accepted liability. In these transactions, we cede to another counterparty reinsurer or retrocessionaire all or part of the risk that we have assumed. However, these arrangements do not legally discharge our liability with respect to the obligations that we have insured or reinsured. Like many other insurance and reinsurance companies, we cede risks to reinsurers and retrocessionaires for one or more of the following reasons:

• reduce net liability on individual risks;

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• protect against catastrophic losses;

• stabilize financial ratios;

• obtain additional underwriting capacity; and

• enhance underwriting pricing margins.

When we reinsure portions of risk, we utilize reinsurance arrangements, such as quota share reinsurance, excess of loss reinsurance and stop-loss contracts that are available in the reinsurance and retrocessional market as a means to manage risk on the products that we write. In quota share reinsurance arrangements, the reinsurer or retrocessionaire shares a proportional part of our premiums and losses associated with the risks being reinsured. Under the terms of excess of loss reinsurance and stop-loss contracts, the reinsurer or retrocessionaire agrees to cover losses in excess of the amount of risk that we have retained, subject to negotiated limits. Our reinsurance strategy includes purchasing reinsurance to limit losses on a single risk or transaction and on a whole portfolio basis as the need arises. Generally, we will utilize quota share reinsurance for our casualty business in order to allow us to provide increased capacity to our clients while still meeting our internally governed maximum net exposure thresholds. During the year ended December 31, 2007, the largest component of our ceded reinsurance has been for quota share treaty reinsurance, principally related to our insurance and U.S. excess and surplus lines insurance segments. Our underwriting policy is to retain a maximum net exposure of not more than 5% of our shareholders’ equity for any individual contract we write. For our property and aviation business, we purchase excess of loss reinsurance in order to reduce the volatility of our underwriting results. Our underwriting policy is to limit the maximum impact of a property or aviation catastrophe event or series of property or aviation catastrophe events to 25% of opening shareholders’ equity on an annual basis for a modeled 1 in 250 year event.

Credit Risk

Our reinsurance and retrocessional arrangements do not legally discharge our liability with respect to obligations that we have insured or reinsured. We remain liable with respect to the liabilities that we cede if a counterparty is unable to meet its obligations assumed under a reinsurance or retrocessional agreement. Accordingly, we evaluate and monitor the financial strength of each of our counterparties. Certain reinsurance and retrocessional agreements give us the right to receive additional collateral or to terminate the agreement in the event of deterioration in the financial strength of the counterparty.

In connection with our retrocessional arrangements, we prefer to cede risk on a funds withheld basis, which allows us to cede risk while retaining collateral to secure our retrocessionaire’s obligation. Grand Central Re, a Bermuda domiciled reinsurance company in which Max Bermuda has a 7.5% equity investment, is our largest retrocessionaire and accounted for 20.4% of our losses recoverable at December 31, 2007. In 2004, Grand Central Re stopped writing new business and requested that A.M. Best Company withdraw its financial strength rating. Consequently, A.M. Best Company has assigned a financial strength rating of “NR-4” to Grand Central Re. We retain funds from Grand Central Re amounting to approximately 107.5% of its loss recoverable obligations.

Our reinsurance programs for our property and casualty insurance risks are generally written on a funds transferred basis and therefore we have greater credit risk exposure. The aggregate amount due from reinsurers of our property and casualty insurance risks represents 67.8% of losses recoverable at December 31, 2007 and all of these reinsurers are presently rated “A-” or above by A.M. Best Company.

Loss and Benefit Reserves

In accordance with U.S. GAAP, we establish and carry as liabilities an actuarially determined amount of loss reserves. We use our own property and casualty and life and annuity actuaries as part of our loss reserving process. In addition, we engage outside independent actuaries to perform an annual review of our loss reserve estimates. These reserve amounts have been established to meet our estimated future obligations for losses that have occurred relating to premiums we have earned. Future loss and benefit payments comprise the majority of our financial obligations.

Loss and benefit reserves do not represent an exact calculation of liability. The estimation of loss and benefit reserves is a complex process impacted by many external factors that affect the payment of losses and benefits. We apply the assumption that past experience (both industry and our own), adjusted for the effect of current developments and likely future trends, is an appropriate basis for estimating ultimate liabilities. The reserves presented represent our estimate of the expected cost of the ultimate settlement and administration of our claims and are based upon quantitative techniques overlaid with subjective considerations and managerial judgment.

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In determining an initial reserve estimate, our actuaries utilize the underwriting information received when a transaction is negotiated. This data, when combined with our own experience on prior period or similar contracts helps us to select the appropriate actuarial methods and assumptions that we use to create an initial pricing and reserving model. Initial assumptions include estimates of future trends in claims severity and frequency, mortality, judicial theories of liability and other factors. We regularly evaluate and update our initial loss development and trending factor selections using client specific and industry data. We also subscribe to industry publications to enable us to keep current with the latest industry trends. During the underwriting process, the client’s data is analyzed by our underwriting teams to ascertain its quality and credibility. This process may include an underwriting audit and claims audit of a client’s operations as well as inquiry of the insured or ceding company as to the trends and methodologies utilized in arriving at their estimates. In cases where we find the data initially provided by the client is not sufficient, we will utilize industry data that we have collected from either third party sources or from our own historical submission database to enhance the quality of the reserve model that is created.

On a quarterly basis, we perform a detailed review of our contracts and of the actuarial method utilized in arriving at reserve estimates and the related reinsurance recoverables. This review is performed by our corporate actuarial group, which is staffed by a team of qualified actuaries, on a contract by contract basis for our reinsurance segment, and on a portfolio basis for our insurance and U.S. excess and surplus lines insurance segments. The quarterly review utilizes the initial submission information updated by current premium, loss and claims data reported to us. The newly reported loss information from our clients is the principal contributor to changes in our loss reserve estimates. As part of this process, our actuaries validate that the actuarial method applied continues to be appropriate to allow us to form a sound basis for projection of future liabilities. In addition, our reserve estimates are reviewed annually by outside actuaries in order to corroborate management’s estimates.

Marketing

We believe that diversity in our sources of business reduces the potential adverse effects arising from the termination of any one of our business relationships. Our marketing plan calls for the development of relationships with brokers and potential clients that we or brokers believe have a need for reinsurance or insurance, based on regulatory filings, industry knowledge and market trends. A significant volume of premium for the insurance and reinsurance industry is produced through a small number of large intermediaries and brokerage firms. We have relationships with multiple key personnel in these companies and therefore expect to maintain strong working relationships in the future.

During the years ended December 31, 2007, 2006 and 2005, brokered transactions accounted for the majority of our gross premiums written. Our top three independent producing intermediaries and brokerage firms for the year ended December 31, 2007 were Guy Carpenter, Aon Ltd. and Benfield. During the years ended December 31, 2007, 2006 and 2005, the top three independent producing intermediaries and brokerage firms accounted for 18%, 16% and 9%; 28%, 24% and 9%; and 33%, 23% and 8%, respectively, of gross premiums written. Potential credit risk associated with brokers and intermediaries is discussed in Item 1A—Risk Factors.

In addition, we attempt to capitalize on existing relationships with reinsurance and insurance companies, large global corporations and financial intermediaries to develop and underwrite business.

Overview of Investments

We seek to earn a superior risk-adjusted total return on our assets by engaging in an investment strategy that combines fixed maturities and alternative investments that employ strategies intended to manage investment risk. We diversify our portfolio to limit volatility and attempt to maintain adequate liquidity in our fixed maturities and alternative investments to fund operations and protect against losses from unexpected events. We seek to manage our credit risk through industry and issuer diversification and interest rate risk by monitoring the duration and structure of the investment portfolio relative to the duration and structure of the liability portfolio. The finance and investment committee of our board of directors approves and monitors performance of the managers of our fixed maturities investments and alternative investments. The finance and investment committee also periodically reviews our investment guidelines in light of prevailing market conditions and amends them from time to time as it deems appropriate. Based on fair values at December 31, 2007, the allocation of invested assets was 79.3% in cash and fixed maturities and 20.7% in alternative investments.

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Aggregate Portfolio Results

The table below shows the annual total rate of return of our cash and fixed maturities portfolio, alternative investment portfolio and aggregate investment portfolio for the years ended December 31, 2007, 2006 and 2005 (1).

	Year Ended December 31,
	2007		2006		2005
Cash and Fixed Maturities Investments	5.11	%	3.78	%	3.83	%
Alternative Investments—Max Diversified(2)	16.78	%	6.30	%	5.88	%
Alternative Investments—Reinsurance Private Equity(2)	97.33	%	31.64	%	(43.00)	%
Alternative Investments—Total	16.97	%	6.96	%	3.34	%
Aggregate Portfolio(3)	10.38	%	4.73	%	3.66	%

(1) Annual total rate of return means the annual total rate of return calculated by compounding the 12 consecutive monthly rates of return that are calculated by dividing monthly net performance by the beginning net asset value of that month. One is then subtracted from the product and the result is multiplied by 100.

(2) Max Diversified holds all of our alternative investments other than reinsurance private equity investment, which is held by Max Bermuda.

(3) Consists of cash and fixed maturities and our alternative investments.

This annual total rate of return information for our investment portfolio should not be relied upon as a representation of future results. Future results may vary and these variations may be significant.

Fixed Maturities Investments

Based on fair values at December 31, 2007, approximately 79.3% of our total investment portfolio was invested in cash and fixed maturities and was managed by General Re-New England Asset Management, Inc., Conning Asset Management and Asset Allocation and Management. Our fixed maturities investments comprise liquid, high quality securities. As of December 31, 2007, our fixed maturities investments had a dollar-weighted average rating of “AA1,” an average duration of approximately 4.6 years and an average book yield to maturity of 4.6%.

The investment strategy and guidelines for our fixed maturities investments emphasize diversification and preservation of principal. Under our current fixed maturities investment guidelines, securities in our fixed maturities portfolio must have a minimum rating of BAA3/BBB-, or its equivalent, from at least one internationally recognized statistical rating organization. In addition, a minimum weighted average credit quality rating of AA2/Aa, or its equivalent, must be maintained for our fixed maturities investment portfolio as a whole. Our fixed maturities investment guidelines also provide that we cannot leverage our fixed maturities investments.

Our cash and fixed maturities investments provide liquidity for day-to-day operations. We believe that we will be able to satisfy our foreseeable cash needs from our cash and fixed maturities investments and we maintain significant cash and cash equivalent balances to reduce the likelihood of needing to sell fixed maturities investments before maturity. Accordingly, we believe that our cash and fixed maturities investment guidelines reduce the likelihood of having to liquidate any portion of the alternative investments to meet near term cash flow needs.

Additional information about our fixed maturities investments can be found in Notes 2 and 3 to our audited consolidated financial statements included herein.

Alternative Investments

Overview. Based on fair values at December 31, 2007, approximately 20.7% (Max Diversified—20.6% and reinsurance private equity—0.1%) of our investment portfolio was invested in alternative investments. Max Diversified holds all of our alternative investments other than a reinsurance private equity investment, which is held by Max Bermuda. Alstra Capital Management, LLC, an affiliate of one of our directors and which we refer to as Alstra, has served as fund advisor for Max Diversified since April 1, 2004. As of December 31, 2007, Max Diversified was invested in 35 underlying alternative investment funds representing the following investment strategies: Distressed Securities Investing, Diversified Arbitrage, Emerging Markets, Event Driven Arbitrage, Fixed Income Arbitrage, Global Macro, Long/Short Credit, Long/Short Equities and Opportunistic Investing. These strategies were selected because of their low correlation with the stock market, the bond market and each other. Our alternative investment guidelines also provide that Max Diversified may be invested in Commodities Trading, Convertible Arbitrage and Merger Arbitrage.

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Our alternative investments are invested in accordance with our investment guidelines, which may be amended from time to time by our board of directors. Our investment guidelines currently mandate, among other things, that:

• funds must be invested in a minimum of five distinct alternative investment strategies;

• investments in any single strategy may not be made if it would cause the single strategy to exceed 25% of the value of our alternative investment portfolio, with further concentration limits imposed on certain strategies;

• a minimum of 80% of our alternative investment portfolio must be maintained in funds with monthly or quarterly liquidity; and

• investments in any single underlying fund may not be made if it would cause the single underlying fund to exceed 5% of the value of our alternative investment portfolio.

Under the terms of our customer agreement and trading authorization contract with Alstra, Alstra may make discretionary investment determinations so long as those determinations comply with our alternative investment guidelines and are in underlying strategies approved by the finance and investment committee of the board of directors. Currently, Max Diversified pays Alstra a management fee of 70 basis points plus an incentive fee of 7.5% of the return in excess of a 10% threshold on the net asset value of the funds in which Max Diversified had invested.

Alternative Investment Strategies. The following is a summary of the underlying strategies of funds in which we may invest our alternative investments:

Commodities Trading. Commodities trading advisors seek to make returns by trading futures, options and other securities in the over-the-counter market and on the regulated commodities exchanges.

Convertible Arbitrage. This strategy typically entails the simultaneous purchase of a convertible bond and a short sale of the underlying common stock, which results in an offsetting hedged position. This strategy generates returns from equity market volatility in either up or down directions. Income is also earned from the coupon interest payment on the convertible bond and from the short sale rebate, which is effectively interest paid on balances generated from the short sale of the underlying common stock. The principal risk of this strategy is a decline in the price of the convertible bond due to interest rate movements or credit quality changes that are not offset by an increase in the value of the corresponding common stock short position.

Distressed Securities Investing. Funds that pursue a distressed investing strategy purchase securities of companies experiencing financial distress. Typically, these companies are engaged in out-of-court debt restructurings or bankruptcy proceedings.

Diversified Arbitrage. This strategy typically entails simultaneously pursuing a variety of market-neutral strategies such as convertible arbitrage and event-driven arbitrage. By combining multiple skill sets within the same fund, these managers are able to allocate resources from one market neutral strategy to another in an effort to focus opportunistically on the strategies that are perceived as offering the greatest potential for returns in any given environment.

Emerging Markets. Emerging market funds seek to generate returns by employing fundamental analysis of emerging market countries and investing in government and corporate securities of emerging market countries.

Event-Driven Arbitrage. This strategy typically entails the purchase of securities of a company involved in a significant corporate event. Event-driven arbitrage funds will typically employ merger arbitrage techniques along with additional arbitrage techniques for companies that are spinning off divisions, going through reorganizations or undergoing other significant corporate events.

Fixed Income Arbitrage. Fixed income arbitrage funds seek to make returns by arbitraging fixed income securities. Principal trading activities include making arbitrage trades based on aberrations in the yield curve, credit spreads or between sectors in the fixed maturities market, such as between mortgage backed securities and asset backed securities.

Global Macro. Funds that pursue a global macro strategy typically participate in directional trading of bonds, stocks and currencies in an attempt to take advantage of perceived changes in macroeconomic conditions. A global macro fund will typically buy or sell securities such as Treasury bills and government notes and bonds, corporate bonds, foreign currencies and common stocks of individual companies or futures contracts on stock indices such as the S&P 500 Index^®. A global macro fund typically purchases both securities, such as common stock or government bonds, as well as derivatives of these securities, including futures, forward contracts and options. The principal risk of this strategy is that funds pursuing the strategy may incorrectly predict macroeconomic trends.

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Long/Short Credit. Funds that pursue a long/short credit strategy seek opportunities to invest primarily in high grade, high yield and distressed fixed maturities based on the identification of imbalance in valuation and capital allocation across credit ratings, industry sectors and geographic regions.

Long/Short Equities. Funds that pursue a long/short strategy typically purchase common stock (go long) of companies in a particular sector with perceived strong fundamentals and sell common stock (go short) of companies in the same sector that are perceived to have deteriorating fundamentals. The strategy attempts to create investment returns through superior stock selection based upon fundamental analysis rather than creating returns based simply upon an upward price direction of the overall stock market. While this strategy can profit from either positive or negative price trends in the overall stock market, investment managers of long/short equity funds generally have a net long position and returns tend to benefit from upward movement in the stock market and be negatively affected by declines in the stock market. Funds that pursue this strategy generally purchase and sell common stock of publicly-traded companies.

Merger Arbitrage. This strategy typically entails the simultaneous purchase of common stock of a company being acquired or merged and a short sale of the common stock of the acquiring company.

Opportunistic Investing. Our principal opportunistic investment focuses on investing in distressed loan portfolios. These loans tend to be collateralized by real estate and are typically purchased for a small fraction of the original loan amount. This strategy involves analysis of the value of the real estate collateral underlying each loan. The fund then attempts to reach an agreement with the debtor under each of the individual loans to satisfy the indebtedness for an amount greater than the purchase price of the loan. Securities purchased pursuant to this strategy are normally private debt obligations for which there is no public market.

Reinsurance Private Equity. In addition to Max Diversified’s investments in alternative investment funds, Max Bermuda has a private equity investment in Grand Central Re, a reinsurance company.

Alternative Investment Portfolio. As of December 31, 2007 and 2006, our alternative investment portfolio was allocated as follows:

	As of December 31,
	2007				2006
	Fair Value		Percentage of Total Alternative Investment Portfolio		Fair Value		Percentage of Total Alternative Investment Portfolio
	(in thousands)				(in thousands)
Commodities trading	$	—	0.0	%	$	27,858	2.6	%
Distressed securities investing		168,050	15.8			210,633	19.8
Diversified arbitrage		161,870	15.2			169,226	15.9
Emerging markets		98,882	9.3			108,534	10.2
Event driven arbitrage		170,563	16.1			169,857	15.9
Fixed income arbitrage		32,265	3.0			25,748	2.4
Global macro		69,092	6.5			60,382	5.7
Long/short credit		51,512	4.9			81,023	7.6
Long/short equity (1)		269,959	25.4			180,605	16.9
Opportunistic investing		35,600	3.4			29,515	2.8
Total Max Diversified		1,057,793	99.6			1,063,381	99.8
Reinsurance private equity		3,941	0.4			2,493	0.2
Total alternative investment portfolio	$	1,061,734	100.0	%	$	1,065,874	100.0	%

(1) Under our investment guidelines, no additional investment may be made in any single strategy if it would cause the strategy to exceed 25% of the value of our alternative investment portfolio. Because investment performance has increased the fair value of this strategy to greater than 25% of total alternative investments, this strategy remains in compliance with our investment guidelines.

Alternative Investment Portfolio Liquidity. We are able to liquidate our alternative investments held through Max Diversified on the same terms that the underlying funds can be liquidated. In general, the funds in which our alternative investments are invested require 30 days notice of liquidation, and may be liquidated on a monthly, quarterly or longer basis.

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In accordance with our investment guidelines, a minimum of 80% of our alternative investment portfolio must be maintained in funds with monthly or quarterly liquidity. As of December 31, 2007, the liquidity profile of our alternative investments held through Max Diversified was as follows:

Monthly	22	%
Quarterly	59	%
Other	19	%

Once a notice of withdrawal is given, we could be subject to periods extending up to 60 days before the cash proceeds are returned by an investment fund. Although we believe that our fixed maturities investments provide sufficient liquidity to satisfy the claims of our insureds and ceding clients, in the event that we were required to access assets invested in the alternative investments, our ability to do so may be impaired by these liquidity constraints.

Additional information about the alternative investments can be found in Notes 2 and 3 to our audited consolidated financial statements included herein.

Competition

The reinsurance and insurance industry is highly competitive. Competition in the types of business that we currently underwrite and intend to underwrite in the future is based principally on:

• premium rates;

• ability to obtain terms and conditions appropriate with the risk we are assuming and in accordance with our underwriting guidelines;

• the general reputation and perceived financial strength of the insurer or reinsurer;

• relationships with reinsurance and insurance intermediaries;

• ratings assigned by independent rating agencies;

• speed of claims payment and administrative activities; and

• experience in the particular line of insurance or reinsurance to be underwritten.

We compete directly with numerous independent reinsurance companies, captive insurance companies, insurance companies, subsidiaries or affiliates of established insurance companies or newly formed companies, reinsurance departments of primary insurance companies and underwriting syndicates from countries throughout the world in our chosen product lines. Many of these competitors are well established, have significant operating histories and have developed longstanding customer relationships. Our worldwide insurance and reinsurance competitors include ACE Limited, American International Group, Inc., Berkshire Hathaway, Inc., Swiss Reinsurance Company and XL Capital Ltd., all larger companies, with higher credit ratings and greater credit capacity. Additionally, competitors such as Allied World Assurance Holdings, Ltd., AXIS Capital Holdings Limited, Arch Capital Group Ltd., Endurance Specialty Insurance Ltd. and Platinum Underwriters Reinsurance, Inc. compete in many of our property and casualty markets. In the aftermath of the significant losses experienced by the insurance and reinsurance industry as a result of several hurricanes in the United States in 2005, a number of highly capitalized start-up companies entered the market. These competitors, which include Ariel Reinsurance Co. Ltd., Flagstone Reinsurance Limited and Validus Reinsurance Ltd., have been concentrating on the property market, an area that saw heavy competition in 2007. With the resulting increase in capacity there is increased competition for appropriately priced business in most types of business that we write. As a result, we expect downward pressure on premium volume as we maintain our underwriting discipline.

Ratings

Ratings are an important factor in establishing the competitive position of reinsurance and insurance companies and are important to our ability to market our products. At December 31, 2007, we are rated “A-(excellent)” by A.M. Best Company, or A.M. Best, “A (strong)” by Fitch, Inc., or Fitch, and “A3” by Moody’s Investors Service, Inc., or Moody’s. These ratings reflect each rating agency’s opinion of our financial strength, operating performance and ability to meet obligations. They are not evaluations directed toward the protection of investors in securities issued by Max Capital.

In April 2007, Max USA sold $100.0 million aggregate principal amount of 7.20% senior notes due April 14, 2017. The senior notes are guaranteed by Max Capital. The senior notes were assigned a senior unsecured debt rating of “BBB-” by Standard & Poor’s Ratings Services, or S&P, “bbb-” by A.M. Best, “BBB+” by Fitch, and “Baa2” by Moody’s, and all with a stable outlook. The ratings assigned by rating agencies to reinsurance and insurance companies are based upon factors and criteria established independently by each rating agency. They are not an evaluation directed to investors in our senior notes, and are not a recommendation to buy, sell or hold our senior notes. These ratings are subject to periodic review by the rating agencies or may be revised downward or revoked at the sole discretion of the rating agencies.

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Administration

We provide most of our own management and administrative services and establish and administer our loss reserves and policy benefits. Our underwriters, financial staff, chief operating officer and actuaries assist our claims personnel in performing traditional claims tasks such as monitoring claims and reserving. In addition, when we write highly specialized business we from time to time hire third-party claims specialists to assist in evaluating loss exposure and establishing reserving practices and claims-paying procedures. Generally, we self-manage and administer the claims activity associated with our insurance and reinsurance operations and utilize both internal resources and external experts in the reserving and settlement of claims.

In connection with the administration of the life and annuity benefit payments of our clients’ primary insureds that are covered on certain reinsurance transactions, our company, together with the client, will select an independent third-party claims administrator. We and our client then enter into a contract with the third-party administrator that will typically contain a provision requiring a significant amount of advance notice in order to terminate the contract. We are responsible for the loss and benefit payment expense charged by the third party administrator.

Regulation

Bermuda

The Insurance Act 1978 of Bermuda and its related regulations, which we refer to collectively as the Bermuda Insurance Act, regulates the reinsurance and insurance business of Max Bermuda and the reinsurance and insurance management business of Max Managers. The Bermuda Insurance Act imposes solvency and liquidity standards and auditing and reporting requirements on Max Bermuda and grants to the Bermuda Monetary Authority powers to supervise, investigate and intervene in the affairs of Bermuda reinsurance and insurance companies. Max Bermuda is required to prepare annual statutory financial statements, file an annual statutory financial return and have its statutory reserves actuarially certified. In addition, Max Capital, Max Bermuda, Max Managers and Max Diversified are each required to comply with the provisions of the Companies Act 1981 of Bermuda, which we refer to as the Bermuda Companies Act, regulating, among other things, the payment of dividends and making of distributions from contributed surplus.

In addition, pursuant to the Bermuda Insurance Act, any person who becomes a holder of at least 10%, 20%, 33% or 50% of our common shares must notify the Bermuda Monetary Authority in writing within 45 days of becoming such a holder or 30 days from the date they have knowledge of having become such a holder, whichever is later. The Bermuda Monetary Authority has the power to object to a person holding 10% or more of our common shares if it appears to the Authority that the person is not fit and proper to be such a holder. In such a case, the Bermuda Monetary Authority may require the holder to reduce their shareholding in us and may direct, among other things, that the voting rights attaching to their common shares shall not be exercisable. A person that does not comply with such a direction from the Bermuda Monetary Authority will be guilty of an offense.

Under proposed amendments to the Bermuda Insurance Act, effective for the year ended December 31, 2008, Max Bermuda will be subject to risk-based capital requirements in addition to the existing minimum solvency and liquidity requirements. The risk-based capital model will determine a control threshold for statutory capital and surplus. If a company falls below the control level, various degrees of regulatory action may be taken by the Bermuda Monetary Authority. We expect that the control threshold will be higher than the current minimum statutory capital and surplus requirement for Max Bermuda.

Ireland and Switzerland

Our Irish operating subsidiaries, Max Insurance Europe and Max Re Europe, are subject to regulation by the Irish Financial Services Regulatory Authority, or IFSRA. Max Insurance Europe must comply with the Irish Insurance Acts 1909 to 2000, regulations promulgated thereunder, regulations relating to insurance business promulgated under the European Communities Act 1972, the Irish Central Bank Acts 1942 to 1998 as amended, regulations promulgated thereunder and directions and guidelines, and codes of conduct, issued by IFSRA (the Insurance Acts and Regulations).

Max Insurance Europe is required to maintain statutory reserves in respect of underwriting liabilities and a solvency margin as provided for in the Insurance Acts and Regulations. Assets constituting statutory reserves must comply with admissibility, diversification, localization and currency matching rules. Statutory reserves must be actuarially certified annually.

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Max Re Europe must comply with the European Communities (Reinsurance) Regulations, 2006 and rules made thereunder and insofar as relevant to reinsurance the Irish Insurance Acts 1909 to 2000, regulations promulgated thereunder, regulations relating to reinsurance business promulgated under the European Communities Act 1972, the Irish Central Bank Acts 1942 to 1998 as amended, regulations promulgated thereunder and directions, papers and guidelines and codes of conduct issued by IFSRA.

Max Re Europe is required to maintain statutory reserves in respect of underwriting liabilities and a solvency margin as provided for in the European Communities (Reinsurance) Regulations, 2006. Assets constituting statutory reserves must comply with certain principles including obligations to diversify the assets, to secure sufficiency, liquidity, security, quality, profitability and currency matching of investments. Statutory reserves must be actuarially certified annually.

Max Insurance Europe and Max Re Europe, as of December 31, 2007, are entitled to do business on a “Freedom of Services” basis throughout the European Economic Area, or EEA. Because Switzerland is not a member country of the EEA, Max Insurance Europe has established an authorized branch in Switzerland. The Swiss branch is subject to regulation by the Swiss Federal Office of Private Insurance, or FOPI, pursuant to the new Swiss Insurance Supervision Law, which took effect on January 1, 2006, as well as the Supervision Ordinance promulgated thereunder, and guidelines and directives issued by the FOPI. The Swiss branch is required to maintain statutory reserves in Switzerland in regard to business written in Switzerland, and maintain a solvency margin pursuant to the FOPI directives. Assets constituting statutory reserves in Switzerland must comply with FOPI guidelines as to admissibility, diversification, localization and currency matching rules. The statutory reserves must be actuarially certified annually.

United States

Max Specialty is domiciled and licensed in Delaware as a property and casualty insurer and does not hold insurance certificates of authority in any other jurisdiction. Nevertheless, Max Specialty is listed or authorized as an eligible surplus lines insurer in 46 other U.S. states. Although Max Specialty is subject to regulation as an eligible surplus lines insurer by state insurance departments and under applicable state insurance laws in each jurisdiction in which it is listed or authorized, the principal insurance regulatory authority is the Delaware Department of Insurance.

We are also subject to regulation under the Delaware Insurance Holding Company Act. The Delaware Insurance Holding Company Act requires periodic disclosure concerning stock ownership and prior approval of certain intercompany transactions within the holding company system. Furthermore, no person, corporation or other entity is permitted to acquire control of Max Capital, Max USA or Max Specialty unless such person, corporation or entity has obtained the prior approval of the Delaware Insurance Commissioner. For purposes of the Delaware Insurance Holding Company Act, any person acquiring, directly or indirectly, 10% or more of the voting securities of an insurance company is presumed to have acquired “control” of that company.

We may from time to time be subject to regulation under the insurance and insurance holding company statutes of one or more additional states.

Other Jurisdictions

We do not intend to conduct any activities that may constitute the transaction of the business of insurance in any jurisdiction in which we are not licensed or otherwise authorized to engage in such activities.

In addition to the regulatory requirements imposed by the jurisdictions in which a reinsurer is licensed, a reinsurer’s business operations are affected by regulatory requirements governing credit for reinsurance in other jurisdictions in which its ceding companies are located. In general, a ceding company that obtains reinsurance from a reinsurer that is licensed, accredited or approved by the jurisdiction in which the ceding company files statutory financial statements is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the liability for unearned premiums and loss reserves and loss expense reserves ceded to the reinsurer. Many jurisdictions also permit ceding companies to take credit on their statutory financial statements for reinsurance obtained from unlicensed or non-admitted reinsurers if certain prescribed security arrangements are made. Because Max Bermuda is not licensed, accredited or approved in any jurisdiction other than Bermuda, in certain instances our reinsurance customers require Max Bermuda to provide a letter of credit or enter into other security arrangements.

Employees

As of December 31, 2007, we had 209 employees.

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Available Information

Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports and the Proxy Statement for our Annual General Meeting of Shareholders are made available, free of charge, on our web site, http://www.maxcapgroup.com, as soon as reasonably practicable after such reports have been filed with or furnished to the SEC. In addition, our Code of Business Conduct and Ethics is available on our web site.

ITEM 1A. RISK FACTORS

Any of the following risk factors could cause our actual results to differ materially from historical results or anticipated results. These risks and uncertainties are not the only ones we face, but represent the risks that we believe are material. However, there may be additional risks that we currently consider not to be material or of which we are not currently aware, and any of these risks could have the effects set forth above.

Risks Related to Our Business

Our losses and benefits may exceed our loss and benefit reserves, which could significantly increase our liabilities and reduce our net income.

Our success depends on our ability to assess accurately the risks associated with the business that we insure and reinsure. If we fail to assess these risks accurately, or if events or circumstances cause our estimates to be incorrect, we may not establish appropriate premium rates and our reserves may be inadequate to cover our losses. If our actual claims experience is less favorable than our underlying assumptions, we will be required to increase our liabilities, which will reduce our net income.

As of December 31, 2007, we had loss and benefit reserves of $3,537.4 million. During the year ended December 31, 2007, we incurred loss and benefit expenses of $676.0 million. We periodically review and, where appropriate, adjust our loss and benefit reserves in the period in which this review occurs.

Reserves are actuarial and statistical projections at a given point in time of what we ultimately expect to pay on claims and benefits, based on facts and circumstances then known, predictions of future events, estimates of future trends in claim frequency and severity, mortality, morbidity and other variable factors such as inflation. Reinsurance has inherently greater uncertainties of loss and benefit reserves as compared to insurance, primarily due to:

• the necessary reliance on the ceding company or insurer for information regarding losses and benefits; and

• the lapse of time from the occurrence of the event to the reporting of the loss or benefit to the reinsurer and the ultimate resolution or settlement of the loss or benefit.

Our estimation of reserves is inherently less reliable than the reserve estimations of a reinsurance and insurance company with a greater volume of business and a more established loss history. Our actual losses and benefits may deviate, perhaps substantially, from the reserve estimates contained in our financial statements. In addition, although we conduct due diligence on the transactions that we underwrite in connection with our reinsurance business we are also dependent on the original underwriting decisions made by ceding companies. Specifically, we are subject to the risk that the ceding clients may not have adequately evaluated the risks to be reinsured by us and that the premiums ceded may not adequately compensate us for the risks that we assume.

As industry practices and legal, judicial and social conditions change, unexpected issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond the period that we intended or by increasing the number or size of claims. In some instances, these changes may not manifest themselves until many years after we issue insurance or reinsurance contracts affected by these changes. As a result, we may not be able to ascertain the full extent of our liabilities under our insurance or reinsurance contracts for many years following the issuance of these contracts.

If we determine that our reserves are inadequate, we will increase our reserves with a corresponding reduction in net income for the period in which the deficiency is identified.

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Our ability to write reinsurance and insurance in the property and casualty market may be affected by cyclical trends and in the life and annuity market by global economic conditions and fluctuations in interest rates.

The property and casualty reinsurance and insurance industry has historically been affected by cyclical trends. Demand for property and casualty reinsurance and insurance is influenced significantly by underwriting results of insurers and prevailing general economic and market conditions, all of which affect reinsurance and insurance premium rates and liability retention decisions of companies and insurers. The supply of property and casualty reinsurance and insurance is directly related to the levels of surplus available to support assumed business that, in turn, may fluctuate in response to changes in rates of return on investments being realized in the reinsurance and insurance industry, the frequency and severity of losses and prevailing general economic and market conditions. The cyclical trends in the property and casualty reinsurance and insurance industries and the profitability of these industries can also be significantly affected by volatile and unpredictable developments, including what our management believes to be a trend of courts to grant increasingly larger awards for certain damages, natural disasters such as catastrophic hurricanes, windstorms, tornadoes, earthquakes, floods and fires, fluctuations in interest rates, changes in the investment environment that affect market prices of investments and inflationary pressures that may tend to affect the size of losses experienced by insureds and primary insurance companies. Although we cannot predict with accuracy whether market conditions will remain constant, improve or deteriorate, we anticipate that market conditions will likely remain constant or deteriorate in 2008. Adverse market conditions may lead to a significant reduction in property and casualty premium rates, less favorable policy terms and/or less premium volume.

The nature of the life and annuity transactions we consider results in a limited number of transactions actually bound with potentially large variations in annual premium volume. We cannot predict how market conditions will develop or the magnitude of their effect on our life and annuity reinsurance business in the future.

Competitors may make it difficult for us to market our products effectively and offer our products at a profit.

The reinsurance and insurance industry is highly competitive. Competition in the types of business that we currently underwrite and intend to underwrite in the future is based principally on:

• premium rates;

• the general reputation and perceived financial strength of the insurer or reinsurer;

• relationships with reinsurance and insurance intermediaries;

• ratings assigned by independent rating agencies;

• speed of claims payment and administrative activities; and

• experience in the particular line of reinsurance or insurance to be written.

We compete directly with numerous independent reinsurance companies, captive insurance companies, insurance companies, subsidiaries or affiliates of established insurance companies or newly formed companies, reinsurance departments of primary insurance companies and underwriting syndicates from countries throughout the world in our chosen product lines. Many of these competitors are well established, have significant operating histories, underwriting expertise and extensive capital resources and have developed longstanding customer relationships. Our worldwide insurance and reinsurance competitors include ACE Limited, American International Group, Inc., Berkshire Hathaway, Inc., Swiss Reinsurance Company and XL Capital Ltd., all larger companies, with higher credit ratings and greater credit capacity. Additionally, competitors such as Allied World Assurance Holdings, Ltd., AXIS Capital Holdings Limited, Arch Capital Group Ltd., Endurance Specialty Insurance Ltd. and Platinum Underwriters Reinsurance, Inc. compete in many of our property and casualty markets. In the aftermath of the significant losses experienced by the insurance and reinsurance industry as a result of several hurricanes in the United States in 2005, a number of highly capitalized start-up companies entered the market. These competitors, which include Ariel Reinsurance Ltd., Flagstone Reinsurance Limited and Validus Reinsurance Ltd., have been concentrating on the property market, an area in which we directly compete.

The property, property catastrophe, aviation and marine insurance and reinsurance that we offer may make us vulnerable to losses from catastrophes and may cause our results of operations to vary significantly from period to period.

The property, property catastrophe, aviation and marine insurance and reinsurance that we offer may cause us to be vulnerable to losses from catastrophes. Catastrophes can be caused by various unpredictable events, including earthquakes, hurricanes, hailstorms, severe winter weather, floods, fires, tornadoes, volcano eruptions, explosions, airplane crashes and other natural or man-made disasters. The incidence and severity of catastrophes are inherently unpredictable, but the loss experience of property catastrophe insurers and reinsurers has been generally characterized as low frequency and high severity in nature. In addition, because accounting regulations do not permit insurers and reinsurers to reserve for such catastrophic events until they occur, claims from catastrophic events could cause substantial volatility in our financial results for any fiscal quarter or year and could have a material adverse effect on our financial condition and results of operations. Our ability to write new business also could be adversely impacted.

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A downgrade or withdrawal of any of our ratings would significantly and negatively affect our ability to implement our business strategy successfully.

Companies, insurers and reinsurance and insurance intermediaries use financial ratings as an important means of assessing the financial strength and quality of insurers and reinsurers. An unfavorable rating or the lack of a rating of its reinsurer or insurer may adversely affect the rating of a company purchasing reinsurance or insurance.

Our financial strength ratings as of December 31, 2007 are “A-” (4th out of 14 categories) by A.M. Best, “A” (6th out of 21 categories) by Fitch, and “A3” (7th out of 21 categories) by Moody’s. The ratings assigned by rating agencies to reinsurance and insurance companies are based upon factors relevant to policyholders and are not directed toward the protection of investors or a recommendation to buy, sell or hold securities. To date, none of our ratings issued by an independent rating agency has been downgraded. However, if an independent rating agency downgrades or withdraws any of our ratings, we could be severely limited or prevented from writing any new reinsurance and insurance contracts and certain existing contracts may be terminated, which would significantly and negatively affect our ability to implement our business strategy successfully.

A limited number of reinsurance and insurance brokers and broker transactions account for a large portion of our revenues, and a loss of all or a substantial portion of this brokered business could have a material adverse effect on our business and results of operations.

A substantial portion of our reinsurance and insurance business is placed through brokered transactions, which involve a limited number of reinsurance and insurance brokers. During the years ended December 31, 2007, 2006 and 2005, the top three independent producing intermediaries and brokerage firms accounted for 18%, 16% and 9%; 28%, 24% and 9%; and 33%, 23% and 8%, respectively, of gross premiums written. Loss of all or a substantial portion of the brokered business provided through one or more of these brokers could have a material adverse effect on our business and results of operations.

The involvement of reinsurance brokers subjects us to their credit risk.

In accordance with industry practice, we frequently pay amounts owed on claims under our policies to reinsurance brokers, and these brokers, in turn, pay these amounts over to the ceding insurers that have reinsured a portion of their liabilities with us. Although the law is unsettled and depends upon the facts and circumstances of any particular case, in some jurisdictions, if a broker fails to make such a payment, we might remain liable to the ceding insurer for the deficiency. Conversely, in certain jurisdictions, when the ceding insurer pays premiums for these policies to reinsurance brokers for payment to us, these premiums are considered to have been paid and the ceding insurer will no longer be liable to us for these premiums, whether or not we have actually received them. Consequently, consistent with the industry, we assume a degree of credit risk associated with brokers with whom we do business. However, due to the unsettled and fact-specific nature of the law, we are unable to quantify our exposure to this risk. To date, we have not experienced any material losses related to these credit risks.

Current investigations and proceedings by government agencies relating to insurance practices could adversely affect the industry in which we operate.

Beginning in October 2004, the New York State Attorney General filed a series of suits against certain insurance brokers and insurance companies, not including the company or any of its affiliates, challenging the legality of certain practices , including some practices connected with Placement Services Agreements . In October 2007, the Connecticut Attorney General filed suit against an insurance broker alleging unrelated state antitrust violations. In addition to these actions, other regulatory authorities have launched parallel investigations. We are currently party to two lawsuits alleging broker misconduct, as more fully described in Item 3 – Legal Proceedings. While we do not believe that issues facing major producing brokers will have a material adverse effect on our business or financial condition, we cannot assure you that this will be the case.

In the event that we are unable to purchase reinsurance or retrocessional reinsurance on acceptable terms, or if we purchase reinsurance or retrocessional reinsurance but are unable to collect, we may have difficulty mitigating the effect of large or multiple losses which, in turn, could have a significant and negative effect on our business.

We purchase reinsurance and retrocessional reinsurance for our own account in order to mitigate the effect of large and multiple losses. A reinsurer’s insolvency or inability or refusal to make payments under the terms of its reinsurance or retrocessional agreement with us could have an adverse effect on our company because we remain liable to our client irrespective of our reinsurance or retrocessional reinsurance.

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From time to time, market conditions have limited, and in some cases have prevented, insurers and reinsurers from obtaining the types and amounts of reinsurance that they consider adequate for their business needs. Accordingly, as a result of these unfavorable market conditions, we may be unable to obtain desired amounts of reinsurance or retrocessional reinsurance. In addition, even if we are able to obtain such reinsurance or retrocessional reinsurance, we may not be able to negotiate appropriate or acceptable terms or obtain reinsurance or retrocessional reinsurance from entities with satisfactory creditworthiness. If we fail to obtain reinsurance or retrocessional reinsurance at all or on acceptable terms, our capacity to underwrite new business may be limited. In addition, if we purchase reinsurance or retrocessional reinsurance but are unable to collect, we may have difficulty mitigating the effect of large or multiple losses which, in turn, could have a significant and negative effect on our business.

Operational risks, including human or systems failures are inherent in our business.

Operational risks and losses can result from, among other things, fraud, errors, failure to document transactions properly or to obtain proper internal authorization, failure to comply with regulatory requirements, information technology failures or external events.

We believe that our modeling, underwriting and information technology and application systems are critical to our business. Moreover, our information technology and application systems have been an important part of our underwriting process and our ability to compete successfully. We have also licensed certain systems and data from third parties. We cannot be certain that we will have access to these, or comparable, service providers, or that our information technology or application systems will continue to operate as intended. A major defect or failure in our internal controls or information technology and application systems could result in management distraction, harm our reputation or increase expenses. We believe appropriate controls and mitigation procedures are in place to prevent significant risk of defect in our internal controls, information technology and application systems, but internal controls provide only a reasonable, not absolute, assurance as to the absence of errors or irregularities and any ineffectiveness of such controls and procedures could have a material adverse effect on our business.

We may require additional capital in the future, which may not be available to us on satisfactory terms, if at all.

Our future capital requirements depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover our losses. To the extent that the funds generated by our ongoing operations are insufficient to fund future operating requirements and cover claim payments, we may need to raise additional funds through financings or curtail our growth. Although we currently believe that we have access to the equity and debt markets, any future equity or debt financing may not be available on terms that are favorable to us, if at all. Any future equity financings could be dilutive to our existing shareholders or could result in the issuance of securities that have rights, preferences and privileges that are senior to those of our other securities. Our inability to obtain adequate capital could have a material adverse effect on our business, financial condition and results of operations.

If we lose or are unable to retain our senior management and other key personnel, or if we are unable to renew the Bermudian work permits of any members of our senior management or other key personnel, our ability to implement our business strategy could be delayed or hindered, which, in turn, could significantly and negatively affect our business.

Our future success depends to a significant extent on the efforts of our senior management and other key personnel to implement our business strategy. We do not currently maintain key man life insurance with respect to any of our senior management.

In addition, under Bermuda law, non-Bermudians, other than spouses of Bermudians, may not engage in any gainful occupation in Bermuda without an appropriate governmental work permit. A work permit may be granted or renewed only upon showing that, after proper public advertisement, no Bermudian, spouse of a Bermudian, holder of a permanent resident’s certificate or holder of a working resident’s certificate is available who meets the minimum standards reasonably required by the employer. The Bermuda government limits the term of work permits to six years, subject to certain exemptions for key employees.

The employment permits for our Chief Executive Officer and Chief Operating Officer expire in April 2010 and May 2009, respectively. The loss of the services of one or more of the members of our senior management or other key personnel, including as a result of our inability to renew the Bermudian work permit of such individual, or our inability to hire and retain other senior management and other key personnel, could delay or prevent us from fully implementing our business strategy and, consequently, significantly and negatively affect our business.

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Currency fluctuations could result in exchange losses and our failure to manage our multiple currency liabilities effectively could significantly and negatively impact our business.

We operate our business in multiple currencies. As of December 31, 2007, approximately 72.5% of our reinsurance and insurance reserves were denominated in U.S. dollars. We purchase fixed maturities denominated in the currencies of the relevant reinsurance and insurance liabilities to manage our multiple currency exposures. We continually monitor those assets and liabilities to reduce our exposure to currency risk. Mismatches in multiple currency assets and liabilities may give rise to currency losses and our business could be significantly and negatively affected.

Our failure to maintain sufficient letter of credit facilities or to increase our letter of credit capacity on commercially acceptable terms as we grow could significantly and negatively affect our ability to implement our business strategy.

Our reinsurance operations are conducted by our companies licensed and operated in Bermuda and Ireland. Many jurisdictions do not permit insurance companies to take statutory credit for reinsurance obtained from unlicensed or non-admitted reinsurers, such as Max Bermuda and Max Re Europe, in their statutory financial statements unless appropriate security measures are implemented. Consequently, the majority of our reinsurance clients typically require us to obtain a letter of credit or provide other collateral through funds withheld or trust arrangements. When we obtain a letter of credit facility, we are required to provide collateral to secure our obligations under the facility.

As of December 31, 2007, we had three available letter of credit facilities totaling $720.0 million with an additional $200 million available subject to certain conditions. On that date, we had $388.8 million in letters of credit and a $50.0 million unsecured loan outstanding under these facilities. Our failure to maintain our letter of credit facilities or to increase our letter of credit capacity on commercially acceptable terms as we grow could significantly and negatively affect our ability to implement our business strategy.

Our results of operations may fluctuate significantly from period to period and may not be indicative of our long-term prospects.

Our results of operations may fluctuate significantly from period to period. These fluctuations result from a variety of factors, including the seasonality of the reinsurance and insurance business, the volume and mix of reinsurance and insurance products that we write, loss experience on our reinsurance and insurance liabilities, the performance of our investment portfolio and our ability to assess and integrate our risk management strategy effectively. In particular, we seek to underwrite products and make investments to achieve long-term results. As a result, our short-term results of operations may not be indicative of our long-term prospects.

Our financial condition and results of operations could be negatively affected to the extent that we sustain losses from our reinsurance and insurance of terrorist attacks and similar risks.

Worldwide terrorist attacks, threats of future terrorist attacks and the military initiatives and political unrest in certain geographic areas have all adversely affected general economic, market and political conditions, increasing many of the risks associated with the insurance markets worldwide. Although we may attempt to exclude losses from terrorism and certain other similar risks from some coverage that we write, we may not be successful in doing so. In addition, we have written and will continue to write some policies explicitly covering acts of terrorism. These risks are inherently unpredictable and recent events may lead to increased frequency and severity of losses. It is difficult to predict the timing of such events with statistical certainty or to estimate the amount of loss that any given occurrence will generate. Our financial condition and results of operations could be negatively affected to the extent that we sustain reinsurance and insurance losses from terrorist attacks and similar risks. In addition, because accounting regulations do not permit insurers and reinsurers to reserve for such terrorist events until they occur, claims from terrorist events could cause substantial volatility in our financial results for any fiscal quarter or year and could have a material adverse effect on our financial condition and results of operations. Our ability to write new business also could be adversely impacted.

We are a holding company that depends on the ability of our subsidiaries to pay dividends.

Max Capital is a holding company and does not have any significant operations or assets other than its ownership of the shares of its subsidiaries. Dividends and other permitted distributions from our subsidiaries are our primary source of funds to meet ongoing cash requirements, including any future debt service payments and other expenses, and to pay dividends to our shareholders. Some of our insurance and reinsurance subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay dividends. The inability of our insurance and reinsurance subsidiaries to pay dividends in an amount sufficient to enable us to meet our cash requirements at the holding company level could have an adverse effect on our operations and our ability to pay dividends to our shareholders and/or meet our debt service obligations.

In addition, each of Max Bermuda’s credit facilities prohibits Max Bermuda from paying dividends at any time that there is a default under the particular facility, which will occur if Max Capital’s shareholders’ equity or Max Bermuda’s shareholders’ equity is less than a specified amount, as well as in certain other circumstances. Max Capital is party to one credit facility that imposes parallel restrictions on its ability to pay dividends.

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Max Capital, Max Bermuda, Max Managers and Max Diversified. The payment of dividends and making of distributions by Max Capital, Max Bermuda, Max Managers and Max Diversified are limited under Bermuda law and regulations. Under the Bermuda Insurance Act, Max Bermuda must maintain specified minimum solvency levels and is prohibited from declaring or paying dividends that would result in noncompliance. Further, as a long-term insurer, Max Bermuda must maintain long-term business assets of a value at least $250,000 greater than its long-term business liabilities and is prohibited from declaring or paying dividends if it does not comply or such action would result in noncompliance with the Bermuda Insurance Act. Additionally, under the Bermuda Companies Act, each of Max Capital, Max Bermuda, Max Managers and Max Diversified may only declare or pay a dividend if, among other things, it has reasonable grounds for believing that it is, or would after the payment be, able to pay its respective liabilities as they become due.

Max Re Europe, Max Insurance Europe and Max Europe Holdings. Under Irish company law, each of Max Re Europe, Max Insurance Europe and Max Europe Holdings is permitted only to make distributions out of profits available for distribution. A company’s profits available for distribution are its accumulated, realized profits, so far as not previously utilized by distribution or capitalization, less its accumulated, realized losses, so far as not previously written off in a reduction or reorganization of capital duly made. Further, in general, under applicable insurance regulations, Max Insurance Europe may not enter into a material arrangement with a related company, including, but not limited to, paying a dividend, making a distribution, providing any form of guarantee or entering into a loan agreement, without pre-approving any such arrangement with the Irish Financial Services Regulatory Authority.

Ireland has already adopted regulations implementing the EU Reinsurance Directive and these regulations (the Irish European Communities (Reinsurance) Regulations, 2006) became fully applicable to Max Re Europe on December 10, 2007. These regulations, which are broadly in line with current European Union life and non-life insurance regulation, mean that Max Re Europe is subject to formal regulation, and prudential and financial supervision by the Irish Financial Services Regulatory Authority in a manner similar to Max Insurance Europe.

Max USA and Max Specialty. The payment of dividends and distributions by Max USA and Max Specialty are limited under Delaware law and regulation. Neither Max USA nor Max Specialty may declare and pay dividends on its capital if the amount paid exceeds an amount equal to the surplus which represents the excess of Max USA’s or Max Specialty’s, as applicable, net assets over paid-in-capital or, if there is no surplus, Max USA’s or Max Specialty’s, as applicable, net profits for the current and/or immediately preceding fiscal year. In addition, under applicable Delaware case law, dividends may not be paid on Max USA’s or Max Specialty’s capital stock if it becomes insolvent or the payment of the dividend will render it insolvent. To the extent Max USA or Max Specialty were to pay dividends and is deemed to be insolvent or inadequately capitalized, a bankruptcy court could direct the return of any dividends.

Delaware insurance law also limits the ability of Max Specialty to pay extraordinary dividends. Max Specialty may not pay an extraordinary dividend until 30 days after the Delaware Insurance Commissioner has received notice of the intended dividend and has not objected in such time or has approved the payment of the extraordinary dividend within the 30-day period. An extraordinary dividend is defined as any dividend or distribution that together with any other dividends or distributions made within the preceding 12 months exceeds the greater of: (1) 10% of the insurance company’s surplus as of the preceding December 31, or (2) the insurance company’s net income, not including realized capital gains, for the 12-month period ending the preceding December 31, but does not include pro rata distributions of any class of Max Specialty’s own securities. The Delaware Insurance Commissioner has broad discretion to limit the payment of dividends by insurance companies.

If we do not generate positive cash flows, we may be unable to service our indebtedness.

Our ability to pay principal and interest on the notes and on our other indebtedness depends on our future operating performance. Future operating performance is subject to market conditions and business factors that are often beyond our control. Consequently, we cannot assure you that we will have sufficient cash flows to pay the principal, premium, if any, and interest on our indebtedness. If our cash flows and capital resources are insufficient to allow us to make scheduled payments on our indebtedness, we may have to seek additional capital or restructure or refinance our indebtedness. We cannot assure you that the terms of our indebtedness will allow us to take these measures or that these measures would satisfy our scheduled debt service obligations.

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Our failure to comply with restrictive covenants contained in the indenture governing the notes or our current or future credit facilities could trigger prepayment obligations, which could adversely affect our business, financial condition and results of operations.

The indenture governing the notes contains covenants that impose restrictions on our company and certain of our subsidiaries with respect to, among other things, the incurrence of liens and the disposition of capital stock of these subsidiaries. In addition, each of our credit facilities requires our company and/or certain of our subsidiaries to comply with certain covenants, including the maintenance of a minimum consolidated net tangible worth and restrictions on the payment of dividends. Our failure to comply with these covenants could result in an event of default under the indenture or any credit facility we may enter into in the future, which, if not cured or waived, could result in us being required to repay the notes or any amounts outstanding under these facilities prior to maturity. As a result, our business, financial condition and results of operations could be adversely affected.

Consolidation in the insurance industry could adversely impact us.

Our ability to compete may be harmed if insurance industry participants consolidate. These consolidated entities may try to use their enhanced market power to negotiate price reductions for our products and services. If competitive pressures reduce our prices, we would expect to write less business. As the insurance industry consolidates, competition for customers will become more intense and the importance of acquiring and properly servicing each customer will become greater. We could incur greater expenses relating to customer acquisition and retention, further reducing our operating margins. In addition, insurance companies that merge may be able to spread their risks across a consolidated, larger capital base so that they require less reinsurance. The number of companies offering retrocessional reinsurance may decline. Reinsurance intermediaries could also consolidate, potentially adversely impacting our ability to access business and distribute our products. We could also experience more robust competition from larger, better capitalized competitors. Any of the foregoing could adversely affect our business or our results of operation.

The integration of new insurance and reinsurance initiatives into our existing operations may present significant challenges.

We may face significant challenges in integrating new insurance and reinsurance initiatives, including Max Specialty, into our existing operations in a timely, efficient and effective manner. Successful integration will depend on, among other things, the effective execution of our business plan for the new insurance and reinsurance initiatives, our ability to effectively integrate the operations of new insurance and reinsurance initiatives into our existing risk management techniques, our ability to effectively manage any regulatory issues created by our entry into new markets and geographic locations, our ability to retain key personnel and other operational and economic factors. There can be no assurance that the integration of new insurance and reinsurance initiatives will be successful or that the business derived therefrom will prove to be profitable. The failure to integrate new insurance and reinsurance initiatives successfully or to manage the challenges presented by the integration process may adversely impact our financial results.

Risks Related to Our Investment Strategy

If our calculations with respect to our liabilities are incorrect, or if we do not appropriately structure our investments in relation to our anticipated liabilities, we could be forced to liquidate investments at a significant loss.

Our ability to measure and manage risk and to implement our investment strategy is crucial to our success. We cannot assure investors that we will successfully structure our investments in relation to our anticipated liabilities under our reinsurance and insurance policies. If our calculations with respect to these liabilities are incorrect, or if we do not properly structure our investments to satisfy such liabilities, we could be forced to liquidate investments at a significant loss.

Changes in market interest rates could have a material adverse effect on our investment portfolio, investment income and results of operations.

Increasing market interest rates reduce the value of our fixed maturities, and we may realize a loss if we sell fixed maturities whose value has fallen below their acquisition cost. Declining market interest rates can have the effect of reducing our investment income, as we invest proceeds from positive cash flows from operations and reinvest proceeds from maturing and called investments in new investments that may yield less than our investment portfolio’s average rate of return. Accordingly, changes in interest rates could have a material adverse effect on our investment portfolio, investment income and results of operations.

Unexpected volatility or illiquidity associated with our fixed maturities investment portfolio or in the financial markets could significantly and negatively affect our ability to conduct business.

Although our investment strategy for our fixed maturities portfolio requires all fixed maturity investments to have a minimum credit rating of BAA3/BBB-, or its equivalent, from at least one internationally recognized statistical rating organization, unexpected volatility or illiquidity in the financial markets could have significant adverse impact on the credit

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ratings of the fixed maturities investment we hold. Deterioration of credit ratings on our fixed maturities investments may result in the need to liquidate these securities in the financial markets. If we are required to liquidate these securities during a period of tightening credit in the financial markets, we may realize a significant loss.

Our portfolio of investment grade fixed maturities includes mortgage-backed and asset-backed securities and collateralized mortgage obligations. These types of securities have cash flows that are backed by the principal and interest payments of a group of underlying mortgages or other receivables. During 2007, delinquency and default rates have increased on these types of securities, and particularly on securities backed by sub-prime mortgages. Generally, sub-prime mortgages are considered to be those made to borrowers who do not qualify for market interest rates for one or more possible reasons, such as a low credit score, a limited or lack of credit history, or a lack of earnings documentation. As a result of the increasing default rates of sub-prime borrowers, there is a greater risk of defaults on mortgage-backed and asset-backed securities and collateralized mortgage obligations, especially those that are non-investment grade. Therefore, fixed maturities securities backed by sub-prime mortgages have exhibited significant declines in market value. These factors combined with the contraction in liquidity in the principal markets for these securities makes the estimate of fair value increasingly uncertain. The fair values of our holdings in securities exposed to sub-prime borrowers are generally not based on quoted prices for identical securities, but are based on model-derived valuations from independent pricing sources in which all significant inputs and significant value drivers are observable in active markets. Should we need to liquidate these securities within a short period of time, the actual realized proceeds may be significantly different from the fair values estimated at December 31, 2007. We believe our exposure to sub-prime credit risk is limited, although there can be no assurance that events in the sub-prime mortgage sector will not adversely affect the value of our investments.

Unexpected volatility or illiquidity associated with our alternative investment portfolio or in the financial markets could significantly and negatively affect our ability to conduct business.

Although we intend that up to 20% of our investment portfolio will be invested in alternative assets, our investment guidelines permit us to invest up to 50% of our investment portfolio in an alternative investment portfolio, which we principally invest through Max Diversified. Max Diversified invests in various investment funds, which follow investment strategies that involve investing in a broad range of investments, some of which may be volatile. We invest the remainder of our alternative investment portfolio through Max Bermuda, which makes strategic investments in reinsurance companies. Although we believe that our investment portfolio assists us in maintaining low overall volatility, the risks associated with our alternative investment portfolio may be substantially greater than the risks associated with fixed maturities investments. Further, because many of the alternative investment funds in which we invest impose limitations on the timing of withdrawals, we may be unable to withdraw our investment from a particular alternative investment fund on a timely basis. Unexpected volatility or illiquidity associated with our alternative investment portfolio could significantly and negatively affect our ability to conduct business.

The success of our investment strategy is also affected by general economic conditions, including volatility in interest rates and the price of securities. Unexpected volatility or illiquidity in the financial markets could significantly and negatively affect our ability to conduct business.

The failure of our investment managers to perform their services in a manner consistent with our expectations and investment objectives, or the termination of our agreements with one or more of these investment managers, could significantly and negatively affect our ability to conduct business.

We have entered into an investment management agreement with General Re New England Asset Management, Inc., Conning Asset Management and Asset Allocation and Management to manage portions of our aggregate fixed maturities portfolio. We have also entered into a customer agreement and trading authorization contract with Alstra Capital Management, LLC, an affiliate of one of our directors and which we refer to as Alstra, to act as a fund of funds advisor for our alternative investment portfolio invested through Max Diversified. Additionally, each underlying alternative investment fund manager has discretionary authority over the portion of our underlying alternative investment portfolio that it manages. As a result, the aggregate performance of our investment portfolio depends to a significant extent on the ability of our investment managers, and the investment managers of each underlying alternative investment fund, to select and manage appropriate investments. We cannot assure you that any or all of these investment managers will be successful in meeting our investment objectives, or that these investment managers will not terminate their respective agreements with our company. The failure of these investment managers to perform their services in a manner consistent with our expectations and investment objectives, or the termination of our agreements with one or more of these investment managers, could significantly and negatively affect our ability to conduct our business.

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Our investment portfolios are managed by outside managers, therefore we cannot control individual trading activity.

Our investment managers are contractually obligated to follow our investment guidelines, including requiring consent before selling any fixed maturity securities. However, we cannot assure you as to how our assets will be allocated among different securities or as to our level of risk exposure. Further, while the securities in our fixed maturities portfolio are all investment grade, these securities are still subject to credit risk, interest rate risk and currency risk.

Members of our board of directors may have conflicts of interests.

Mr. Zack Bacon III, a member of our board of directors and its Finance and Investment Committee, is also a principal of Alstra. Given Alstra’s role as the fund advisor of Max Diversified, Mr. Bacon may have interests that are different from, or in addition to, the interests of our shareholders generally.

Risks Related to Regulation of Our Company

The regulatory systems under which we operate, and potential changes thereto, could have a material adverse effect on our business.

General. Our subsidiaries may not be able to obtain or maintain necessary licenses, permits, authorizations or accreditations in locales where we currently engage or intend to engage in business, or we may only be able to do so at a significant cost. In addition, we may not be able to comply fully with, or obtain appropriate exemptions from, the wide variety of laws and regulations applicable to reinsurance and insurance companies. Failure to comply with or to obtain appropriate authorizations and/or exemptions under any applicable laws could result in loss of revenue, fines or other sanctions to us. In addition, changes in laws or regulations to which our subsidiaries are subject could have a material adverse effect on our business.

Max Bermuda. Generally, Bermuda insurance statutes and regulations applicable to Max Bermuda are less restrictive than those that would be applicable to Max Bermuda if it was subject to the insurance laws of any state in the United States. In the past, there have been Congressional and other initiatives in the United States regarding proposals to supervise and regulate insurers domiciled outside the United States. If in the future Max Bermuda became subject to any insurance laws of the United States or any state thereof or of any other jurisdiction, we cannot assure you that we would be able to comply with these laws or that complying with these laws would not significantly and negatively affect our business or results of operations.

Max Specialty. Max Specialty is licensed in Delaware and is currently approved in 46 states and expects to eventually be able to conduct business in all 50 U.S. states. Our business is subject to varying degrees of regulation and supervision in each of these jurisdictions. The laws and regulations of the jurisdiction in which Max Specialty is domiciled require, among other things, that Max Specialty maintain minimum levels of statutory capital, surplus and liquidity, meet solvency standards and submit to periodic examinations of its financial condition. These laws and regulations also sometimes restrict payments of dividends and reductions of capital. These statutes, regulations and policies may also restrict the ability of Max Specialty to write insurance policies, to make certain investments and to distribute funds. The purpose of insurance laws and regulations generally is to protect insureds, not our creditors or shareholders. Compliance with insurance statutes and regulations or securing appropriate exemptions from these statutes and regulations may present challenges to Max Specialty. Failure to comply with or to obtain appropriate authorizations and/or exemptions under any applicable laws could result in restrictions on Max Specialty’s ability to do business or undertake activities that are regulated in one or more of the jurisdictions in which Max Specialty conducts business and could subject us to fines and other sanctions. In addition, changes in the laws or regulations to which Max Specialty is subject could have an adverse effect on its business. Moreover, the National Association of Insurance Commissioners, which is the organization of insurance regulators from the 50 U.S. states, the District of Columbia and the four U.S. territories, as well as the state insurance regulators, regularly reexamine existing laws and regulations.

Other. We do not currently nor do we intend to maintain an office or to solicit, advertise, settle claims or conduct other insurance activities in any jurisdiction other than where our activities would require us to be authorized or admitted as set forth above. However, we cannot assure you that insurance regulators in a jurisdiction in which we are not licensed will not review our activities or, that if there were such a review, that they would not be successful in claiming that we are subject to the licensing requirements of the particular jurisdiction. If we were to become subject to the laws and regulations of any other jurisdiction in the future, we may consider various alternatives to our operations, including:

• modifying or restricting the manner in which we conduct our business in order to avoid being subject to, and the necessity of complying with, the laws and regulations; or

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• obtaining licenses to enable us to transact reinsurance or insurance in the particular jurisdiction.

Political, regulatory and industry initiatives could adversely affect our business.

The insurance and reinsurance regulatory framework is subject to heavy scrutiny by the U.S. and individual state governments as well as an increasing number of international authorities. Government regulators are generally concerned with the protection of policyholders to the exclusion of other constituencies, including shareholders. Increasingly, governmental authorities in both the United States and worldwide seem to be interested in the potential risks posed by the insurance and reinsurance industry as a whole, and to commercial and financial systems in general. While we do not believe these inquiries have identified meaningful new risks posed by the insurance and reinsurance industry, and we cannot predict the exact nature, timing or scope of possible governmental initiatives, we believe it is likely there will be increased regulatory intervention in our industry in the future. For example, the U.S. federal government has increased its scrutiny of the insurance regulatory framework in recent years, and some state legislators have considered or enacted laws that will alter and likely increase state regulation of insurance and reinsurance companies and holding companies. Moreover, the National Association of Insurance Commissioners regularly reexamines existing laws and regulations.

For example, we could be adversely affected by proposals to:

• provide insurance and reinsurance capacity in markets and to consumers that we target, such as the legislation enacted in Florida in early 2007;

• require our participation in industry pools and guaranty associations;

• expand the scope of coverage under existing policies for matters such as hurricanes Katrina, Rita and Wilma, and the New Orleans flood, or such as a pandemic flu outbreak;

• increasingly mandate the terms of insurance and reinsurance policies; or

• disproportionately benefit the companies of one country over those of another.

The growth of our primary insurance business, which is regulated more comprehensively than reinsurance, increases our exposure to adverse political, judicial and legal developments. Moreover, our exposure to potential regulatory initiatives could be heightened by the fact that our principal operating company is domiciled in, and operate exclusively from, Bermuda. For example, Bermuda, a small jurisdiction, may be disadvantaged in participating in global or cross border regulatory matters as compared with larger jurisdictions such as the United States or the leading European Union countries. In addition, Bermuda, which is currently an overseas territory of the United Kingdom, may consider changes to its relationship with the United Kingdom in the future. These changes could adversely affect Bermuda’s position in respect of future regulatory initiatives, which could adversely impact us commercially.

Risks Related to Our Common Shares

Our common shares are subject to limitations on ownership and voting rights.

Under our bye-laws, our directors or their designees are authorized to decline to register any transfer of our common shares if they have any reason to believe that such transfer would result in a shareholder owning, directly or indirectly, 9.5% or more of our common shares. Similar restrictions apply to issuances and repurchases of our common shares by us. Our directors or their designees also may, in their absolute discretion, decline to register the transfer of any common shares if they have reason to believe that such transfer may expose us, our subsidiaries, any shareholder or any person ceding insurance to us to adverse tax or regulatory treatment in any jurisdiction. Our board of directors expects to apply these restrictions fully except with respect to the purchase and sale of our common shares on the Nasdaq Global Select Market. Although our board of directors will not decline to register any transfer of our common shares on the Nasdaq Global Select Market, it will require the transferee to surrender the common shares to an agent designated by the board if the transfer results in the transferee owning, directly or indirectly, 9.5% or more of any class of our capital stock or causes our board to have reason to believe that the transfer may expose us, any subsidiary or shareholder or any person insured or reinsured or proposing to be insured or reinsured to adverse tax or regulatory treatment in any jurisdiction. A transferor of our common shares will be deemed to own those shares for dividend, voting and reporting purposes until a transfer of such common shares has been registered on our Register of Members. We are authorized to request information from any holder or prospective acquiror of our common shares as necessary to effect registration of any such transaction and may decline to register any such transaction if complete and accurate information is not received as requested.

In addition, our bye-laws generally provide that any shareholder owning, directly or by attribution, 9.5% or more of our common shares will have the voting rights attached to such common shares reduced so that it may not exercise more than approximately 9.5% or more of the total voting rights. Because of the attribution provisions of the Internal Revenue Code and the rules of the SEC regarding determination of beneficial ownership, this requirement may have the effect of reducing the

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voting rights of a shareholder whether or not that shareholder directly holds of record 9.5% or more of our common shares. Further, our directors or their designees have the authority to request from any shareholder certain information for the purpose of determining whether that shareholder’s voting rights are to be reduced. Failure to respond to such a notice, or submitting incomplete or inaccurate information, gives the directors or their designees discretion to disregard all votes attached to such shareholder’s common shares.

Furthermore, the insurance laws of Delaware prevent any person from acquiring control of us, Max USA or Max Specialty, unless the person has filed a notification with the specified information with the Delaware Insurance Commissioner and has obtained his approval. Under the Delaware Insurance Holding Company Act, acquiring 10% or more of the voting stock of an insurance company or its parent company is presumptively considered a change of control, although such presumption may be rebutted. Accordingly, any person who acquires, directly or indirectly, 10% or more of the voting securities of Max Capital without the prior approval of the Delaware Insurance Commissioner will be in violation of this law and may be subject to injunctive action requiring the disposition or seizure of those securities by the Delaware Insurance Commissioner. In addition, many U.S. state insurance laws require prior notification of state insurance departments of a change in control of a non-domiciliary insurance company doing business in that state. While these pre-notification statutes do not authorize the state insurance departments to disapprove a change of control, they authorize regulatory action in the affected state if particular conditions exist such as undue market concentration. Any future transactions that would constitute a change in control of Max Capital may require prior notification in those that have adopted pre-acquisition notification laws.

U.S. persons who own our common shares may have more difficulty in protecting their interests than U.S. persons who are shareholders of a U.S. corporation.

The Bermuda Companies Act, which applies to us, differs in certain material respects from laws generally applicable to U.S. corporations and their shareholders. Set forth below is a summary of certain significant provisions of the Bermuda Companies Act, including modifications adopted pursuant to our bye-laws, applicable to us which differ in certain respects from provisions of Delaware corporate law. Because the following statements are summaries, they do not discuss all aspects of Bermuda law that may be relevant to us and our shareholders.

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

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

• such material facts are disclosed or are known to the stockholders entitled to vote on such transaction and the transaction is specifically approved in good faith by vote of the majority of shares entitled to vote thereon; or

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

Under Delaware law, such interested director could be held liable for a transaction in which such director derived an improper personal benefit.

Mergers and Similar Arrangements. The amalgamation of a Bermuda company with another company or corporation (other than certain affiliated companies) requires the amalgamation agreement to be approved by the company’s board of directors and by its shareholders. We may, with the approval of a majority of votes cast at a general meeting of our shareholders at which a quorum is present, amalgamate with another Bermuda company or with a body incorporated outside Bermuda. In the case of an amalgamation, a shareholder may apply to a Bermuda court for a proper valuation of such shareholder’s shares if such shareholder is not satisfied that fair value has been paid for such shares. Under Delaware law, with certain exceptions, a merger, consolidation or sale of all or substantially all the assets of a corporation must be approved by the board of directors and a majority of the outstanding shares entitled to vote thereon. Under Delaware law, a stockholder of a corporation participating in certain major corporate transactions may, under certain circumstances, be entitled to appraisal rights pursuant to which such stockholder may receive cash in the amount of the fair value of the shares held by such stockholder (as determined by a court) in lieu of the consideration such stockholder would otherwise receive in the transaction.

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Shareholders’ Suit. The rights of shareholders under Bermuda law are not as extensive as the rights of shareholders under legislation or judicial precedent in many United States jurisdictions. Class actions and derivative actions are generally not available to shareholders under the laws of Bermuda. However, the Bermuda courts ordinarily would be expected to follow English case law precedent, which would permit a shareholder to commence an action in the name of the company to remedy a wrong done to the company where the act complained of is alleged to be beyond the corporate power of the company, is illegal or would result in the violation of our memorandum of association or bye-laws. Furthermore, consideration would be given by the court to acts that are alleged to constitute a fraud against the minority shareholders or where an act requires the approval of a greater percentage of our shareholders than actually approved it. The winning party in such an action generally would be able to recover a portion of attorneys’ fees incurred in connection with such action. Our bye-laws provide that shareholders waive all claims or rights of action that they might have, individually or in the right of the company, against any director or officer for any act or failure to act in the performance of such director’s or officer’s duties, except with respect to any fraud or dishonesty of such director or officer. Class actions and derivative actions generally are available to stockholders under Delaware law for, among other things, breach of fiduciary duty, corporate waste and actions not taken in accordance with applicable law. In such actions, the court has discretion to permit the winning party to recover attorneys’ fees incurred in connection with such action.

Indemnification of Directors. We may indemnify our directors or officers in their capacity as directors or officers of any loss arising or liability attaching to them by virtue of any rule of law in respect of any negligence, default, breach of duty or breach of trust of which a director or officer may be guilty in relation to the company other than in respect of his own fraud or dishonesty. Under Delaware law, a corporation may indemnify a director or officer of the corporation against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in defense of an action, suit or proceeding by reason of such position if such director or officer acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, such director or officer had no reasonable cause to believe his or her conduct was unlawful.

There are anti-takeover provisions contained in our bye-laws that could impede an attempt to replace or remove our management or delay or prevent the sale of our company, which could diminish the value of our common shares.

Our bye-laws contain provisions that could delay or prevent changes in our management or a change of control that a shareholder might consider favorable. For example, they may prevent a shareholder from receiving the benefit from any premium over the market price of our common shares offered by a bidder in a potential takeover. Even in the absence of a takeover attempt, these provisions may adversely affect the prevailing market price of our common shares if they are viewed as discouraging takeover attempts in the future. For example, the board of directors’ authority as expressed in the bye-laws permits the board to issue up to 20,000,000 preferred shares and to fix the price, rights, preferences, privileges and restrictions of the preferred shares without any further vote or action by our shareholders. The issuance of preferred shares may delay or prevent a change in control transaction by making it more difficult for a bidder to acquire enough votes to influence or control our board of directors and the management of our company.

Our bye-laws contain other provisions that could have a similar effect, including:

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

• shareholders have limited ability to remove directors;

• shareholders must give advance notice to nominate directors at shareholder meetings;

• the total voting power of any U.S. shareholder owning 9.5% or more of our common shares is automatically reduced to less than 9.5% of the total voting power of our capital stock, unless the reduction is otherwise waived by the unanimous consent of our board of directors; and

• our directors may, in their absolute discretion, decline to register the transfer of any common shares if they believe that the transfer may expose us, any subsidiary, shareholder or client to adverse tax or regulatory treatment or if they believe that registration of the transfer under any federal or state securities law or under the laws of any other jurisdiction is required and the registration has not yet been effected.

A shareholder may be required to sell its shares of Max Capital.

Our bye-laws provide that we have the option, but not the obligation, to require a shareholder to sell its common shares for their fair market value to us, to other shareholders or to third parties if our board of directors determines that ownership of our common shares by such shareholder may result in adverse tax, regulatory or legal consequences to us, any of our subsidiaries or any of our shareholders and that such sale is necessary to avoid or cure such adverse consequences.

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You may have difficulty effecting service of process on us or enforcing judgments against us in the United States.

We are incorporated pursuant to the laws of Bermuda and our business is based in Bermuda. In addition, certain of our directors and officers reside outside the United States, and all or a substantial portion of our assets and the assets of such persons are located in jurisdictions outside the United States. Accordingly, we have been advised that there is doubt as to whether:

• a holder of our common shares would be able to enforce, in the courts of Bermuda, judgments of U.S. courts based upon the civil liability provisions of the U.S. federal securities laws;

• a holder of our common shares would be able to bring an original action in the Bermuda courts to enforce liabilities against us or our directors and officers who reside outside the United States, based solely upon U.S. federal securities laws.

We have also been advised that there is no treaty in effect between the United States and Bermuda providing for the enforcement of judgments of U.S. courts, and there are grounds upon which Bermuda courts may not enforce judgments of U.S. courts. Further, certain remedies available under U.S. federal and state laws, including U.S. federal securities laws, may not be available under Bermuda law. Because judgments of U.S. courts are not automatically enforceable in Bermuda, it may be difficult for you to recover against us based upon such judgments.

Risks Related to Taxation

Max Capital and its non-U.S. subsidiaries may be subject to U.S. federal income taxation.

If Max Capital or any of our non-U.S. subsidiaries were treated as engaged in a trade or business in the United States, that entity could be subject to U.S. income and branch profits tax on all or a portion of the income that is effectively connected with such trade or business. We intend to operate in a manner such that neither Max Capital nor any of our non-U.S. subsidiaries, with the exception of MCS Ireland and MCS BDA, will be treated as being engaged in a trade or business in the United States. Accordingly, we do not believe that Max Capital or any of our non-U.S. subsidiaries, with the exception of MCS Ireland and MCS BDA, are or will be subject to U.S. federal income taxation on net income. However, this determination is essentially factual in nature, and there are no definitive standards provided by the Internal Revenue Code, regulations or court decisions as to what activities constitute being engaged in a trade or business within the United States. Accordingly, there can be no assurance that the U.S. Internal Revenue Service, or IRS, would not find that Max Capital or any of our non-U.S. subsidiaries, with the exception of MCS Ireland and MCS BDA, is engaged in a trade or business in the United States. Any such income or branch profits tax could materially adversely affect our results of operations.

Even if Max Capital and our non-U.S. subsidiaries, with the exception of MCS Ireland and MCS BDA, are not treated as being engaged in a trade or business in the United States, we may be subject to U.S. federal income tax on certain fixed or determinable annual or periodical gains, profits, and income (such as dividends and certain interest on investments) derived from sources within the United States. In addition, we will be subject to a U.S. excise tax that is imposed on reinsurance and insurance premiums received with respect to risks or insureds located in the United States.

Changes in U.S. federal income tax law could materially adversely affect an investment in our common shares.

Legislation is periodically introduced in the U.S. Congress intended to eliminate some perceived tax advantages of companies (including insurance and reinsurance companies) that have legal domiciles outside the United State but have certain U.S. connections. While we believe there are no currently pending legislative proposal which, if enacted, would have a material adverse impact on us or our shareholders, it is possible that legislative proposals could emerge in the future that could have an adverse impact on us or our shareholders.

Shareholders who are U.S. persons may recognize income for U.S. federal income tax purposes on our undistributed earnings.

Shareholders who are U.S. persons may recognize income for U.S. federal income tax purposes on our undistributed earnings if we are treated as a passive foreign investment company or a controlled foreign corporation or if we have generated more than a permissible amount of related person insurance income. In addition, gain on the disposition of our common shares may be treated as dividend income.

Passive Foreign Investment Company. In order to avoid significant potential adverse U.S. federal income tax consequences for any U.S. person who owns our common shares, we must not constitute a passive foreign investment company in any year in which such U.S. person is a shareholder. Those consequences could include increasing the tax liability of the investor, accelerating the imposition of the tax and causing a loss of the basis step-up on the death of the

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investor. In general, a non-U.S. corporation is a passive foreign investment company for a taxable year if 75% or more of its income constitutes passive income or 50% or more of its assets produce passive income. Passive income generally includes interest, dividends and other investment income. However, passive income does not include income derived in the active conduct of an insurance business by a company that is predominantly engaged in an insurance business. This exception is intended to ensure that income derived by a bona fide insurance company is not treated as passive income, except to the extent such income is attributable to financial reserves in excess of the reasonable needs of the insurance business. Currently, we do not believe that we maintain financial reserves in excess of the reasonable needs of our insurance business. If, because of a change in the business plan or for any other reason, we maintain excess financial reserves, we may be characterized as a passive foreign investment company. Although Max Capital’s insurance and reinsurance subsidiaries, which we refer to as the Insurance Subsidiaries, expect to engage predominantly in insurance activities that involve significant risk transfer and do not expect to have financial reserves in excess of the reasonable needs of their insurance businesses, we could nonetheless be deemed to be a passive foreign investment company. We may be characterized as a passive foreign investment company if any Insurance Subsidiary engages in certain non-traditional insurance activities that do not involve sufficient transfer of risk or if any company maintains financial reserves in excess of the reasonable needs of its respective insurance business. In addition, there may be other circumstances that may cause us not to satisfy the exception for insurance companies. For example, the IRS may disagree with our interpretation of the current scope of the active insurance company exception and successfully challenge our position that we qualify for the exception. In addition, the IRS may issue regulatory or other guidance that applies on either a prospective or retroactive basis under which we may fail to qualify for the active insurance company exception. While we do not believe that we are or will be a passive foreign investment company, we cannot assure shareholders that the IRS or a court will concur that we are not a passive foreign investment company with respect to any given year. If we were treated as a passive foreign investment company, the availability of the mark to market election is uncertain for shareholders who are U.S. persons. This election may under certain circumstances mitigate the negative tax consequences of an investment in a passive foreign investment company.

Controlled Foreign Corporation. Each U.S. person who, directly, indirectly, or through attribution rules, owns 10% or more of our common shares should consider the possible application of the controlled foreign corporation rules.

Each U.S. 10% shareholder of a controlled foreign corporation on the last day of the controlled foreign corporation’s taxable year generally must include in its gross income for U.S. federal income tax purposes its pro-rata share of the controlled foreign corporation’s subpart F income, even if the subpart F income has not been distributed. In general, a non-U.S. insurance company is treated as a controlled foreign corporation only if such U.S. 10% shareholders collectively own more than 25% of the total combined voting power or total value of the company’s capital stock for an uninterrupted period of 30 days or more during any year. We believe that, because of the anticipated dispersion of share ownership among holders and because of the restrictions in our bye-laws on transfer, issuance or repurchase of our common shares, shareholders will not be subject to treatment as U.S. 10% shareholders of a controlled foreign corporation. In addition, because under our bye-laws no single shareholder is permitted to exercise 9.5% or more of the total combined voting power, unless such provision is waived by the unanimous consent of the board of directors, we believe that our shareholders should not be viewed as U.S. 10% shareholders of a controlled foreign corporation for purposes of the controlled foreign corporation rules. We cannot assure shareholders, however, that these rules will not apply to our shareholders.

Related Person Insurance Income. If any Insurance Subsidiary’s related person insurance income determined on a gross basis were to equal or exceed 20% of its gross insurance income in any taxable year and direct or indirect insureds and persons related to such insureds were directly or indirectly to own more than 20% of the voting power or value of such Insurance Subsidiary’s capital stock, then a U.S. person who owns our common shares directly or indirectly on the last day of the taxable year most likely would be required to include in income for U.S. federal income tax purposes the U.S. person’s pro-rata share of such Insurance Subsidiary’s related person insurance income for the taxable year, determined as if such related person insurance income were distributed proportionately to such U.S. person at that date. Related person insurance income is generally underwriting profits and related investment income attributable to insurance or reinsurance policies where the direct or indirect insureds are direct or indirect U.S. shareholders or are related to such direct or indirect U.S. shareholders. We do not expect any Insurance Subsidiary will knowingly enter into insurance or reinsurance agreements in which, in the aggregate, the direct or indirect insureds are, or are related to, owners of 20% or more of our common shares. Currently, we do not believe that the 20% gross insurance income threshold has been met. However, we cannot assure shareholders that this is or will continue to be the case. Consequently, we cannot assure shareholders that a person who is a direct or indirect U.S. shareholder will not be required to include amounts in its income in respect of related person insurance income in any taxable year.

If a U.S. shareholder is treated as disposing of shares in a non-U.S. insurance corporation that has related person insurance income and in which U.S. persons own 25% or more of the voting power or value of the company’s capital stock, any gain from the disposition will generally be treated as dividend income to the extent of the U.S. shareholder’s portion of the corporation’s undistributed earnings and profits that were accumulated during the period that the U.S. shareholder owned

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the shares. In addition, such a shareholder will be required to comply with certain reporting requirements, regardless of the amount of shares owned by the direct or indirect U.S. shareholder. These rules should not apply to dispositions of our common shares because Max Capital is not itself directly engaged in the insurance business and because proposed U.S. Treasury regulations applicable to this situation appear to apply only in the case of shares of corporations that are directly engaged in the insurance business. We cannot assure shareholders, however, that the IRS will interpret the proposed regulations in this manner or that the proposed regulations will not be promulgated in final form in a manner that would cause these rules to apply to dispositions of our common shares.

U.S. tax-exempt organizations who own our common shares may recognize unrelated business taxable income.

A U.S. tax-exempt organization may recognize unrelated business taxable income if a portion of our subpart F insurance income is allocated to the organization. In general, subpart F insurance income will be allocated to a U.S. tax-exempt organization if either we are a controlled foreign corporation and the tax-exempt shareholder is a U.S. 10% shareholder or there is related person insurance income and certain exceptions do not apply. Although we do not believe that any U.S. persons will be allocated subpart F insurance income, we cannot assure shareholders that this will be the case.

Changes in U.S. tax laws may be retroactive and could subject us and/or U.S. persons who own our common shares to U.S. income taxation on our undistributed earnings.

The tax laws and interpretations regarding whether a company is engaged in a U.S. trade or business, is a passive foreign investment company, is a controlled foreign corporation, or has related party insurance income are subject to change, possibly on a retroactive basis. There are currently no regulations regarding the application of the passive foreign investment company rules to an insurance company and the regulations regarding related party insurance income are still in proposed form. New regulations or pronouncements interpreting or clarifying such rules will likely be forthcoming from the IRS. We are not able to predict if, when or in what form such guidance will be provided and whether such guidance will have a retroactive effect.

We may become subject to taxes in Bermuda after March 28, 2016, which would have a material adverse effect on our business and results of operations.

Under current Bermuda law, there is no income, corporate, profits, withholding, capital gains or capital transfer tax payable by Max Capital, Max Bermuda, Max Managers or Max Diversified. Each of these entities has obtained from the Minister of Finance under The Exempted Undertakings Tax Protection Act 1966, as amended, an assurance that, in the event that Bermuda enacts legislation imposing tax computed on profits, income, any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance, then the imposition of any such tax shall not be applicable to any of these entities, their operations or their shares, debentures or other obligations, until March 28, 2016. Given the limited duration of the Minister of Finance’s assurance we cannot be certain that we will not be subject to any Bermuda taxes after March 28, 2016. Our business and results of operations would be materially and adversely affected if we were to become subject to taxes in Bermuda.

The impact of Bermuda’s commitment to the Organization for Economic Cooperation and Development to eliminate harmful tax practices is uncertain and could adversely affect our tax status in Bermuda.

The Organization for Economic Cooperation and Development, which is commonly referred to as the OECD, has published reports and launched a global dialogue among member and non-member countries on measures to limit harmful tax competition. These measures are largely directed at counteracting the effects of tax havens and preferential tax regimes in countries around the world. In the OECD’s report dated April 18, 2002 and updated as of June 2004, November 2005 and September 2006 via a “Global Forum,” Bermuda was not listed as an uncooperative tax haven jurisdiction because it had previously committed to eliminate harmful tax practices and to embrace international tax standards for transparency, exchange of information and the elimination of any aspects of the regimes for financial and other services that attract business with no substantial domestic activity. We are not able to predict what changes will arise from the commitment or whether such changes will subject us to additional taxes.

Proposed U.S. Tax Legislation Could Adversely Affect U.S. Shareholders.

Under current U.S. law, non-corporate U.S. holders of our common shares generally are taxed on dividends at a capital gains tax rate rather than ordinary income tax rates. Currently, there is proposed legislation before both Houses of Congress that would exclude shareholders of foreign corporations from this advantageous income tax treatment unless the stock of such corporation is readily tradable on an established securities market in the United States and the corporation is organized or created under the laws of a country that has a “comprehensive income tax system” that the U.S. Secretary of the Treasury determines is satisfactory for this purpose. Max Capital would likely not satisfy this test and, accordingly, if this legislation became law, individual U.S. shareholders would no longer qualify for the capital gains tax rate on the Company’s dividends.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

There are no unresolved staff comments regarding our current or periodic reports.

GLOSSARY OF SELECTED INSURANCE INDUSTRY TERMS AND NON-GAAP FINANCIAL MEASURES

Annual total rate of return	Annual total rate of return is calculated by compounding the 12 consecutive monthly rates of return that are calculated by dividing monthly net performance by the beginning net asset value of that month. One is then subtracted from the product and the result is multiplied by 100.
Capacity	The percentage of shareholders’ equity, or the dollar amount of exposure, that an insurer or reinsurer is willing or able to place at risk.
Case Reserves	Loss reserves established for individual claims (and as reported by our cedants in the case of reinsurance).
Combined Ratio	The combined ratio is calculated by dividing the sum of losses, acquisition costs and general and administrative expenses by net premiums earned. A combined ratio below 100% indicates profitable underwriting prior to the consideration of investment income.
Contract Binding	A term to describe a distribution channel for writing insurance using a network of appointed wholesale general agents. The agents have binding authority for the insurer which allows them to quote and bind policies on behalf of the insurer.
Excess and surplus lines insurance	Any type of coverage that cannot be placed with an insurer admitted to do business in a certain jurisdiction. Risks placed in excess and surplus lines markets are often unique, unusual or difficult to place in conventional markets due to a shortage of capacity.
Annualized five year return	Annualized five year return is calculated by compounding the 60 consecutive monthly rates of return that are calculated by dividing monthly net performance by the beginning net asset value of that month. One is then subtracted from the product and the result is multiplied by 100 and divided by 5.
Incurred but not reported, or IBNR	Incurred but not reported reserves, which include reserves for the following: •        Pure incurred but not reported claims; •        Future development on known claims.
Loss ratio	The loss ratio is calculated by dividing losses by net premiums earned.
Loss reserve	For an individual loss, an estimate of the amount the insurer expects to pay for the reported claim. For total losses, estimates of expected payments for reported and unreported claims. These may include amounts for claims expenses.
Monthly net performance	Monthly net performance is the total income generated by an investment in the form of interest or dividends and the change in value of that investment in the form of unrealized or realized gains and losses.
Net operating income	Net income excluding after-tax realized gains or losses on sales of fixed maturities. We believe this non- GAAP measure provides a better indication of management performance as realized gains and losses on fixed maturities may fluctuate from period to period.
Net operating return on average shareholders’equity	Net operating return on average shareholders’ equity is calculated by dividing the net operating income by the average of the beginning and ending shareholders’ equity. This non-GAAP measure allows management to assess how the Company has performed in terms of wealth generated for our shareholders.

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Non-admitted carrier	A non-admitted carrier is not licensed by the state, but is allowed to do business in that state. Non-admitted carriers are not bound by most of the rate and form regulations imposed on standard market companies, allowing them the flexibility to change the coverage offered and the rate charged without time constraints and financial costs associated with the filing process.
Rate of return	Rates of return are calculated by dividing monthly net performance by the beginning net asset value of that month. One is then subtracted from the product and the result is multiplied by 100.
Return on average shareholders’ equity	Return on average shareholders’ equity is calculated by dividing the net income by the average of the beginning and ending shareholders’ equity. This non-GAAP measure allows management to assess how the Company has performed in terms of wealth generated for our shareholders.
Total return	See Annual total rate of return.

ITEM 2. PROPERTIES

We lease office space in Hamilton, Bermuda and Dublin, Ireland for use by our existing property and casualty and life and annuity segments, although the life and annuity segment primarily works from our Bermuda office. Max USA has leased office space in the following states for our U.S.-based excess and surplus lines activities:

• Richmond, Virginia;

• Atlanta, Georgia;

• San Francisco, California;

• Horsham, Pennsylvania;

• Dallas, Texas, and

• New York, New York.

We lease office space on a long-term basis, which we believe will be adequate for anticipated future operations.

ITEM 3. LEGAL PROCEEDINGS

We are, from time to time, a party to litigation and/or arbitration that arises in the normal course of our business operations. We are also subject to other potential litigation, disputes and regulatory or governmental inquiry.

SEC Inquiry. We previously disclosed that we had received a subpoena from the SEC in October 2006 relating to the SEC’s industry-wide investigations into non-traditional, or loss mitigation, (re)insurance products, our business practice review and our determination to restate our financial statements for the fiscal years ended December 31, 2005, 2004, 2003, 2002 and 2001 and the quarters ended March 31, 2006 and June 30, 2006. On December 18, 2007, we received a letter from the SEC’s Division of Enforcement stating that it completed its investigation and does not intend to recommend any enforcement action against us.

Other Actions. Two lawsuits filed in the United States District Court for The Northern District of Georgia name Max Bermuda, along with about 100 other insurance companies and brokers. The claims in each case are that the defendants conspired to manipulate bidding practices for insurance policies in certain insurance lines and failed to disclose certain commission arrangements. The first of these cases, was filed on April 4, 2006 by New Cingular Wireless Headquarter LLC and 16 other corporations. The complaint asserts statutory claims under the Sherman Antitrust Act, the Racketeer Influenced and Corrupt Organization Act, the antitrust laws of several states, as well as common law claims alleging breach of fiduciary duty and fraud. On October 16, 2006, the Judicial Panel on Multidistrict litigation transferred the case to the U.S. District Court for the District of New Jersey for pretrial proceedings on a consolidated basis with other lawsuits raising smaller claims. The second action was filed October 12, 2007 by Sears, Roebuck & Co. and two affiliated corporations. The complaint in this suit charges Max Bermuda and certain other insurance company defendants as the violators of the antitrust and consumer fraud laws of Georgia and other states and common law claims of inducement of breach of fiduciary duties, tortuous interference with contract, unjust enrichment, and aiding and abetting fraud. The defendants have asked the Judicial Panel on Multidistrict Litigation to transfer this case to the U.S. District Court for the District of New Jersey for pretrial proceedings, and the plaintiffs have consented to that transfer. We intend to defend ourselves vigorously in this suit but cannot at this time predict the outcome of the matters described above or estimate the potential costs related to defending the action. No liability has been established in our audited consolidated financial statements as of December 31, 2007.

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While any proceeding contains an element of uncertainty, we currently do not believe that the ultimate outcome of all outstanding litigation, arbitrations and inquiries will have a material adverse effect on our consolidated financial condition, future operating results and/or liquidity, although an adverse resolution of a number of these items could have a material adverse effect on our results of operations in a particular fiscal quarter or year.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of shareholders during the fourth quarter of the fiscal year ended December 31, 2007.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES

(A) Market Information

Our common shares began trading on the Nasdaq National Market on August 14, 2001 under the symbol MXRE. Effective May 7, 2007, Max Capital’s symbol was changed to MXGL. Prior to August 14, 2001, there was no trading market for Max Capital common shares. The following table sets forth for the periods indicated the high and low reported sale price of our common shares on the Nasdaq Global Select Market.

	2007				2006
	High		Low		High		Low
First Quarter	$	25.90	$	23.59	$	26.74	$	21.35
Second Quarter	$	29.24	$	25.07	$	25.76	$	21.65
Third Quarter	$	29.05	$	23.25	$	24.37	$	21.23
Fourth Quarter	$	30.14	$	25.49	$	25.00	$	22.16

Our common shares began trading on the Bermuda Stock Exchange, BSX, under the symbol MXRE BH on December 17, 2001. On May 7, 2007, the symbol was changed to MXGL:BH. The last day a closing price was reported by the BSX was $15.50 on December 18, 2001.

(B) Holders

As of January 31, 2008, the number of holders of record of our common shares was 159.

(C) Dividends

We have paid a quarterly cash dividend of $0.09 per common share ($0.36 annually) since the second quarter of 2007. From the third quarter of 2006 through the second quarter of 2007, we paid a quarterly cash dividend of $0.07 per common share ($0.28 annually). For the first and second quarters of 2006, we paid a quarterly cash dividend of $0.05 per common share ($0.20 annually). For our cash dividends per common share on an annual basis see Item 6 – Selected Financial Data. Any determination to pay cash dividends is at the discretion of our board of directors and is dependent upon the results of operations and cash flows, the financial position and capital requirements, general business conditions, legal, tax, regulatory and any contractual restrictions on the payment of dividends and other factors the board of directors deems relevant.

Max Capital’s ability to pay dividends depends, in part, on the ability of its subsidiaries to pay dividends to it. Max Bermuda is subject to Bermuda regulatory constraints that affect its ability to pay dividends to Max Capital. Under the Bermuda Insurance Act, Max Bermuda must maintain a minimum solvency margin and minimum liquidity ratio and is prohibited from declaring or paying dividends if it does not comply or such action would result in noncompliance with the Bermuda Insurance Act. Max Bermuda must maintain a minimum solvency margin and minimum liquidity ratio in relation to its property and casualty business and maintain a further $250,000 in relation to its long-term business in order to declare or pay dividends under the Bermuda Insurance Act. Additionally, the amounts of any such dividend shall not exceed the aggregate of that excess and other funds properly available for the payment of dividends, being funds arising out of its business, other than its long-term business.

Under the Bermuda Companies Act, each of Max Capital, Max Bermuda, Max Managers and Max Diversified may only declare or pay a dividend if, among other matters, there are reasonable grounds for believing that it is, or would after the payment be, able to pay its respective liabilities as they become due. Under the Irish Insurance Acts and regulations, each of Max Europe Holdings, Max Re Europe and Max Insurance Europe may only declare a dividend if, among other matters, such payment would not reduce its regulatory capital below the required minimum as required by law and regulatory practice. Max USA, as a Delaware corporation, may not declare and pay dividends on its capital if the amount paid exceeds an amount equal to the surplus which represents the excess of Max USA’s net assets over paid-in-capital or, if there is no surplus, Max USA’s net profits for the current and/or immediately preceding fiscal year. In addition, under applicable Delaware case law, dividends may not be paid on Max USA’s capital stock if it becomes insolvent or the payment of the dividend will render it insolvent. To the extent Max USA were to pay dividends and is deemed to be insolvent or inadequately capitalized, a bankruptcy court could direct the return of any dividends. Accordingly, we cannot assure shareholders that we will declare or pay dividends in the future.

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In addition, each of Max Bermuda’s three letter of credit facilities prohibits Max Bermuda from paying dividends at any time that it is in default under the respective facility, which will occur if Max Capital’s shareholders’ equity or Max Bermuda’s shareholders’ equity is less than a specified amount as well as in certain other circumstances. Max Capital is party to one credit facility that imposes parallel restrictions on its ability to pay dividends.

(D) Securities Authorized for Issuance Under Equity Compensation Plans

Information with respect to Item 5(D) is set forth under Item 12.

(E) Performance Graph

Set forth below is a line graph comparing the yearly dollar change in the cumulative total shareholder return on our common shares from December 31, 2001 through December 31, 2007 against the Total Return Index for the S &P 500 Index and the Nasdaq Insurance Index for the same period. The performance graph assumes $100 invested on December 31, 2001 in the stock of Max Capital, the S&P 500 Index and the Nasdaq Insurance Index. It also assumes that all dividends are reinvested.

The performance reflected in the graph above is not necessarily indicative of future performance.

ITEM 6. SELECTED FINANCIAL DATA

The following table of selected financial data should be read in conjunction with our audited consolidated financial statements and the notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each contained herein.

	Year Ended December 31,
	2007			2006			2005			2004			2003
	(dollars in millions, except percentages and per share data)
Gross premiums written	$	1,078.3		$	865.2		$	1,246.0		$	1,043.6		$	1,009.8
Net premiums earned		817.9			665.0			1,053.5			899.9			714.5
Net investment income		188.2			150.0			106.8			82.8			60.1
Net gains on alternative investments		186.7			84.8			39.9			81.6			124.0
Net income before minority interest (1)		303.2			216.9			9.5			141.8			137.9
Fixed maturities and cash		4,060.9			3,470.0			2,996.9			2,395.2			1,805.9
Alternative investments		1,061.7			1,065.9			1,230.9			1,119.0			831.4
Total assets		6,537.2			5,849.0			5,305.2			4,319.4			3,452.6
Shareholders’ equity		1,583.9			1,390.1			1,185.7			902.7			762.9
Book value per share		27.54			23.06			20.16			19.70			16.88
Diluted earnings per share		4.75			3.43			0.18			2.92			3.00
Cash dividends per share		0.32			0.24			0.18			0.12			0.09
Return on average shareholders’ equity		20.4	%		16.8	%		0.9	%		17.0	%		19.1	%

(1) On July 30, 2003, the holders of Max Bermuda non-voting common shares and warrants to acquire Max Bermuda non-voting common shares exchanged such shares and warrants for Max Capital common shares and warrants to acquire Max Capital common shares. The result of this exchange was the elimination of minority interest and an increase in shareholders’ equity of equal amounts as of the date of the exchange.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of our results of operations for the year ended December 31, 2007 compared to the year ended December 31, 2006 and for the year ended December 31, 2006 compared to the year ended December 31, 2005, and also a discussion of our financial condition as of December 31, 2007. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes that are included in this Annual Report on Form 10-K.

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Overview

We are a global provider of specialty property and casualty insurance and reinsurance products, with underwriting operations based in Bermuda, Ireland and the United States. We underwrite a diversified portfolio of risks that encompass long-tail business, including but not limited to excess liability, professional liability and workers compensation risks, as well as short-tail property, property catastrophe and aviation risks. We also provide life and annuity reinsurance when opportunities arise.

In continuation of our long-term strategic initiative to build our franchise, we acquired Max Specialty in April 2007 and expanded into the excess and surplus lines business in the United States. This segment operates across three divisions, brokerage, contract binding and marine, offering property, ocean cargo, inland marine, casualty, general liability and umbrella insurance products. We believe our platform will allow us to continue to utilize our capital efficiently by expanding our specialty insurance products as we target these niche markets.

To manage our reinsurance and insurance liability exposure, make our investment decisions and assess our overall enterprise risk, we model our underwriting and investing activities on an integrated basis. Our integrated risk management, as well as terms and conditions of our products, provides flexibility in making decisions regarding investments. Our investments comprise a high grade fixed maturities portfolio and an alternative investment portfolio that as of December 31, 2007 employed nine strategies invested in 35 underlying trading entities and one strategic reinsurance private equity investment. Our investment portfolio is designed to provide diversification and to generate positive returns while attempting to reduce the frequency and severity of loss outcomes. Based on fair values at December 31, 2007, the allocation of invested assets was 79.3% in cash and fixed maturities and 20.7% in alternative investments.

Our principal operating subsidiary is Max Bermuda. At December 31, 2007, Max Bermuda had $1,659.1 million of shareholders’ equity. We conduct our European activities through Max Europe Holdings and its operating subsidiaries, Max Re Europe and Max Insurance Europe. We conduct our U.S. operations through Max USA and its operating subsidiary, Max Specialty. We hold all of our alternative investments in Max Diversified, other than our reinsurance private equity investment in Grand Central Re, which is held by Max Bermuda. During the fourth quarter of 2007, we began implementation of our global service companies initiative whereby we seek to improve the efficiency of certain corporate services across the group. Pursuant to this initiative, we formed MCS Ireland and its two subsidiaries, MCS USA and MCS BDA, to house those internal support services that will be provided across the group.

Executive Summary

Favorable underwriting results in our mature segments, continued diversification into new markets and new underwriting channels, as well as strong investment returns in the midst of unpredictable and volatile financial markets were the key components of our net income of $303.2 million for the year ended December 31, 2007. We believe that continuing to build on our complimentary underwriting platforms and capitalizing on our diversified investment strategy allowed us to realize the most successful financial performance in our history.

Our underwriting results for the year ended December 31, 2007 reflect a mixture of the results of adherence to our underwriting standards, favorable loss development and expansion into new product lines where we foresee growth opportunities. Losses, and large loss events, in particular, have for the most part been lower than expected for the second consecutive year.

Gross premiums written in our property and casualty segments for the year ended December 31, 2007 decreased 5.3% to $776.3 million compared to the same period in 2006. We expect the softening property and casualty market to continue in many of our product lines and we intend to continue to focus on adherence to our underwriting standards and diversification. As of December 31, 2007, our mix of gross premiums written between property and casualty reinsurance and insurance remained fairly evenly balanced, with insurance and U.S. excess and surplus lines insurance representing 55.5% of our total property and casualty gross premiums written as of December 31, 2007, up slightly from 48.3% for the same period in 2006. We continue to emphasize long-tail casualty lines in our property and casualty reinsurance and insurance segments, with professional liability and excess liability being our first and third largest exposures accounting for 24.6% and 19.1%, respectively, of gross premiums written for the year ended December 31, 2007. Our U.S. excess and surplus lines insurance platform, which commenced in April 2007, continued to grow with gross premiums written of $48.2 million for the year ended December 31, 2007, with 55.0% of this premium being written in the fourth quarter of 2007. We expect this platform will provide opportunities for growth in 2008 in the niche markets we are currently targeting.

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Our combined property and casualty segments produced an aggregate combined ratio for the year ended December 31, 2007 of 88.2%, with combined net income of $179.3 million. We establish reserves for losses and loss expenses using a combination of loss reserving techniques, actuarial methods and management judgment. Reserves for losses and loss expenses are reviewed regularly to reflect new information that we receive. We conduct regular quarterly internal reviews of loss reserves and, in addition, the adequacy of our loss reserves is reviewed annually, during the fourth quarter of the year, by independent actuaries whose recommendations are a significant component of management’s estimation process. As a result of our internal reserve reviews, for the year ended December 31, 2007, we recorded $48.5 million of favorable development on prior period net loss reserves in our property and casualty segments. We also benefited from a $15.2 million release of net loss reserves resulting from an agreement to settle a large block of prior period loss reserves in our property and casualty reinsurance segment for less than originally estimated.

Our internal reserve review included a review of the exposures in our insurance and reinsurance businesses to losses stemming from the sub-prime mortgage sector. We conservatively estimate our net losses as of December 31, 2007 to be approximately $10.0 and $8.0 million in our insurance and reinsurance businesses, respectively. These estimates were within our original loss estimates for those lines and no additional reserves were recorded for sub-prime losses during the year ended December 31, 2007. We believe that any future development will not have a material impact on net income due to the reinsurance and retrocessional protection in place for these risks.

Our life and annuity reinsurance segment produced gross premiums written of $302.0 million for the year ended December 31, 2007 compared to $45.0 million for the same period in 2006. The nature of life and annuity reinsurance transactions that we consider results in a limited number of transactions actually bound with potentially large variations in annual premium volume. Of the gross premiums written during 2007, $91.4 million was the result of underwriting additional closed blocks of annuities for existing clients. We believe our strong relationships with our existing clients provided the opportunity to underwrite these additional transactions.

We manage our exposure to underwriting volatility by carefully selecting line sizes of business assumed, diversifying our underlying exposures and purchasing reinsurance and retrocessional protection. We believe our retrocessional protection is a key component of our diversified strategy and will result in lower volatility in years with losses significantly higher or lower than expected.

For the year ended December 31, 2007, our cash, fixed maturities and alternative investments collectively increased by $586.7 million, or 12.9%, due to positive operating cashflow and a 10.38% total investment return. We believe our 3.2 to 1 ratio of invested assets to shareholders’ equity and our overall investment strategy enhances the return potential for our shareholders.

We believe our fixed maturities investment portfolio has limited exposure to the sub-prime loan market and we have not recognized any losses in income related to sub-prime credit or liquidity issues. At December 31, 2007, our fixed maturities securities with exposure to sub-prime borrowers total $54.2 million in fair value, or 1.5% of total fixed maturities, and $58.0 million in amortized cost, for a net unrealized loss of $3.8 million. By fair value, 90.0% of these securities are AAA-rated with the remainder AA-rated. All have significant levels of subordination coverage available to absorb future credit losses. We have determined that a write-down for impairment of these securities is not necessary based on a consideration of relevant factors including prepayment rates, subordination levels, default rates, credit ratings, weighted average life, credit default insurance and cash flow testing. Together with our investment managers, we continue to monitor our potential exposure to sub-prime borrowers and we will make adjustments to the investment portfolio as necessary.

We are pleased with the performance of our alternative investments, which provided an investment rate of return of 16.97% and net gains of $186.7 million for the year ended December 31, 2007. Our rolling 60-month annualized rate of return at December 31, 2007 was 10.28%. The alternative investment strategies that principally contributed to the gains for the year ended December 31, 2007 were the long/short equity and event driven arbitrage strategies, which are the two largest allocations of our alternative investments at 25.4% and 16.1%, respectively. Certain of our underlying funds in the alternative investment portfolio have traded sub-prime securities, both long and short positions. This activity was a meaningful contributor to the returns made in 2007. Our alternative investment strategies are selected because of their low correlation with the stock market, the bond market and each other. Our alternative investment portfolio continued to achieve consistently positive returns with volatility similar to an investment-grade quality fixed maturities portfolio.

Our investment allocation to alternative investments was 20.7% at December 31, 2007 compared to 23.5% at December 31, 2006. We made net redemptions of $195.0 million from our alternative investments during the year ended December 31, 2007 as part of our investment objective to reduce our target allocation to alternative investments to approximately 20% of our total invested assets.

Our underwriting and investment performance resulted in an annualized return on average shareholders’ equity of 20.7% for the year ended December 31, 2007. Book value per common share increased 19.4%, from $23.06 at December 31, 2006 to $27.54 at December 31, 2007. Our shareholders’ equity as of December 31, 2007 has increased by $193.8 million,

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or 13.9%, since December 31, 2006. This growth is net of the effect of our share repurchase program, under which we have spent $114.4 million to repurchase 4,289,251 shares in the year ended December 31, 2007. At December 31, 2007, the remaining authorization under our share repurchase program was $75.3 million and we believe our share price remains attractive for repurchasing at recent valuations. Subsequent to December 31, 2007, we commenced with an accelerated share repurchase program under which we committed to repurchase $50.0 million of shares, and the Board of Directors approved an increase in the repurchase program. Following the increase on February 12, 2008, the amount available under the Board-approved share repurchase program was $100.0 million. In addition, on February 8, 2008 we repurchased 1,031,178 shares issued upon the exercise of warrants by an original shareholder. The repurchase amount for these shares was $29.7 million. We believe our active capital management provides us with the flexibility to pursue growth opportunities and assist us in maximizing returns to our shareholders.

Drivers of Profitability

Revenues

We derive operating revenues from premiums from our reinsurance and insurance businesses. Additionally, we recognize returns from our investment portfolios.

Reinsurance and insurance premiums are a function of the amount and type of contracts written as well as prevailing market prices. Property and casualty premiums are earned over the terms of the underlying coverage. Life and annuity reinsurance premiums are generally earned when the premium is due from policyholders. Each of our reinsurance and insurance contracts contain different pricing, terms and conditions and expected profit margins. Therefore, the amount of premiums is not necessarily an accurate indicator of our anticipated profitability. Premium estimates are based upon information in underlying contracts, data received from clients and from premium audits. Changes in premium estimates are expected and may result in significant adjustments in any period. These estimates change over time as additional information regarding the underlying business volume of our clients is obtained. There is often a delay in the receipt of updated premium information from clients due to the time lag in preparing and reporting the data to us. After review by our underwriters and finance staff, we increase or decrease premium estimates as updated information from our clients is received.

Our net investment income is a function of the average invested assets and the average yield that we earn on those invested assets. The investment yield on our fixed maturities investments is a function of market interest rates as well as the credit quality and maturity of our fixed maturities portfolio. We recognize realized capital gains or losses on our fixed maturities investments at the time of sale. The realized capital gains or losses reflect the results of changing market conditions, including changes in market interest rates and changes in the market’s perception of the credit quality of our fixed maturities holdings. Our net gains on alternative investments are a function of the success of the funds in which we are invested, which depends on, among other things, the underlying strategies of the funds, the ability of the fund managers to execute the fund strategies, general economic and investment market conditions.

Expenses

Our principal expenses are losses and benefits, acquisition costs, interest expense and general and administrative expenses. Losses and benefits are based on the amount and type of reinsurance and insurance contracts written by us during the current reporting period and information received during the current reporting period from clients pertaining to contracts written in prior years. We record losses and benefits based on actuarial estimates of the expected losses and benefits to be incurred on each contract written. The ultimate losses and benefits depend on the actual costs to settle these liabilities. We increase or decrease losses and benefits estimates as actual claim reports are received. Our ability to make reasonable estimates of losses and benefits at the time of pricing our contracts is a critical factor in determining profitability.

Acquisition costs consist principally of ceding commissions paid to ceding clients and brokerage expenses. These typically represent a negotiated percentage of the premiums on reinsurance and insurance contracts written. Acquisition costs are stated net of ceding commissions associated with premiums ceded to our quota share partners on our reinsurance and insurance business. These ceding commissions are designed to compensate us for the costs of producing the portfolio of risks ceded to our reinsurers. We defer and amortize these costs over the period in which the related premiums are earned.

Interest expense principally reflects interest on our bank loans at a rate based on LIBOR plus a spread and interest on our senior notes. In addition, interest expense also includes the net interest charge on funds withheld from reinsurers under reinsurance and retrocessional contracts. Interest expense on funds withheld from other reinsurers under reinsurance and retrocessional contracts will vary principally due to changes in the balance of funds withheld. Finally, interest expense also includes interest on deposit contracts.

General and administrative expenses are principally employee salaries, bonuses and related personnel costs, office rent, amortization of leasehold improvements and other operating costs. These costs do not vary with the amount of premiums written.

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Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with GAAP, which require management to make estimates and assumptions. We believe that the following accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue recognition

We follow SFAS No. 60, “Accounting and Reporting by Insurance Enterprises,” SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and Realized Gains and Losses from the Sale of Investments,” and SFAS No. 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts,” in determining the accounting for our reinsurance and insurance products. Assessing whether or not the contracts we write meet the conditions for risk transfer requires judgment. The determination of risk transfer is based, in part, on the use of actuarial and pricing models and assumptions.

Property and casualty insurance and U.S. excess and surplus lines insurance revenue recognition

Our property and casualty insurance and U.S. excess and surplus lines insurance premiums are recorded at the inception of each contract, based upon contract terms. For property and casualty insurance and U.S. excess and surplus lines insurance, the amount of minimum and/or deposit premium is usually contractually documented at inception, and variances between deposit premium and final premium are generally small. An adjustment is posted to amend the minimum and/or deposit premium if there are changes in underlying exposures insured. Premiums are earned on a pro rata basis over the coverage period.

Property and casualty reinsurance revenue recognition

Our property and casualty reinsurance premiums are recorded at the inception of each contract, based upon contract terms and information received from ceding clients and their brokers. For excess of loss contracts, the amount of minimum and/or deposit premium is usually contractually documented at inception, and variances between deposit premium and final premium are generally small. An adjustment is posted to amend the minimum and/or deposit premium when notified if there are changes in underlying exposures insured. For quota share or proportional property and casualty reinsurance contracts, gross premiums written are normally estimated at inception based on information provided by cedants and/or brokers. We generally account for such premiums using the client’s initial estimates, and then adjust them as more current information becomes available, with such adjustments recorded as premiums written in the period they are determined. We believe that the ceding clients’ estimate of the volume of business they expect to cede to us represents the best estimate of gross premium written at the beginning of the contract. As the contract progresses, we monitor actual premium received in conjunction with correspondence from the ceding client in order to refine our estimate. Variances from original premium estimates are normally greater for quota share contracts than excess of loss contracts. Premiums are earned on a pro rata basis over the coverage period. The net adjustments to gross premiums written as a result of changes in premium estimates for the years ended December 31, 2007 and 2006 were not material.

Additional Premiums

Certain contracts that we write are retrospectively rated and we are entitled to additional premium should losses exceed pre-determined, contractual thresholds. These additional premiums are based upon contractual terms and the only element of management judgment involved is with respect to the estimate of the amount of losses that we expect to be ceded to us. Additional premiums are recognized at the time loss thresholds specified in the contract are exceeded and are earned over the policy period. Changes in estimates of losses recorded on contracts with additional premium features will result in changes in additional premiums based on contractual terms.

Additional premiums assumed and ceded, related additional acquisition costs, related net losses and the net impact on operating results for each of the three years to December 31, 2007 are as follows:

	2007			2006			2005
	(000’s)			(000’s)			(000’s)
Additional premiums assumed	$	(6,404	)	$	16,707		$	196,532
Additional premiums ceded		960			(2,506	)		(29,480	)
Additional acquisition costs		(43	)		(2,838	)		(4,942	)
Net losses		13,201			—			(179,855	)
Net operating result	$	7,714		$	11,363		$	(17,745	)

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For each of the years ended December 31, 2007, 2006 and 2005, additional premiums relate to contracts where the coverage period had expired. Therefore, these additional premiums, representing revisions to our initial estimate of ultimate premiums as a result of changes in the estimate of loss reserves, were fully earned since the exposure period has ended.

Reinstatement Premiums

Certain of the contracts we write, particularly the property and property catastrophe reinsurance risks, provide for reinstatements of coverage. Reinstatement premiums are the premiums for the restoration of the insurance or reinsurance limit of a contract to its full amount after a loss occurrence by the insured or reinsured and principally relate to our property catastrophe reinsurance contracts. The purpose of optional and required reinstatements is to permit the insured / reinsured to reinstate the insurance coverage at a pre-determined price level once a loss event has penetrated the insured layer. In addition, required reinstatement premiums permit the insurer / reinsurer to obtain additional premiums to cover the additional loss limits provided.

We accrue for reinstatement premiums resulting from losses recorded. Such accruals are based upon contractual terms and the only element of management judgment involved is with respect to the amount of losses recorded. Changes in estimates of losses recorded on contracts with reinstatement premium features will result in changes in reinstatement premiums based on contractual terms. Reinstatement premiums are recognized at the time we record losses and are earned on a pro rata basis over the coverage period. Reinstatement premiums assumed and ceded for each of the three years to December 31, 2007 are not material to our financial results.

Life and annuity reinsurance premium

Our life and annuity reinsurance premiums are recorded at the inception of the contract based on actual premiums received and are fully earned at that time. We may periodically receive additional premiums which are recorded and earned when received. Additional premium receipts are generally small.

Premiums receivable

For quota share or proportional contracts, we are entitled to receive premium as the ceding client collects the premium under contractual reporting and payment terms, which are usually quarterly. Premiums are usually collected over a two year period on our quota share or proportional contracts. For excess of loss contracts, premium is generally paid in contractually stipulated installments with payment terms ranging from payment at the inception of the contract to four quarterly payments. As a result of recognizing the estimated gross premium written at the inception of the policy and collecting that premium over an extended period, we include a premium receivable asset on our balance sheet. We actively monitor our premium receivable asset to consider whether we need an allowance for doubtful accounts. As part of this process, we consider the credit quality of our cedants and monitor premium receipts versus expectations. We also seek to include a right of offset in the contract terms. Since commencing our operations, we have not written off any premiums receivable and, currently, no material premiums receivable are significantly beyond their due dates or in dispute.

Losses and benefits

Under GAAP, we are not permitted to establish loss reserves until the occurrence of an event that may give rise to a loss. Once such an event occurs, we establish reserves based upon loss reports from insureds and estimates of total losses incurred by the ceding client as a result of the event and our estimate of the portion of such loss we cover. As a result, only loss reserves applicable to losses incurred up to the reporting date and an allowance for the future emergence of losses that have already occurred may be recorded, with no allowance for the provision of a contingency reserve to account for expected future losses.

In estimating reserves we, consistent with industry practice, utilize a variety of standard actuarial methods together with management judgment. The loss reserve selection from these various methods is based on the loss development characteristics of the specific line of business and specific contracts which take into consideration coverage terms, type of business, maturity of loss data, reported claims and paid claims. We do not necessarily utilize the same actuarial method or group of actuarial methods for all contracts within a line of business or segment, as variations between contracts result in a number of different methods or groups of methods being appropriate. These actuarial methods have been designed to address the lag in loss reporting in the insurance business as well as the delay in obtaining information that would allow us to more accurately estimate future payments. Reporting lag is more pronounced in our reinsurance contracts than in our insurance contracts and more pronounced in casualty business, which generally has a longer claims pay-out period (long claim-tail), than property business, which generally has a shorter claims pay-out period (short claim-tail). On casualty reinsurance transactions the reporting lag will generally be 60-90 days after the end of a reporting period,

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but can be longer than this in some cases. Based on the experience of our actuaries and management, we select loss development factors and trending techniques to mitigate the problems caused by reporting lags and claims tails. We regularly evaluate and update our loss development and trending factor selections using client specific and industry data. The principal actuarial methods we use to perform our quarterly loss reserve analysis may include:

Expected Loss Ratio Method. To estimate ultimate losses under the expected loss ratio method, we multiply earned premiums by an expected loss ratio. The expected loss ratio is selected utilizing industry data, historical client data, frequency-severity and rate level forecasts and professional judgment. We use this method for lines of business and contracts where there are no historical losses or where past loss experience is not sufficient.

Paid Loss Development Method. This method estimates ultimate losses by calculating past paid loss development factors and applying them to exposure periods with further expected paid loss development. The paid loss development method assumes that losses are paid at a rate consistent with the historical rate of payment. It provides an objective test of reported loss projections because paid losses contain no reserve estimates. For many coverages, claim payments are made very slowly and it may take years for claims to be fully reported and settled.

Reported Loss Development Method. This method estimates ultimate losses by calculating past reported loss development factors and applying them to exposure periods with further expected reported loss development. Since reported losses include payments and case reserves, changes in both of these amounts are incorporated in this method. This approach provides a larger volume of data to estimate ultimate losses than paid loss methods. Thus, reported loss patterns may be less varied than paid loss patterns, especially for coverages that have historically been paid out over a long period of time but for which claims are reported relatively early and case loss reserve estimates established.

Bornheutter-Ferguson Paid Loss Method. The Bornheutter-Ferguson paid loss method is a combination of the paid loss development method and the expected loss ratio method. The amount of losses yet to be paid is based upon the expected loss ratios. These expected loss ratios are modified to the extent paid losses to date differ from what would have been expected to have been paid based upon the selected paid loss development pattern. This method avoids some of the distortions that could result from a large development factor being applied to a small base of paid losses to calculate ultimate losses. This method will react slowly if actual paid loss experience develops differently than historical paid loss experience because of major changes in rate levels, retentions or deductibles, the forms and conditions of coverage, the types of risks covered or a variety of other factors.

Bornheutter-Ferguson Reported Loss Method. The Bornheutter-Ferguson reported loss method is similar to the Bornheutter-Ferguson paid loss method with the exception that it uses reported losses and reported loss development factors.

Frequency-Severity Method. This method is based on assumptions about the number of claims that will impact a transaction and the average ultimate size of those claims. On excess of loss contracts, reported claims in lower layers provide insight to the expected number of claims that will likely impact the upper layers.

Although these actuarial methods for establishing reserves have been developed over time, assumptions about anticipated size of loss and loss emergence patterns are subject to fluctuation. Newly reported loss information from our clients or insureds is the principal contributor to changes in our loss reserve estimates. The selection of appropriate actuarial methods to establish reserves may change over time as the underlying loss information becomes more seasoned. Additional discussion of the reserving practices by business segment is included below.

Losses and benefits, net of related reinsurance recoverables, are charged to income as incurred. Unpaid losses (including loss adjustment expenses) represent the accumulation of:

• case reserves, which are reserves established for individual claims (and as reported by our cedants in the case of reinsurance);

• incurred but not reported reserves (which we refer to as IBNR), which include reserves for the following:

• Pure incurred but not reported claims;

• Future development on known claims.

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The table below breaks our reserves as of December 31, 2007 into these components by segment.

In millions of U.S. Dollars	Property and casualty reinsurance		Property and casualty insurance		Excess and surplus insurance		Life and annuity reinsurance
Case reserves	$	454.4	$	161.2	$	12.6	$	1,203.9
IBNR		987.6		705.6		12.5		—
Total	$	1,442.0	$	866.8	$	25.1	$	1,203.9

During 2007, several large reinsurance contracts were commuted that resulted in a significant reduction to case reserves. In addition, many of the losses associated with the 2005 hurricanes were paid in 2007, which also decreased case reserves. As a result, our property and casualty reserves are approximately $300 million lower as of December 31, 2007 when compared to December 31, 2006 reserves.

Our reserving methodology, as discussed above, uses a loss reserving model that calculates a point estimate for our ultimate losses, as opposed to a methodology that develops a range of estimates. Although we believe that our assumptions and methodologies are reasonable, we cannot be certain that our ultimate payments will not vary, perhaps materially, from the estimates we have made. If we determine that adjustments to an earlier estimate are appropriate, those adjustments are reflected in our net income during the period in which we determine these adjustments. The establishment of new reserves, or the adjustment of reserves for reported claims, could result in significant upward or downward changes to our financial condition or results of operations in any particular period. We regularly review and update these estimates using the most current information available to us.

Development of our prior period incurred losses for each of the three years ended December 31, 2007 is reported in Note 6 – “Property and casualty losses and loss adjustment expenses” to our consolidated financial statements on page F-15. After adjusting 2005 prior period incurred losses for contractual additional premiums received related to the recording of losses on two contracts, our development of prior period loss reserves has been less than 3.5% in each of the three years ending December 31, 2007 and an average of 3.3% over the past six years. Based on this experience, we currently believe it reasonably likely that loss reserves could change 3.5% from currently reported amounts. This change could be higher or lower depending on our client reported data and potential future commutation of reserves. As at December 31, 2007, we estimate that a 3.5% change in loss reserves would impact our net income and shareholders’ equity by $81.7 million. Depending on whether the reasonably likely adjustments to loss reserves are on contracts ceded to one of our various reinsurance arrangements, there may also be a partially offsetting change in the losses recoverable, net income and shareholders’ equity.

Property and Casualty Reinsurance Loss Reserve Process

Our property and casualty reinsurance loss reserves include case reserves, amounts for IBNR reserves and loss adjustment expenses. The reserves are compiled on a contract-by-contract basis and are computed on an undiscounted basis. The majority of our reinsurance property and casualty reserves are related to casualty business. Historically, losses associated with casualty business have had a long claim-tail, the time period between the occurrence of a loss and the time it is settled by the insurer we reinsure. Casualty losses are also more susceptible to litigation and can be significantly affected by changing contract interpretations and a changing legal environment. Due to the long claim-tail nature of casualty business, a high degree of judgment is involved in establishing loss reserves.

Our property reinsurance loss reserves are established on a contract-by-contract basis, based on expected loss ratios, losses reported by clients and our assessment of potential losses from catastrophe events, which are initially based on catastrophe model aggregate assessments and location specific assessments when available. Loss estimates are subsequently refined based on broker advices and client notifications.

We establish and review our property and casualty reinsurance loss reserves on a quarterly basis. The process for establishing our property and casualty reinsurance loss reserves is based upon internally generated actuarial analysis of loss data provided by clients. We use a variety of actuarial techniques and methods in estimating our ultimate liability for property and casualty reinsurance losses and loss expenses, together with management judgment. These methods include paid loss development, incurred loss development, paid and incurred Bornhuetter-Ferguson methods and frequency-severity methods. This actuarial data is analyzed by product, type of risk, coverage and accident or policy year, as appropriate. Industry loss experience is also used to supplement our own data in selecting development factors in areas where our own data or the clients’ data is limited.

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As a reinsurer, we rely on loss data reported by our clients when calculating our reserves. The quality of the loss data varies from client to client. On a periodic basis, the clients’ loss data is analyzed by our actuarial and claims management teams to ascertain its quality and credibility. This process may involve comparisons with submission data and industry loss data, claim audits and inquiries about the methods of establishing case reserves or reserves associated with large industry events. There is often a time lag between our clients establishing case reserves and re-estimating their reserves, and notifying us of the new or revised case reserves. On casualty reinsurance transactions, the reporting lag will generally be 60-90 days after the end of a reporting period, but can be longer than this in some cases. Appropriate selection of loss development and trending techniques is used to mitigate these problems. We utilize the latest information received from our clients and work to ensure that the loss data is current. However, due to the varying quality of data from our reinsureds and the inherent reporting delays, our property and casualty reinsurance reserves will have more uncertainty than our property and casualty insurance reserves, where we receive loss information directly from our insureds.

Mitigating the uncertainty inherent in the reserves of our property and casualty reinsurance portfolio is the fact that a large portion of our recorded reinsurance reserves are attributable to contracts that are booked at contractual aggregate limits. As of December 31, 2007 and December 31, 2006 approximately 33% and 42%, respectively, of the total property and casualty reinsurance reserves are on contracts that are recorded at contractual aggregate limits.

When determining reserves, we also consider additional historical data, industry loss trends, legal developments, changes in social attitudes and economic conditions, including the effects of inflation. As additional data becomes available and is reviewed, we revise our property and casualty reinsurance reserve estimates to reflect this additional data, which may result in increases or decreases to reserves for insured events of prior years. These adjustments are recorded in the period they are determined. The table below breaks our property and casualty reinsurance reserves as of December 31, 2007 and 2006 into casualty (long claim-tail) and property (short claim-tail) components.

In millions of U.S. Dollars	December 31, 2007		December 31, 2006
Casualty	$	1,274.1	$	1,529.7
Property		167.9		172.5
Total	$	1,442.0	$	1,702.2

Property and Casualty Insurance Loss Reserve Process

Our casualty insurance loss reserves, which include case reserves, amounts for IBNR reserves and loss adjustment expenses, are compiled on a portfolio basis and are computed on an undiscounted basis. The majority of the insurance business we have written is casualty business. Historically, losses associated with casualty business have had a long claim-tail, which is the time period between the occurrence of a loss and the time it is settled by the insurer. Casualty losses are also generally more susceptible to litigation and can be significantly affected by changing contract interpretations and a changing legal environment. Due to the long claim-tail nature of casualty business, a high degree of judgment is involved in establishing loss reserves.

Our property insurance loss reserves, which include case reserves, amounts for IBNR reserves and loss adjustment expenses, are compiled on a portfolio basis and are computed on an undiscounted basis. These reserves are adjusted for losses reported by our clients and for our estimate of losses resulting from catastrophe events, based on a detailed, location specific analysis of our clients’ properties impacted by the events.

In connection with our ongoing analysis of our property and casualty insurance loss reserves, we review loss reports received from our clients to confirm that submitted claims are covered under the contract terms and take into account industry loss activity and industry loss trends. We also consider historical data, legal developments, changes in social attitudes and economic conditions, including the effects of inflation. As additional data becomes available and is reviewed, we may revise our property and casualty insurance reserve estimates to reflect this additional data, which may result in increases or decreases to reserves for insured events of prior years. These adjustments are recorded in the period they are determined.

We establish and review our property and casualty insurance loss reserves on a quarterly basis. The process for adjusting our property and casualty insurance loss reserves is based upon loss reports received from clients, which are input into actuarial models. We use a variety of actuarial techniques and methods in estimating our ultimate liability for property

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and casualty insurance losses and loss expenses, together with management judgment. As noted above, these methods include paid loss development, incurred loss development, paid and incurred Bornhuetter-Ferguson methods and frequency-severity methods. This actuarial data is analyzed by product, type of risk, coverage and accident or policy year. Industry loss experience is also used to supplement our own data in selecting long term trend and development factors and in areas where our own data or the insureds’ data is limited. The table below breaks our insurance reserves as of December 31, 2007 and 2006 into casualty (long claim-tail) and property (short claim-tail) components.

In millions of U.S. Dollars	December 31, 2007		December 31, 2006
Casualty	$	787.4	$	576.6
Property		79.4		56.3
Total	$	866.8	$	632.9

U.S. Excess and Surplus Lines Insurance Loss Reserve Process

On a gross basis, the majority of the U.S. excess and surplus lines insurance business we have written is property business. On a net of reinsurance basis, the earned premium is approximately equally split between property and casualty. Our U.S. excess and surplus lines insurance property loss reserves, which include case reserves, amounts for IBNR reserves and loss adjustment expenses, both allocated and unallocated, are compiled on a portfolio basis and are computed on an undiscounted basis.

We determine our IBNR reserves by first projecting the ultimate expected losses by product within each line of business. We then subtract paid losses and reported loss reserves from the ultimate loss reserves. The remainder is our incurred but not reported reserves. The level of IBNR reserves in relation to total reserves depends upon the characteristics of the particular line of business, particularly with respect to the speed by which losses are reported and outstanding loss reserves are adjusted. Lines for which losses are reported quickly will have a lower percentage of IBNR reserves than lines for which losses are reported more slowly, and lines for which reserve volatility is low will have a lower percentage of IBNR reserves than higher volatility lines.

The reserves for reported losses related to our U.S. excess and surplus lines insurance business are initially set by our claims personnel or independent claims adjusters we retain. The loss reserves are subject to our review, with a goal of setting them at the ultimate expected loss amount as soon as possible when the information becomes available.

We establish and review our property and casualty U.S. excess and surplus lines insurance IBNR loss and loss expense reserves on a quarterly basis. We use a variety of actuarial techniques and methods in estimating our ultimate liability for excess and surplus lines insurance losses and loss expenses, together with management judgment. As noted above, these methods include paid loss development, incurred loss development, paid and incurred Bornhuetter-Ferguson methods. Industry loss experience is also used to supplement our own data in selecting loss reporting and payment patterns and expected loss ratios. The table below breaks our U.S. excess and surplus lines insurance reserves as of December 31, 2007 into casualty (long claim-tail) and property (short claim-tail) components.

In millions of U.S. Dollars	December 31, 2007
Casualty	$	18.7
Property		6.4
Total	$	25.1

Disputes

In connection with our ongoing analysis of our property and casualty insurance and reinsurance and U.S. excess and surplus lines insurance loss reserves, we review loss notifications and reports received from our clients to confirm that submitted claims are covered under the contract terms. Disputes with clients arise in the ordinary course of business due to coverage issues such as classes of business covered and interpretation of contract wording. We typically resolve any disputes through negotiations that could vary from a simple exchange of email correspondence to arbitration with a panel of experts. Our contracts generally provide for dispute resolution through arbitration. We are not currently involved in any coverage disputes that would, individually or in the aggregate, be material to us.

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Property and Casualty Loss Reserve Development

The following table presents the development of balance sheet property and casualty loss reserves calculated in accordance with GAAP, as of December 31, 2000 through December 31, 2007. This table does not present accident or policy year development data. The top line of the table shows the gross reserves at the balance sheet date for each of the indicated years and is reconciled to the net reserve by adjusting for reinsurance recoverables. This represents the estimated amount of net claims and claim expenses arising in the current year and all prior years that are unpaid at the balance sheet date, including IBNR reserves. The table also shows the re-estimated amount of the previously recorded reserves as adjusted for new information received as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The “net cumulative redundancy (deficiency)” represents the aggregate change to date from the original estimate on the third line of the table “reserve for property and casualty losses, originally stated, net of reinsurance.” The “gross cumulative redundancy (deficiency)” represents the aggregate change to date from the original gross estimate on the top line of the table. The table also shows the cumulative net paid amounts as of successive years with respect to the net reserve liability.

	2000			2001			2002			2003			2004			2005			2006			2007
				(1)			(1)
Gross reserve for property and casualty losses	$	136,338		$	456,377		$	617,404		$	991,687		$	1,455,099		$	2,006,032		$	2,335,109		2,333,877
Reinsurance recoverable		(5,370	)		(51,838	)		(80,407	)		(163,348	)		(293,512	)		(409,229	)		(496,173	)	(537,864	)(3)
Reserve for property and casualty losses originally stated, net of reinsurance		130,968			404,539			536,997			828,339			1,161,587			1,596,803			1,838,936		1,796,013
Cumulative net paid losses
1 year later		7,752			136,734			106,076			119,269			217,637			169,008			361,702		—
2 years later		117,230			202,134			165,539			257,182			321,533			501,837			—		—
3 years later		141,134			242,681			244,578			333,238			545,653			—			—		—
4 years later		150,212			285,166			309,183			502,167			—			—			—		—
5 years later		158,738			326,529			420,454			—			—			—			—		—
6 years later		162,217			359,823			—			—			—			—			—		—
7 years later		166,002			—			—			—			—			—			—		—
Reserves re-estimated as of
1 year later		150,154			442,101			554,795			826,799			1,296,558			1,585,834			1,774,591		—
2 years later		178,460			439,490			563,469			975,441			1,277,712			1,533,584			—		—
3 years later		175,057			444,348			666,781			977,590			1,229,303			—			—		—
4 years later		175,057			496,631			676,365			945,186			—			—			—		—
5 years later		175,057			497,449			655,532			—			—			—			—		—
6 years later		175,057			482,046			—			—			—			—			—		—
7 years later		175,057			—			—			—			—			—			—		—
Net cumulative redundancy (deficiency)		(44,089	)		(77,507	)		(118,535	)		(116,847	)		(67,716	)		63,219			64,345	(2)
Gross cumulative redundancy (deficiency)		(44,089	)		(87,143	)		(139,478	)		(137,501	)		(80,115	)		82,305			70,159

(1) Adjusted for reclassification of a contract to a deposit liability.

(2) The difference between the loss development included above and that reflected in the reconciliation of losses and loss adjustment expenses in Note 6 to the consolidated financial statements of $593 relates to amortization of deferred charges on retroactive reinsurance.

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(3) The difference between the reinsurance recoverable included above and that reflected in the reconciliation of losses and loss adjustment expenses in Note 6 to the consolidated financial statements of $1,165 relates to the remaining net deferred loss on retroactive reinsurance.

During 2007 our re-estimated balance sheet reserves for 2001 and each subsequent balance sheet decreased as a result of net favorable development on a large number of contracts with varied underwriting years and lines of business. The more significant development included:

• The settlement of a large block of prior period reinsurance reserves resulting in a net favorable development of $15.2 million and net paid losses related to prior years of $131.9 million. The favorable development and paid losses impacted the reserves for 2001, 2002 and 2003.

• Favorable development of $13.0 million on one alternative risk reinsurance contract where reserves were released based on updated information received from one client. Due to contractual features requiring additional premiums and interest thereon in the event of additional losses in excess of pre-determined thresholds, an offsetting decrease in additional premium was recorded and earned in the amount of $15.2 million which is not reflected in the table above.

• Adverse development of $20.0 million on a marine reinsurance quota share contract that had losses in relation to the 2005 hurricanes.

• Net favorable loss development for our property and casualty insurance segment of $8.8 million arising from the re-estimation of liabilities principally relating to property contacts which had exposure to the 2005 hurricanes.

Our balance sheet reserves for 2001 and each subsequent balance sheet date through 2004 in the above tables continue to show the effects of the development on two specific contracts recorded in 2005. The first contract increased 2001 reserves by $50.2 million, with the recording of such increased losses triggering additional premiums and interest on additional premiums of $49.3 million, which are not reflected in the table above. The second contract increased 2002 reserves by $49.6 million, 2003 reserves by $64.8 million and 2004 reserves by $15.3 million, for a total increase of $129.7 million. The adverse development triggered additional premiums and interest on such additional premiums of $105.3 million, which are not reflected in the table above.

Changes in loss estimates principally arise from changes in underlying reported, incurred and paid claims data on contracts. Other assumptions used in our process, such as inflation, change infrequently in the reserving process and we do not perform a sensitivity analysis of changes in these assumptions. Given the variety of assumptions and judgments involved in establishing reserves for losses and benefits on our insurance and reinsurance and U.S. excess and surplus lines insurance portfolios, we have not designed and maintained a system to capture and quantify the financial impact of changes in each of our underlying individual assumptions and judgments.

For additional information on our reserves, including a reconciliation of losses and loss adjustment expense reserves for the years ended December 31, 2007, 2006 and 2005, please refer to Note 6 of our audited consolidated financial statements included herein.

Life and Annuity Reinsurance Benefit Reserve Process

Our life and annuity reinsurance benefit reserves are compiled by our life and annuity actuaries on a contract-by-contract basis and are computed on a discounted basis using standard actuarial techniques and cash flow models. We establish and review our life and annuity reinsurance benefit reserves regularly based upon cash flow projection models utilizing data provided by clients and actuarial models. We establish and maintain our life and annuity reinsurance reserves at a level that we estimate will, when taken together with future premium payments and interest income expected to be earned on associated premiums, be sufficient to support all future cash flow benefit and third party servicing obligations as they become payable.

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Since the development of our life and annuity reinsurance benefit reserves is based upon cash flow projection models, we must make estimates and assumptions based on industry tables regarding mortality, morbidity, lapse, expense and investment experience. We establish these estimates based upon transaction specific historical experience, information provided by the ceding company and industry experience studies. Actual results could differ materially from these estimates. We monitor actual experience and, where circumstances warrant, revise our assumptions and the related life and annuity reinsurance reserve estimates. We record these revisions in the period they are determined.

There have been no material reserve adjustments to our life and annuity reinsurance benefit reserves during the years ended December 31, 2007, 2006 and 2005.

Investments

We own a portfolio of investment grade fixed maturities that are available for sale and, as a result, we record the investments at fair value on our balance sheet. The unrealized gain or loss associated with the difference between the fair value and the amortized cost of the investments is recorded in other comprehensive income in the equity section of our balance sheet. Fixed maturities are subject to fluctuations in fair value due to changes in the interest rates, changes in issuer specific circumstances such as credit rating and changes in industry specific circumstances such as movements in credit spreads based on the markets perception of industry risks. As a result of these potential fluctuations, it is possible to have significant unrealized gains or losses on a security. Our strategy for our fixed maturities portfolio is to tailor the maturities of the portfolio to the timing of expected loss and benefit payments. At maturity, fixed maturities’ amortized cost will equal their fair value and no realized gain or loss will be recognized in income. If, due to an unforeseen change in loss payment patterns, we need to sell investments before maturity, we could realize significant gains or losses in any period, which could result in a meaningful effect on reported net income for such period.

In order to reduce the likelihood of needing to sell investments before maturity, especially given the unpredictable and potentially significant cash flow requirements of our property catastrophe business, we maintain significant cash and cash equivalent balances and can access our credit facility, which is described in Note 17 of our audited consolidated financial statements. We believe we have the ability to hold those securities in an unrealized loss position until such time as they reach maturity or the fair value increases. The only time we would expect to realize an other than temporary impairment on a fixed maturity security is if there were concern about receiving the interest payments and the maturity value of the investment. We perform regular reviews of our fixed maturities portfolio and utilize a model that considers numerous indicators in order to identify investments that are showing signs of potential other than temporary impairments. The indicators include the issuer’s financial condition and ability to make future scheduled interest and principal payments, the nature of collateral or other credit support and significant economic events that have occurred that affect the industry in which the issuer participates.

We utilize dynamic financial analysis to determine our overall asset and liability risk and the potential for adverse scenarios producing projected losses and potential adverse cash flow. This analysis is accomplished through a stochastic simulation of future periods with each asset and liability cash flow individually modeled. This 5000 path stochastic simulation utilizes the expected volatility of each of our individual asset and liability cash flows. We construct our asset portfolio based on the expected cash flows from our liability portfolio. Fixed maturities securities are purchased to meet cash flows along the entire maturity spectrum of the liabilities. In our dynamic financial analysis modeling we assume that alternative investments will liquidate in years five through ten, so fixed maturities securities are purchased to meet liability cash flows in years one through five and for liability cash flows beyond ten years. Our liability cash flows are highly variable. Because of this risk, we maintain a significant cash balance, which has consistently exceeded $250.0 million, and presently we have aggregate letter of credit facilities of up to $720.0 million, with an additional $200.0 million available subject to certain conditions. We have also generated over $300.0 million of positive operating cash flow in each of the five years ended December 31, 2007.

Our investments are carried at fair value or amounts that approximate fair value. Fair value for our investments in fixed maturities is generally based on: (i) quoted market prices for identical or similar instruments in active markets, or quoted market prices; or (ii) model-derived valuations from independent pricing sources in which all significant inputs and significant value drivers are observable in active markets, or model-derived valuations. The ability to obtain quoted market prices is reduced in periods of decreasing liquidity, and this increases the use of model-derived valuations and the uncertainty surrounding the fair value estimates. We obtain fair value estimates from multiple independent pricing sources in an effort to mitigate some of the uncertainty surrounding the fair value estimates.

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Fair value for our alternative investments is generally based on the net asset value reported by the respective investment fund managers or, for our reinsurance equity investment, based on the carried amount under the equity method of accounting. The investment fund managers generally carry their trading positions and investments at fair value and greater than 90% of the underlying holdings are securities with quoted market prices. For underlying securities that do not have quoted market prices, fair value is estimated by the fund manager. We use the financial reports from the fund managers as part of our evaluation of fair value in order to record the net gains on alternative investments in our statement of income. In addition, audited financial statements are obtained annually for each of the funds held in our alternative investment portfolio and we have never had a material difference between the reported net asset value of a fund and the audited net asset value.

As at December 31, 2007, our Max Diversified alternative investment portfolio contained 35 underlying investments in 9 different strategies. We focus on risk, as opposed to return, in the selection of each of our alternative investments. This causes us to select individual alternative investments that have exhibited attractive risk/reward characteristics and low correlation to other investments in the portfolio, as opposed to individual investments that have shown the highest return, but also higher volatility of return. We then combine the selected individual alternative investments into a portfolio of alternative investments. By combining investments with moderate volatility and low correlations, we are able to achieve an alternative investment portfolio within Max Diversified that has overall lower volatility relative to investing in a common stock portfolio or a typical fund of hedge funds portfolio.

We have constructed our alternative investment portfolio to have significantly less risk, as measured by standard deviation of return, than a common stock portfolio, which is the equity investment choice of many insurance organizations. For the five years ended December 31, 2007, our Max Diversified alternative investment portfolio has produced an annual standard deviation of return of 4.35% compared to the annual standard deviation of return of 8.61% for the S&P 500 Index. The annualized five year return on our Max Diversified alternative investment portfolio of 10.98% compares to the S&P 500 Index return of 12.12% for the same period, and with lower volatility as measured by standard deviation. There is significant risk in all investment activities, and the results of our alternative investment portfolio will vary over time with the investment markets. Our Max Diversified alternative investments have produced consistently positive results for every annual period since inception and have shown approximately one-half the volatility of the S&P 500 Index.

	Annual Return
Year	Max Diversified		S&P 500 Index
2007	16.78	%	5.49	%
2006	6.30	%	11.85	%
2005	5.88	%	3.00	%
2004	9.81	%	10.87	%
2003	16.67	%	28.67	%

Despite the lower volatility of the alternative investment portfolio there is potential for losses, as there is for any investment portfolio. We approach our investment strategies based on long term performance and believe the annualized five year return of our Max Diversified portfolio of 10.98% demonstrates a superior return profile compared to other alternative investment vehicles.

Investments in reinsurance private equities, where we have a meaningful ownership position and the ability to exercise significant influence over operating and financial policies of the investee, are carried under the equity method of accounting. Under this method, we initially record the investments at cost and periodically adjust the carrying values to recognize our proportionate share of income or loss and dividends from these investments. Future adverse changes in general market, global and economic conditions, changes to the interest and currency rate environment or poor operating results by our investments carried under the equity method of accounting could result in losses. At December 31, 2007, our total investment in reinsurance private equity was an interest in Grand Central Re of $3.9 million.

See Note 2 to our audited consolidated financial statements included herein for our significant accounting policies.

Results of Operations

We monitor the performance of our underwriting operations in four segments:

• Property and casualty reinsurance – This segment generally offers quota share and excess of loss capacity providing coverage for a portfolio of underlying risks written by our clients.

• Property and casualty insurance – This segment generally offers excess of loss capacity on specific risks related to individual insureds.

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• U.S. excess and surplus lines insurance – This segment comprises the underwriting operations of all of the company’s U.S.-based business. Max Specialty offers property and casualty coverage as an eligible non-admitted insurer on an excess and surplus basis in the United States.

• Life and annuity reinsurance – This segment generally offers reinsurance products focusing on existing blocks of business, which take the form of co-insurance transactions. In co-insurance transactions, risks are reinsured on the same basis as the original policies.

We also have a corporate function that manages our investment and financing activities.

The U.S. excess and surplus lines insurance segment has its own portfolio of fixed maturities investments. The investment income earned by our U.S. subsidiaries is reported in that segment.

Invested assets relating to the three non-U.S. segments are managed on a consolidated basis. Consequently, investment income on this consolidated portfolio and gains on the alternative investment portfolio (collectively referred to as the “non-U.S. portfolio”) are not directly captured in the non-U.S. segments. However, because of the longer duration of liabilities on casualty insurance and reinsurance business and life and annuity reinsurance business, investment returns are important in evaluating the profitability of these segments. Accordingly, we allocate investment returns from the non-U.S. portfolio to each non-U.S. segment. This is based on a notional allocation of invested assets from the total portfolio using durations that are determined based on estimated cash flows into and out of each segment. The balance of investment returns are allocated to our corporate function. The investment returns for our strategic private equity reinsurance investment are allocated entirely to the corporate function.

51

Results of Underwriting Operations

Property and Casualty Reinsurance Segment

	2007			% change		2006			% change		2005
	In millions of US Dollars
Gross premiums written	$	345.2		(18.5	)%	$	423.6		(31.2	)%	$	615.7
Reinsurance premiums ceded		(44.6	)	26.3	%		(35.3	)	(31.9	)%		(51.8	)
Net premiums written		300.6		(22.6	)%		388.3		(31.1	)%		563.9
Net premiums earned(a)		312.9		(26.0	)%		422.8		(30.4	)%		607.1
Net investment income		41.1		6.5	%		38.6		16.3	%		33.2
Net gains on alternative investments		53.0		162.4	%		20.2		9.2	%		18.5
Total revenues		407.0					481.6					658.8
Losses(b)(c)		173.3		(41.5	)%		296.0		(46.5	)%		552.8
Acquisition costs(c)		60.9		(21.2	)%		77.3		5.0	%		73.6
Interest expense		11.9					(3.8	)				11.5
General and administrative expenses (c)		28.4		20.9	%		23.5		56.7	%		15.0
Total losses and expenses		274.5		(30.2	)%		393.0		(39.8	)%		652.9
Net income before taxes	$	132.5				$	88.6				$	5.9
Loss ratio(b)/(a)		55.4	%				70.0	%				91.1	%
Combined ratio(c)/(a)		83.9	%				93.9	%				105.7	%

The loss ratio is calculated by dividing losses (shown as (b)) by net premium earned (shown as (a)). The combined ratio is calculated by dividing the sum of losses, acquisition costs and general and administrative expenses (shown as (c)) by net premiums earned (shown as (a)).

	Year Ended December 31, 2007		% of Premium Written		Year Ended December 31, 2006		% of Premium Written		Year Ended December 31, 2005		% of Premium Written
	In millions of U.S. Dollars
Gross Premiums Written by Type of Risk:
Accident and health		—	0	%		7.6	1.8	%		7.8	1.3	%
Aviation		34.1	9.9	%		35.4	8.4	%		43.0	6.9	%
Excess Liability		16.7	4.8	%		66.9	15.8	%		39.9	6.5	%
Medical Malpractice		53.1	15.4	%		53.4	12.6	%		40.7	6.6	%
Other		7.0	2.0	%		0.7	0.2	%		8.2	1.3	%
Professional Liability		33.7	9.8	%		60.7	14.3	%		102.6	16.7	%
Property and property catastrophe		89.2	25.8	%		67.5	15.9	%		30.5	5.0	%
Marine & Energy		47.1	13.6	%		29.2	6.9	%		43.8	7.1	%
Whole Account		15.1	4.4	%		43.5	10.3	%		177.6	28.8	%
Workers Compensation		49.2	14.3	%		58.7	13.8	%		121.6	19.8	%
	$	345.2	100.0	%	$	423.6	100.0	%	$	615.7	100.0	%

52

Gross premiums written. Gross premiums written for the property and casualty reinsurance segment for the year ended December 31, 2007 were $345.2 million compared to $423.6 million for the year ended December 31, 2006, a decrease of 18.5%. Gross premiums written for excess liability, professional liability, whole account and workers compensation lines decreased in total by $115.1 million largely as a result of the non-renewal of four contracts and the restructuring of two reinsurance contracts at renewal. In addition, there was a reduction of $9.3 million in premium estimates on contracts written in prior periods. This reduction includes a $15.2 million adjustment to previously recognized additional premiums on one contract where we are entitled to additional premiums should losses exceed pre-determined, contractual thresholds. Based on updated information received from the client during the year, our estimate of losses has been revised downwards, resulting in a corresponding adjustment to premiums. These decreases were partially offset by growth in property and property catastrophe and marine and energy business where pricing remained at satisfactory levels. Our emphasis in recent years has been to write smaller accounts with a greater number of clients and vary the underlying exposures assumed. As a result, we expect fewer significant premium adjustments or additional premiums than in prior years. The level of business written in future periods will vary, perhaps materially, based on market conditions and management’s assessment of the adequacy of premium rates relative to the underlying risk being assumed.

We continue to monitor pricing and market trends closely and changes to our premium mix reflect the risk types where we believe our price requirements, terms and conditions are being met. As a result, our gross reinsurance premium volume and mix may vary from period to period. In addition, changes in client appetite for risk retentions will vary with market conditions and may also cause fluctuations in our premium volume and mix. For the foreseeable future, we expect to see softening premium rates and increased competition for business. As a result, we expect downward pressure on our property and casualty reinsurance premium volume.

Gross premiums written for the property and casualty reinsurance segment for the year ended December 31, 2006 were $423.6 million compared to $615.7 million for the year ended December 31, 2005, a decrease of 31.2%. Additional premiums of $182.0 million arising from the notification of additional losses on two excess of loss contracts written in prior years are included in the gross premiums written for the year ended December 31, 2005 compared with additional premiums of $16.7 million in the year ended December 31, 2006. This decrease in additional premiums is the primary reason for the 31.2% decrease in gross premiums written. There were no other significant changes to premium estimates on prior period contracts. Gross premiums written for the property and casualty reinsurance segment for the year ended December 31, 2006 reflected our emphasis on writing a greater number of smaller transactions.

Reinsurance premiums ceded. Reinsurance premiums ceded for property and casualty reinsurance for the year ended December 31, 2007 were $44.6 million compared to $35.3 million for the year ended December 31, 2006, an increase of 26.3%. The increase was principally attributable to our reinsurance quota share treaty that is utilized to manage our retained exposure on our property business. We also purchased additional excess of loss protection for our property and aviation reinsurance business in the year ended December 31, 2007.

Reinsurance premiums ceded for property and casualty reinsurance for the year ended December 31, 2006 were $35.3 million compared to $51.8 million for the year ended December 31, 2005, a decrease of 31.9%. The decrease was largely due to $27.3 million of reinsurance premiums ceded during the year ended December 31, 2005, which were directly related to the $182.0 million of additional premiums written on two contracts written in a prior year, as described above. This compares to $2.5 million of reinsurance premiums ceded during the year ended December 31, 2006 in relation to additional premiums written. The decline in premiums ceded in relation to additional premiums was partially offset by an increase in purchased excess of loss reinsurance to manage our exposure to significant catastrophe events.

Net premiums earned. Net premiums earned for property and casualty reinsurance decreased by 26.0% to $312.9 million for the year ended December 31, 2007 from $422.8 million in 2006. The decrease is principally attributable to lower gross premiums written and higher reinsurance premiums ceded and earned in the year ended December 31, 2007.

Net premiums earned for property and casualty reinsurance decreased by 30.4% to $422.8 million for the year ended December 31, 2006 from $607.1 million in 2005. The decrease was primarily the result of the decrease in additional premiums described above.

Net investment income and gains on alternative investments. The overall performance of our fixed maturities portfolio and alternative investment portfolio is discussed within the corporate function results of operations as we manage investments for our non-U.S. segments on a consolidated basis.

Losses. Losses relating to property and casualty reinsurance were $173.3 million for the year ended December 31, 2007 compared to $296.0 million for the year ended December 31, 2006, a decrease of 41.5%. The decrease in losses for the year ended December 31, 2007 is principally attributable to the following:

• A decrease in net premiums earned of $109.9 million resulting in a corresponding decrease in net losses of $76.9 million at a 70.0% loss ratio;

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• Net favorable development of $13.0 million stemming from one contract where updated information received from the client indicated reported losses lower than previously expected;

• An agreement to settle a large block of prior period reserves resulting in a net $15.2 million release in reserves;

• Net favorable development of $36.0 million arising from the re-estimation of liabilities from our quarterly and annual actuarial review process. During the year ended December 31, 2007, a large number of contracts were adjusted to reflect either favorable or adverse development which has aggregated to produce net favorable development. There were no individual contracts or lines of business with significant development. Marine, medical malpractice, professional liability and workers’ compensation all had between $5.0 million and $10.0 million in favorable development, with most other lines of business having between $nil and $5.0 million in favorable development;

• Adverse development of $20.0 million on a marine reinsurance quota share contract that had losses in relation to the 2005 hurricanes. As a result of this development the contract has reached the aggregate limit;

• During the year ended December 31, 2007, we received information on a number of contracts that indicated lower than expected losses. As a result, we recognized $5.0 million in favorable development of prior year reserves. These contracts contained provisions for the adjustment of ceding commissions within a range based on losses incurred on the contract. As a result, the favorable development was largely offset by additional acquisition costs.

The increase in our property and property catastrophe business as a percentage of total net earned premium in a year with lower than expected large loss events has led to a decline in our average loss ratio for the segment, which has been partially offset by the purchase of additional excess of loss reinsurance in 2007.

Losses relating to property and casualty reinsurance were $296.0 million for the year ended December 31, 2006 compared to $552.8 million for the year ended December 31, 2005, a decrease of 46.5%. The losses for the year ended December 31, 2006 reflect expected loss activity on our casualty business combined with below average catastrophe losses on our recently expanded property reinsurance business. The losses for the year ended December 31, 2005 include $73.4 million of losses attributable to the hurricanes in the United States and $179.9 million of net losses pertaining to additional losses notified on two excess of loss contracts written in a prior year. The loss ratio for our property and casualty reinsurance segment for the year ended December 31, 2006 was 70.0% compared to 91.1% for the year ended December 31, 2005. Excluding hurricane losses and losses that triggered additional premiums in 2005, the adjusted loss ratio for our property and casualty reinsurance segment is 66.3%. The adjusted 2005 loss ratio is lower in part due to a large commutation that was made during the 2005 year.

Acquisition costs. Acquisition costs were $60.9 million for the year ended December 31, 2007 compared to $77.3 million for the year ended December 31, 2006, a decrease of 21.2%. The percentage decrease in acquisition costs is lower than the percentage decrease in net premiums earned due to the adjustment of the ceding commission on a number of contracts as described in the losses section above. Acquisition costs vary from contract to contract depending on characteristics such as the type of business, the clients’ cost to administer the underlying contracts and the involvement of a broker. These factors may result in differences in the ratio of acquisition costs to net premiums earned from period to period.

Acquisition costs were $77.3 million for the year ended December 31, 2006 compared to $73.6 million for the year ended December 31, 2005, an increase of 5.0%. The increase in acquisition costs for the year ended December 31, 2006 is due to higher average acquisition costs on premiums earned.

Interest expense. Interest expense was $11.9 million for the year ended December 31, 2007 compared to $(3.8) million for the year ended December 31, 2006. Interest expense includes $9.3 million of interest expense pertaining to the funds withheld on the variable quota share retrocession agreement with Grand Central Re for the year ended December 31, 2007 compared to $7.0 million for the year ended December 31, 2006. The interest expense on the Grand Central Re funds withheld is based on the average of two total return fixed maturity indices, which had a higher total return for the year ended December 31, 2007 compared to the year ended December 31, 2006.

Interest expense also includes the accretion of interest expense on a number of reinsurance contracts that are not deemed to transfer risk under the requirements of Statement of Financial Accounting Standards No. 113 and therefore are recorded as deposit liabilities on the balance sheet. These deposit liabilities are recorded on a net present value basis and an interest expense is recorded and added to the liability over the life of the contract so as to equal the expected ultimate settlement amount. During 2006, we were notified by the cedant of one of the contracts that the ultimate loss is expected to be lower than our original estimate. As a result we recognized a reduction in interest expense of $12.0 million during the year ended December 31, 2006 in order to reflect the current net present value of the revised loss estimate.

Interest expense was $(3.8) million for the year ended December 31, 2006 compared to $11.5 million for the year ended December 31, 2005. Interest expense includes the $12.0 million reduction described in the paragraph above and $7.0 million of interest expense pertaining to the funds withheld on the variable quota share retrocession agreement with Grand Central Re for the year ended December 31, 2006 compared to $6.0 million for the year ended December 31, 2005. The interest expense on the Grand Central Re funds withheld is based on the average of two total return fixed maturity indices, which had a higher total return for the year ended December 31, 2006 compared to the year ended December 31, 2005.

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General and administrative expenses. General and administrative expenses were $28.4 million for the year ended December 31, 2007 compared to $23.5 million for the year ended December 31, 2006, an increase of 20.9%. The increase partially reflects an increasingly mature book of business and the additional claims and underwriting staff hired since December 31, 2006, in order to service a larger client base. The increase also reflects higher incentive based compensation stemming from the net income generated by this segment for the year ended December 31, 2007.

General and administrative expenses were $23.5 million for the year ended December 31, 2006 compared to $15.0 million for the year ended December 31, 2005, an increase of 56.7%. The increase resulted principally from personnel costs associated with an increased headcount within our reinsurance staff. In addition there was an increase in incentive-based compensation as a result of net income that exceeded plan for the year ended December 31, 2006.

Net income. Net income attributable to property and casualty reinsurance for the year ended December 31, 2007 was $132.5 million compared to $88.6 million for the year ended December 31, 2006. Major components of the increase were $15.2 million release of net loss reserves related to an the agreement to settle a large block of prior period reserves and the net favorable development of $16.0 million on various lines of business. Additionally, the 16.97% return on alternative investments for the year ended December 31, 2007 compared to a 6.96% return in the year ended December 31, 2006, accounted for $32.8 million of the increase. Partially offsetting these increases was the increase in interest expense of $15.7 million compared to the prior year.

Net income attributable to property and casualty reinsurance for the year ended December 31, 2006 was $88.6 million compared to $5.9 million for the year ended December 31, 2005. The primary difference in net income for the year ended December 31, 2006 compared with the year ended December 31, 2005 is the $73.4 million of losses stemming from hurricane activity impacting the year ended December 31, 2005. Further, additional invested assets combined with improved returns on both fixed maturities and the Max Diversified portfolio increased net income for the year ended December 31, 2006.

Property and Casualty Insurance Segment

	2007			% change		2006			% change		2005
	In millions of US Dollars
Gross premiums written	$	382.9		(3.5)	%	$	396.6		11.6	%	$	355.3
Reinsurance premiums ceded		(202.0)		3.9	%		(194.5)		33.5	%		(145.7)
Net premiums written		180.9		(10.4)	%		202.1		(3.6)	%		209.6
Net premiums earned(a)		199.6		0.9	%		197.9		14.5	%		172.9
Net investment income		16.1		8.1	%		14.9		43.3	%		10.4
Net gains on alternative investments		14.3		180.4	%		5.1		45.7	%		3.5
Total revenues		230.0					217.9					186.8
Losses(b)		153.8		23.8	%		124.2		(29.2)	%		175.5
Acquisition costs		(1.2)					(0.1)					0.1
General and administrative expenses		19.4		24.4	%		15.6		57.6	%		9.9
Total losses and expenses(c)		172.0		23.1	%		139.7		(24.7)	%		185.5
Net income before taxes	$	58.0				$	78.2				$	1.3
Loss ratio(b)/(a)		77.1	%				62.8	%				101.5	%
Combined ratio(c)/(a)		86.2	%				70.6	%				107.3	%

The loss ratio is calculated by dividing losses (shown as (b)) by net premium earned (shown as (a)). The combined ratio is calculated by dividing losses and expenses (shown as (c)) by net premiums earned (shown as (a)).

55

	Year Ended December 31, 2007		% of Premium Written		Year Ended December 31, 2006		% of Premium Written		Year Ended December 31, 2005		% of Premium Written
					In millions of U.S. Dollars
Gross Premiums Written by Type of Risk:
Aviation	$	41.0	10.7	%	$	21.9	5.6	%	$	—	0.0	%
Excess Liability		131.5	34.3	%		162.8	41.0	%		176.9	49.8	%
Professional Liability		157.4	41.1	%		150.9	38.0	%		144.1	40.6	%
Property		53.0	13.9	%		61.0	15.4	%		34.3	9.6	%
	$	382.9	100.0	%	$	396.6	100.0	%	$	355.3	100.0	%

Gross premiums written. Gross premiums written for the property and casualty insurance segment for the year ended December 31, 2007 were $382.9 million compared to $396.6 million for the year ended December 31, 2006, a decrease of 3.5%. The decrease is principally attributable to the reduction of gross premiums written in the excess liability line of business as a result of increased competition for appropriately priced business. This decrease is offset by increased gross premiums written in the aviation and professional liability business. Typically, insurance business is written on an individual risk excess of loss basis with contractually defined premiums rather than estimates, which generally results in no material premium adjustments.

We continue to monitor pricing and market trends closely and changes to our premium mix reflect the risk types where we believe our price requirements, terms and conditions are being met. As a result, our gross insurance premium volume and mix may vary from period to period. In addition, changes in client appetite for risk retentions will vary with market conditions and may also cause fluctuations in our premium volume and mix. For the foreseeable future, we expect to see softening rates for our excess liability, professional liability and property lines of business and increased competition in all lines of business that we write.

Gross premiums written for the property and casualty insurance segment for the year ended December 31, 2006 were $396.6 million compared to $355.3 million for the year ended December 31, 2005, an increase of 11.6%. The increase was the result of the expansion of our property insurance business from 9.6% of insurance premium volume in 2005 to 15.4% in 2006. In addition, 5.6% of the insurance premium volume relates to our aviation insurance business, which we began writing in October 2006.

Reinsurance premiums ceded. Reinsurance premiums ceded for insurance for the year ended December 31, 2007 were $202.0 million compared to $194.5 million for the year ended December 31, 2006, an increase of 3.9%. Reinsurance premiums ceded were principally related to our quota share treaties that are utilized to manage our retained exposure and, therefore, will tend to increase when gross premiums written increase. However, the increase in premiums ceded, despite the decrease in gross premiums written, is principally related to increasing the percentage ceded to our property quota share treaty and to reinstatement premiums recognized in relation to our aviation excess of loss reinsurance contracts that were triggered by aviation losses, including a Brazilian airline crash, in 2007. As a result, the ratio of reinsurance premiums ceded to gross premiums written for the year ended December 31, 2007 was 52.8% compared to 49.0% for the year ended December 31, 2006.

Reinsurance premiums ceded for insurance for the year ended December 31, 2006 were $194.5 million compared to $145.7 million for the year ended December 31, 2005, an increase of 33.5%. Reinsurance premiums ceded were principally related to our quota share treaties that are utilized to manage our retained exposure and, therefore, will tend to increase when gross premiums written increase. In addition, because we increased the volume of short-tail property and aviation business that we write, we purchased excess of loss reinsurance in order to reduce our exposure to large catastrophe events. This resulted in the ratio of reinsurance premiums ceded to gross premiums written for the year ended December 31, 2006 increasing to 49.0% compared to 41.0% for the year ended December 31, 2005.

Net premiums earned. Net premiums earned on insurance increased by 0.9% to $199.6 million for the year ended December 31, 2007 compared to the year ended December 31, 2006 and by 14.5% to $197.9 million for the year ended December 31, 2006 compared to the year ended December 31, 2005. The increases are attributable to our expansion of the insurance segment over the past three years and reflects the earning pattern of a mature portfolio of insurance contracts.

Net investment income and gains on alternative investments. The overall performance of our fixed maturities portfolio and alternative investment portfolio is discussed within the corporate function results of operations as we manage investments for our non-U.S. segments on a consolidated basis.

56

Losses. Losses relating to insurance were $153.8 million for the year ended December 31, 2007 compared to $124.2 million for the year ended December 31, 2006, an increase of 23.8%. During the year ended December 31, 2007, we recorded $1.7 million net favorable development on our excess liability reserves and $5.7 million net favorable development on our property reserves compared to net favorable development of $20.5 million on reserves for the year ended December 31, 2006. The favorable development in 2007 was partially offset by a net loss of $5.6 million stemming from aviation losses in 2007. The loss ratio for our insurance segment for the year ended December 31, 2007 was 77.1% compared to 62.8% for the same period in 2006. The addition of aviation to our premium mix has contributed to in an increase in our average loss ratio for this segment.

Losses relating to insurance were $124.2 million for the year ended December 31, 2006 compared to $175.5 million for the year ended December 31, 2005, a decrease of 29.2%. The decrease is principally due to a reduction of the expected ultimate losses on our 2003 excess liability insurance business and larger weighting of property business with lower average loss ratios. Our loss reserve analysis on this business, which has seasoned due to the passage of time, continued to show lower reported losses than originally estimated, which caused us to recognize positive development of $20.5 million during the year ended December 31, 2006. In addition, a low level of attritional property insurance losses during the year ended December 31, 2006 compared to $50.0 million of catastrophe losses due to hurricane activity during the year ended December 31, 2005 has affected the comparability between the two periods. The loss ratio for our insurance segment for the year ended December 31, 2006 was 62.8% compared to 101.5% for the same period in 2005. Excluding hurricane losses, the adjusted loss ratio for our property and casualty insurance segment was 72.6% in 2005.

Acquisition costs. Acquisition costs were $(1.2) million for the year ended December 31, 2007 compared to $(0.1) million for the year ended December 31, 2006 and $0.1 million for the year ended December 31, 2005. The acquisition costs are net of ceding commissions associated with premiums ceded to our quota share partners. These ceding commissions are designed to compensate us for the costs of producing the portfolio of risks ceded to our reinsurers, and have increased as our premiums ceded have increased.

General and administrative expenses. General and administrative expenses were $19.4 million for the year ended December 31, 2007 compared to $15.6 million for the year ended December 31, 2006, an increase of 24.4%. The increase principally relates to additional claims and underwriting staff hired since December 31, 2006, in order to service a larger client base.

General and administrative expenses were $15.6 million for the year ended December 31, 2006 compared to $9.9 million for the year ended December 31, 2005, an increase of 57.6%. The increase resulted principally from expenses associated with an increased headcount within our insurance staff. In addition there has been an increase in incentive-based compensation as a result of the improved net income for the year ended December 31, 2006.

Net income. Net income attributable to the property and casualty insurance segment for the year ended December 31, 2007 was $58.0 million compared to $78.2 million for the year ended December 31, 2006. The decrease is principally attributable to the reduced level of favorable development on reserves compared to the year ended December 31, 2006, together with the increase in the average loss ratio for the segment, partially offset by the $9.2 million increase in net gains on alternative investments.

Net income attributable to the property and casualty insurance segment for the year ended December 31, 2006 was $78.2 million compared to $1.3 million for the year ended December 31, 2005. The variance between the year ended December 31, 2006 and the year ended December 31, 2005 is principally attributable to the low level of catastrophic events during the year ended December 31, 2006 compared to the $50.0 million of hurricane losses in the year ended December 31, 2005 and the release of $20.5 million of net reserves on prior year general liability insurance business during the year ended December 31, 2006. Further, additional invested assets combined with improved returns on both the fixed maturities and alternative investment portfolios has increased net income for the year ended December 31, 2006.

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U.S. Excess and Surplus Lines Insurance Segment

Our U.S. excess and surplus lines segment, which comprises the underwriting operations of our U.S.-based business, principally Max Specialty, commenced underwriting activities in April 2007. Therefore, there are no comparative figures for 2006 and 2005.

	2007
Gross premiums written	$	48.2
Reinsurance premiums ceded		(34.6	)
Net premiums written	$	13.6
Net premiums earned(a)	$	4.0
Net investment income		6.0
Net gains on alternative investments		—
Total revenues		10.0
Losses(b)		3.3
Acquisition costs		0.4
General and administrative expenses		17.4
Total losses and expenses(c)	$	21.1
Net loss before taxes	$	(11.1	)
Loss ratio(b)/(a)		82.0	%
Combined ratio(c)/(a)		N/A

The loss ratio is calculated by dividing losses (shown as (b)) by net premium earned (shown as (a)). The combined ratio is calculated by dividing total losses and expenses (shown as (c)) by net premiums earned (shown as (a)). Due to the start-up nature of the U.S. excess and surplus lines insurance segment, the calculated combined ratio does not provide a meaningful result and is therefore shown as N/A.

	Year Ended December 31, 2007		% of Premium Written
	In millions of U.S. Dollars
Gross Premiums Written by Type of Risk:
Property	$	34.7	72.0	%
General Liability		12.3	25.5	%
Marine		1.2	2.5	%
	$	48.2	100.0	%

Gross premiums written and net premiums earned. Gross premiums written by the U.S. excess and surplus lines segment for the year ended December 31, 2007 were $28.2 million produced by the brokerage division and $20.0 million produced by the contract binding division. Gross premiums written for the year ended December 31, 2007 were below our original expectations, which we partially attribute to the longer than anticipated time required acquiring access to all U.S. states, and, in particular, California. Our maintenance of underwriting discipline in the face of a softening market environment also contributed to the lower than expected premium volume. We expect the volume of underwriting submissions received and gross premiums written to increase in 2008 as we further establish our presence in the specialty niche markets where we offer our products. Our ability to write business for a full year in 2008 is a significant difference from our position in 2007 and is expected to contribute to increased premium volume in 2008 compared to 2007. Reinsurance premiums ceded reflect the purchase of quota share and excess of loss reinsurance coverage to manage our retained exposure for both the brokerage and contract binding divisions.

Net premiums earned of $4.0 million for the year ended December 31, 2007 reflect the short period of time since Max Specialty began writing business. We expect this figure to increase as gross premium written volume increases.

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Net investment income. Net investment income, which excludes realized and unrealized gains and losses, comprises principally interest on cash and fixed maturities investments held by Max Specialty. The average annualized investment yield on cash and fixed maturities held by Max Specialty for the year ended December 31, 2007 was 5.08%.

General and administrative expenses. General and administrative expenses were $17.4 million for the year ended December 31, 2007. General and administrative expenses principally comprise personnel and infrastructure costs reflecting the start-up period of the Max Specialty operations. Compared to our other segments, we expect this segment to have the highest volume of transactions and the lowest average dollar value per transaction. This will require a greater number of personnel to generate and process the high volume of transactions customary for this operation and, accordingly, we expect a higher general and administrative expense ratio for this segment compared to our other segments.

Net loss. Net loss attributable to the U.S. excess and surplus lines insurance segment for the year ended December 31, 2007 was $11.1 million. The net loss is principally attributable to the start-up nature of this segment. Gross premium written volume has not yet grown to a level commensurate with the infrastructure put in place in 2007. We expect growth in general and administrative expenses to slow in 2008 and gross premium written to increase as we move into our first full year of operations.

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Life and Annuity Reinsurance Segment

	2007		% change		2006		% change		2005
	In millions of US Dollars
Gross premiums written	$	301.9	570.9	%	$	45.0	(83.6)	%	$	275.0
Reinsurance premiums ceded		(0.5)	(28.6)	%		(0.7)	(53.3)	%		(1.5)
Net premiums written		301.4	580.4	%		44.3	(83.8)	%		273.5
Net premiums earned		301.4	580.4	%		44.3	(83.8)	%		273.5
Net investment income		33.9	16.9	%		29.0	9.8	%		26.4
Net gains on alternative investments		60.7	165.1	%		22.9	24.5	%		18.4
Total revenues		396.0				96.2				318.3
Benefits		345.6	344.2	%		77.8	(75.0)	%		311.2
Acquisition costs		1.2	(29.4)	%		1.7	(32.0)	%		2.5
Interest expense		6.9	32.7	%		5.2	57.6	%		3.3
General and administrative expenses		2.8	(6.7)	%		3.0	(14.3)	%		3.5
Total benefits and expenses		356.5	306.5	%		87.7	(72.6)	%		320.5
Net income (loss) before taxes	$	39.5			$	8.5			$	(2.2)
Number of transactions written		6				1				3

We write life and annuity reinsurance transactions when opportunities arise. The nature of life and annuity reinsurance transactions that we consider results in a limited number of transactions actually bound with potentially large variations in quarterly and annual premium volume. Consequently, components of our underwriting results, such as premiums written, premiums earned and benefits can be volatile and, accordingly, period to period comparisons are not necessarily representative of future trends.

Gross premiums written. Gross premiums written for the life and annuity reinsurance segment for the year ended December 31, 2007 were $301.9 million compared to $45.0 million for the year ended December 31, 2006 and compared to $275.0 million for the year ended December 31, 2005. During the year ended December 31, 2007, we wrote six reinsurance contracts, each covering closed blocks of pension annuities, compared to one contract written in 2006. Of the gross premium written in 2007, $207.9 million was from new clients and $91.4 million was from the reinsurance of additional closed blocks of annuities for existing clients. These additional closed blocks of annuities have similar characteristics to reinsurance contracts written in previous years. We believe our strong relationships with our existing clients provided the opportunity to underwrite these additional transactions.

Gross premiums written during the year ended December 31, 2006, primarily relate to one new reinsurance contract written. We wrote three reinsurance contracts during the year ended December 31, 2005. Apart from the components related to the new contracts incepting during the years ended December 31, 2007, 2006 and 2005, gross premiums written, reinsurance premiums ceded, net premiums earned, acquisition costs and general and administrative expenses represent ongoing premium receipts or adjustments and related administration expenses on existing contracts. Interest expense relates to interest on funds withheld on the variable quota share retrocession agreement with Grand Central Re. The interest expense is based on the average of two total return fixed maturity indices, which varies from period to period.

Net investment income and gains on alternative investments. The overall performance of our fixed maturities portfolio and alternative investment portfolio is discussed within the corporate function results of operations as we manage investments for our non-U.S. segments on a consolidated basis.

Benefits. Benefits relating to the life and annuity reinsurance segment were $345.6 million for the year ended December 31, 2007 compared to $77.8 million for the year ended December 31, 2006. Benefits relating to new contracts were $299.3 million and $41.9 million for the years ended December 31, 2007 and 2006, respectively. Except for new contracts written during the year, benefits in each period represent expected changes in existing policy and claim liabilities, plus the effect of unexpected changes in our existing policy and claim liabilities. There were no material unexpected changes in our policy and claim liabilities in the years ended December 31, 2007, 2006 and 2005.

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Benefits relating to the life and annuity reinsurance segment were $77.8 million for the year ended December 31, 2006 compared to $311.2 million for the year ended December 31, 2005. The decrease was principally due to the decline in premiums written and earned during the year ended December 31, 2006 compared to the year ended December 31, 2005.

Net income (loss). Net income attributable to the life and annuity reinsurance segment for the year ended December 31, 2007 was $39.5 million compared to $8.5 million for the year ended December 31, 2006 and $(2.2) million for the year ended December 31, 2005. The results are driven by the increasing spread between our actual rate of return on investments and the rate of return assumption used when pricing the business that we write, together with the lack of material unexpected changes in our estimates of life and annuity benefit reserves.

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Corporate Function

	2007		% change		2006		% change		2005
	In millions of US Dollars
Net investment income	$	188.2	25.5	%	$	150.0	40.4	%	$	106.8
Less: net investment income allocated to underwriting segments		(97.1)				(82.5)				(70.0)
Balance of net investment income		91.1				67.5				36.8
Net gains on alternative assets		186.7	120.2	%		84.8	112.5	%		39.9
Less: net gains on alternative assets allocated to underwriting segments		(128.0)				(48.2)				(40.4)
Balance of net gains on alternative investments		58.7				36.6				(0.5)
Net realized gains (losses) on sale of fixed maturities		(4.0)	(31.0)	%		(5.8)	728.6	%		(0.7)
Other income		0.7	(30.0)	%		1.0	(78.3)	%		4.6
Interest expense		(23.9)	92.7	%		(12.4)	55.0	%		(8.0)
General and administrative expenses not included in segment results		(38.7)	12.2	%		(44.1)	64.6	%		(26.8)
Net income before taxes excluding segment results	$	83.9	96.5	%	$	42.8	n/a		$	5.4

Net investment income. Net investment income from our cash and fixed maturities portfolio, which excludes realized and unrealized gains and losses, for the year ended December 31, 2007 increased $38.2 million to $188.2 million compared to $150.0 million for the year ended December 31, 2006, an increase of 25.5%. The increase was principally attributable to the growth in the cash and fixed maturities portfolio from $3,470.0 million at December 31, 2006 to $4,060.9 million at December 31, 2007, together with an increase in yield on the fixed maturities portfolio. The average annualized investment yield on the cash, fixed maturities investments and funds withheld by clients for the year ended December 31, 2007 was 4.96% compared to 4.73% for the year ended December 31, 2006. We expect a lower yield in 2008 due to the lower interest rates stemming from the downward movement in the U.S. Federal Open Market Committee’s discount rate between August 2007 and January 2008.

Net investment income from our cash and fixed maturities portfolio, excluding realized and unrealized gains and losses, for the year ended December 31, 2006 increased $43.2 million to $150.0 million compared to $106.8 million for the year ended December 31, 2005, an increase of 40.4%. The increase was principally attributable to the growth in the cash and fixed maturities portfolio from $2,996.9 million at December 31, 2005 to $3,470.0 million at December 31, 2006, resulting from cash flow from operations since December 31, 2005 and the additional capital we raised in the fourth quarter of 2005 in connection with a public offering of our common shares. The average annualized investment yield on the cash, fixed maturities investments and funds withheld by clients for the year ended December 31, 2006 was 4.73% compared to 4.29% for the year ended December 31, 2005 reflecting an increase in average interest rates in 2006 compared to 2005.

Net gains on alternative investments. Net gains on the alternative investment portfolio for the year ended December 31, 2007, were $186.7 million, or 16.97%, including a gain of $2.4 million from our private equity reinsurance investment, compared to $84.8 million, or 6.96%, including a gain of $10.0 million from our private equity reinsurance investments, for the year ended December 31, 2006. Our alternative investment portfolio excluding our private equity reinsurance investment, comprises the investments held in our Max Diversified fund of funds portfolio. For 2007, the return from our Max Diversified portfolio was 16.78%. This return is compared to the returns available in the capital markets as represented by the Merrill Lynch Master Bond Index returning 7.17%, the Standard & Poor’s 500 Index returning 5.49% and the HFRI Fund of Funds Index returning 10.25%.

Each alternative investment strategy we employed was profitable during the year ended December 31, 2007. Alternative investment strategies principally contributing to the gains in the current period were the event driven arbitrage and long/short equity strategies, which returned 36.14% and 26.94%, respectively. Contributing to the returns were meaningful gains from a variety of long and short sub-prime mortgage positions taken by several of the underlying funds in our Max Diversified portfolio. The event driven arbitrage strategy typically entails the purchase of securities of a company involved in a significant corporate event. The long/short equity strategy comprises funds that typically purchase common

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stock (go long) of companies in a particular sector with perceived strong fundamentals and sell common stock (go short) of companies in the same sector that are perceived to have deteriorating fundamentals. While this strategy can profit from either positive or negative price trends in the overall stock market, investment managers of long/short equity funds generally have a net long position and returns tend to benefit from upward movement in the stock market and be negatively affected by declines in the stock market. As at December 31, 2007, 16.1% and 25.4% of our alternative investments were allocated to the event driven arbitrage and long/short equity strategies, respectively.

Net gains on the alternative investment portfolio were $84.8 million, or 6.96%, including a gain of $10.0 million from our private equity reinsurance investments, for the year ended December 31, 2006 compared to $39.9 million, or 3.34%, including a loss of $26.2 million from our private equity reinsurance investments, for the year ended December 31, 2005. For 2006, the return from our Max Diversified fund of funds portfolio was 6.30%. The return for the year ended December 31, 2006 is net of $35.0 million stemming from energy trading losses in certain hedge fund investments included in our Diversified Arbitrage strategy. This return is compared to the returns available in the capital markets as represented by the Merrill Lynch Master Bond Index returning 4.32% and the Standard & Poor’s 500 Index returning 11.85%. For 2005, the return from our Max Diversified fund portfolio was 5.88%. This return is compared to the returns available in the capital markets as represented by the Merrill Lynch Master Bond Index returning 2.55% and the Standard & Poor’s 500 Index returning 3.0%.

On December 28, 2006, as part of our plan to reduce our allocation to alternative investments, Max Bermuda consummated the sale of one of its private equity investments, an approximately 5% interest in DaVinci Re Holdings Ltd. and its operating subsidiary DaVinci Reinsurance Ltd., a Bermuda property catastrophe reinsurer, for a sale price equal to book value.

Net realized losses on sale of fixed maturities. Our fixed maturities investment strategy is not intended to generate significant realized gains and losses as more fully discussed below. The net realized losses for the years ended December 31, 2007, December 31, 2006 and December 31, 2005 of $4.0 million, $5.8 million and $0.7 million, respectively, are principally the result of the sale of fixed maturities in connection with normal portfolio rebalancing transactions. Net realized losses for the year ended December 31, 2007 includes $1.7 million of gross realized losses resulting from the sale of fixed maturities triggered by an agreement to settle a block of prior period reserves.

We perform regular reviews of our fixed maturities portfolio in order to identify investments that are showing signs of potential other than temporary impairments. The indicators include the issuer’s financial condition and ability to make future scheduled interest and principal payments, the nature of collateral or other credit support and significant economic events that have occurred that affect the industry in which the issuer participates. At December 31, 2007, our fixed maturities portfolio contains securities with a total fair value of $144.7 million that are insured against credit default. For the year ended December 31, 2007, net realized losses include $1.1 million for the recognition of an other than temporary impairment on one security for which we believe there is significant doubt regarding collecting the final maturity value. There were no other than temporary impairment losses in the years ended December 31, 2006 and 2005.

Our portfolio of investment grade fixed maturities includes mortgage-backed and asset-backed securities and collateralized mortgage obligations. These types of securities have cash flows that are backed by the principal and interest payments of a group of underlying mortgages or other receivables. During 2007, delinquency and default rates have increased on these types of securities, and particularly on securities backed by sub-prime mortgages. Generally, sub-prime mortgages are considered to be those made to borrowers who do not qualify for market interest rates for one or more possible reasons, such as a low credit score, a limited or lack of credit history or a lack of earnings documentation. As a result of the increasing default rates of sub-prime borrowers, there is a greater risk of defaults on mortgage-backed and asset-backed securities and collateralized mortgage obligations, especially those that are non-investment grade. Therefore, fixed maturities securities backed by sub-prime mortgages have exhibited significant declines in fair value and liquidity. These factors combined with the contraction in liquidity in the principal markets for these securities makes the estimate of fair value increasingly uncertain. The fair values of our holdings in securities exposed to sub-prime borrowers are generally not based on quoted prices for identical securities, but are based on model-derived valuations from independent pricing sources in which all significant inputs and significant value drivers are observable in active markets. We obtain fair value estimates from multiple independent pricing sources in an effort to mitigate some of the uncertainty surrounding the fair value estimates. Should we need to liquidate these securities within a short period of time, the actual realized proceeds may be significantly different from the fair values estimated at December 31, 2007. We believe our exposure to sub-prime credit risk is limited although there can be no assurance that events in the sub-prime mortgage sector will not adversely affect the value of our investments. At December 31, 2007, securities with significant exposure to sub-prime borrowers totaled $54.2 million in fair value, $58.0 million in amortized cost, and $58.3 million in par value, for a net unrealized loss of $3.8 million. By fair value, 90% of these securities are AAA-rated with the remainder AA-rated. The weighted average life of these securities is 3.0 years. We have determined that a write-down for impairment of these securities is not necessary based on a consideration of relevant factors including prepayment rates, subordination levels, default rates, credit ratings, weighted average life, credit default insurance and cash flow testing. Together with our investment managers, we continue to monitor our potential exposure to sub-prime borrowers and we will make adjustments to the investment portfolio as necessary.

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The following table summarizes the amortized cost and fair value of our fixed maturities securities with exposure to sub-prime or Alt-A mortgages as at December 31, 2007. Generally, Alt-A mortgages are considered to be those made to borrowers who do not qualify for market interest rates but who are considered to have less credit risk than sub-prime borrowers.

	Weighted Average Life in Years	AAA Senior Tranche		Credit Rating AAA Junior Tranche		AA		Amortized Cost		Fair Value
	In millions of U.S. Dollars
By Vintage Year
Fixed maturities with sub-prime exposure
Pre-2005	3.5	$	7.8	$	0.5	$	2.6	$	10.9	$	10.6
2005	2.4		3.3		—		3.4		6.7		6.4
2006	3.0		32.9		5.0		—		37.9		34.9
2007	3.3		2.5		—		—		2.5		2.3
Total	3.0		46.5		5.5		6.0		58.0		54.2
Fixed maturities with Alt-A exposure
Pre-2005	4.2		7.1		—		—		7.1		7.0
2005	1.7		—		20.6		—		20.6		20.5
2006	1.4		6.9		10.0		—		16.9		16.8
2007	3.0		4.5		—		—		4.5		4.4
Total	2.1		18.5		30.6		—		49.1		48.7
Total	2.6	$	65.0	$	36.1	$	6.0	$	107.1	$	102.9

Interest expense. Interest expense was $23.9 million for the year ended December 31, 2007 compared to $12.4 million for the year ended December 31, 2006. Interest expense principally reflects interest on our bank loans and senior notes outstanding. Our swap loan, described below under “Financial Condition – Bank Loans,” attracts interest at a rate based on LIBOR plus a spread. The notional amount of this loan increased from $210.0 million to $280.0 million between December 31, 2006 and December 31, 2007. Our $50.0 million revolver loan, also described below, attracts interest at a rate based on LIBOR plus a spread, and was drawn on April 3, 2007. As at December 31, 2007, we had $100.0 million in senior notes outstanding that were issued by Max USA on April 16, 2007, which mature in April 2017, and bear interest at 7.20%. Interest expense for the year ended December 31, 2007 has increased primarily due to the increase in outstanding debt compared to the same period in 2006.

Interest expense was $12.4 million for the year ended December 31, 2006 compared to $8.0 million for the year ended December 31, 2005, an increase of 55.0%. Interest expense in both 2006 and 2005 was based on LIBOR plus a spread applied to the swap loan. The increase principally reflects the increase in LIBOR from 2005 to 2006.

General and administrative costs. General and administrative expenses were $38.7 million for the year ended December 31, 2007 compared to $44.1 million for the year ended December 31, 2006, and $26.8 million for the year ended December 31, 2005. The decrease in general and administrative expenses during the year ended December 31, 2007 compared to 2006 is principally from a decrease in professional service fees.

Financial Condition

Cash and invested assets. Aggregate invested assets, comprising cash and cash equivalents, fixed maturities and alternative investments, were $5,122.6 at December 31, 2007 compared to $4,535.9 million at December 31, 2006, an increase of 12.9%. The increase in cash and invested assets resulted principally from $443.3 million in cash flows from operations and $100.6 million in cash flows from financing in the year ended December 31, 2007.

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Liabilities for property and casualty losses. Property and casualty losses totaled $2,333.9 million at December 31, 2007 compared to $2,335.1 million at December 31, 2006. The decrease in property and casualty losses was principally attributable to the settlement of a block of prior period reserves in the amount of $203.6 million, resulting in a release of $23.3 million in reserves, favorable reserve development of $15.3 million from one contract written where reported losses have been lower than originally recorded based on updated information received from the client and $30.9 million of positive development resulting from our internal review of reserves. During the year ended December 31, 2007, we also paid $280.6 million in property and casualty losses in addition to the settlement previously described. Largely offsetting the payment of property and casualty losses and the favorable development were losses incurred of $394.1 million pertaining to earned premium for the year ended December 31, 2007.

Liabilities for life and annuity benefits. Life and annuity benefits totaled $1,203.5 million at December 31, 2007 compared to $895.6 million at December 31, 2006. The increase was principally attributable to new life and annuity reinsurance contracts written during the year ended December 31, 2007, which added $299.3 million to reserves, together with changes in policy and claims liabilities, and foreign exchange movements on liabilities. This was partially offset by benefit payments of $96.6 million during the year.

Losses and benefits recoverable from reinsurers. Losses and benefits recoverable from reinsurers totaled $578.3 million at December 31, 2007 compared to $538.0 million at December 31, 2006, an increase of 7.5%, principally reflecting losses ceded under our reinsurance and retrocessional agreements resulting from net earned premiums during the year ended December 31, 2007. Grand Central Re, our largest retrocessionaire, accounted for 20.4% of our losses and benefits recoverable at December 31, 2007. A.M. Best has assigned a financial strength rating of “NR-4” to Grand Central Re. We retain funds from Grand Central Re amounting to approximately 107.5% of its loss recoverable obligations.

The principal component of the remainder of losses recoverable relates to amounts due from reinsurers of our property and casualty insurance risks. The loss recoverable from these reinsurers represent 67.8% of losses recoverable at December 31, 2007 and all are presently rated “A-” or above by A.M. Best Company.

Bank loans. In February 2003, Max Bermuda completed a sale of 127,549 shares of its subsidiary, Max Diversified to a third party financial institution, or the Bank, for a fair value of $150.0 million, or the notional amount. Simultaneous with the sale, Max Bermuda entered into a total return swap with the Bank whereby Max Bermuda receives the return earned on the Max Diversified shares in exchange for the payment of a variable rate of interest based on LIBOR plus a spread. The terms of the share sale obligate the Bank to sell the shares to Max Bermuda and give Max Bermuda the right to repurchase the shares at fair value at termination of the total return swap. On February 28, 2007 Max Bermuda amended the swap transaction. The notional amount under the swap was increased to $235.0 million and the number of shares sold to the Bank was increased to 143,952. In addition, the amendment, among other things: (i) extended the termination date under the swap to February 28, 2010; (ii) increased the maximum notional amount under the swap to $300.0 million; (iii) decreased the monthly excess collateral requirement under the swap from 50% to 33% of the notional amount; and (iv) permits Max Bermuda to accelerate the swap termination date to a business day no earlier than February 28, 2009. Max Diversified shares with a fair value of $93.4 million at December 31, 2007 were pledged to the Bank as collateral and to which Max Bermuda is thus exposed to credit risk. The swap transaction contains provisions for earlier termination at Max Bermuda’s option or in the event that Max Bermuda fails to comply with certain covenants, including maintaining a minimum financial strength rating and a minimum Max Diversified net asset value.

Under GAAP, the non-controlling interest in Max Diversified and the total return swap are recorded on a combined basis and accounted for as a financing transaction. The effect of combining the transactions results in the notional amount being presented as a bank loan, with changes in the fair value of the Max Diversified shares increasing or decreasing this notional amount. At December 31, 2007, the notional amount of the loan was approximately $280.0 million.

On April 2, 2007, Max USA completed the acquisition of Max Specialty. On April 3, 2007, Max Capital borrowed $50.0 million and Max USA borrowed $100.0 million under their revolving credit facility, in connection with the acquisition and capitalization of Max Specialty. Max USA repaid the $100.0 million borrowed under their revolving credit facility with the proceeds of the issuance of $100.0 million of senior notes. As of December 31, 2007, the $50.0 million revolver loan to Max Capital remains outstanding. This loan renews at intervals of 1-6 months at Max Capital’s option, at which time the interest rate is reset to LIBOR plus a premium based on Max Capital’s current debt rating. As of December 31, 2007 the interest rate is at 5.63%.

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Senior notes. On April 16, 2007, Max USA privately issued $100.0 million principal amount of 7.20% senior notes, due April 14, 2017, with interest payable on April 16 and October 16 of each year, beginning on October 16, 2007. The senior notes are Max USA’s senior unsecured obligations and rank equally in right of payment with all existing and future senior unsecured indebtedness of Max USA. The senior notes are fully and unconditionally guaranteed by Max Capital. The effective interest rate related to the senior notes, based on the net proceeds received, was approximately 7.27%. The net proceeds from the sale of the senior notes were $99.5 million and they were used to repay the $100.0 million short-term borrowing of Max USA under the revolving credit facility.

Shareholders’ equity. Our shareholders’ equity increased to $1,583.9 million at December 31, 2007 from $1,390.1 million at December 31, 2006, an increase of 13.9%, principally reflecting net income of $303.2 million, partially offset by the repurchase of common shares of $114.4 million, and payments of dividends of $19.2 million during the year ended December 31, 2007.

Liquidity. We generated $443.3 million of cash from operations during the year ended December 31, 2007 compared to $518.6 million for the year ended December 31, 2006, a decrease of 14.5%. The two principal factors that impact our operating cash flow are premium collections and timing of loss and benefit payments. For the year ended December 31, 2007, two of the largest events impacting operating cash flows were the $252.6 million increase in life and annuity reinsurance premiums written compared to the year ended December 31, 2006, partially offset by the agreement to settle a block of prior period loss reserves for $203.6 million.

The casualty business we write generally has a long claim-tail and we expect that we will generate significant operating cash flow as we accumulate loss and benefit reserves on our balance sheet. As we continue to diversify into property, property catastrophe and aviation business, which generally has a short claim-tail, and as losses are incurred, we expect potential volatility in our operating cash flow levels. We believe that our loss and benefit reserves currently have an average duration of approximately 5.0 years and we expect to see increases in the amount of expected loss payments in future periods with a resulting decrease in operating cash flow. We do not expect loss payments to exceed the premiums generated and therefore expect to have continued positive cash flow. However, actual premiums written and collected and losses and benefits paid in any period could vary from our expectations and could have a meaningful effect on operating cash flow.

While we tailor our fixed maturities portfolio to match the duration of expected loss and benefit payments, increased loss amounts or settlement of losses and benefits earlier than anticipated can result in greater cash needs. We maintain a meaningful working cash balance (typically greater than $250.0 million), have generated positive cash flow from operations in each of our seven years of operating history and can access our credit facilities described in Note 17 of our audited consolidated financial statements. We believe that we currently maintain sufficient liquidity to cover existing requirements and provide for contingent liquidity. Nonetheless, it is possible that significant deviations in expected loss and benefit payments can occur, potentially requiring us to liquidate a portion of our fixed maturities portfolio. If it became necessary to liquidate these securities within a short period of time, the actual realized proceeds may be significantly different from the fair values estimated at December 31, 2007, resulting in realized losses.

As a holding company, Max Capital’s principal assets are its investments in the common shares of its principal subsidiary, Max Bermuda, and its other subsidiaries. Max Capital’s principal source of funds is from interest income on cash balances and cash dividends from its subsidiaries, including Max Bermuda. The payment of dividends is limited under Bermuda insurance laws. In particular, Max Bermuda may not declare or pay any dividends if it is in breach of its minimum solvency or liquidity levels under Bermuda law or if the declaration or payment of the dividends would cause it to fail to meet the minimum solvency or liquidity levels under Bermuda law. At December 31, 2007, Max Bermuda, which is required to have approximately $270.0 million in statutory capital and surplus in order to pay dividends, had approximately $1,600.0 million in statutory capital and surplus.

In the ordinary course of business, we are required to provide letters of credit or other regulatory approved security to certain of our clients to meet contractual and regulatory requirements. We have three credit facilities as of December 31, 2007 providing an aggregate of $720.0 million of letter of credit capacity, and subject to certain conditions, up to an additional $200.0 million in capacity. Each of our credit facilities requires that we comply with certain substantially similar covenants, including a minimum consolidated tangible net worth, a minimum insurer financial strength rating and restrictions on the payment of dividends. We were in compliance with all the covenants of each of our credit facilities at December 31, 2007.

Capital resources. At December 31, 2007, our capital structure consisted of common equity. Total capitalization amounted to $1,583.9 million as compared to $1,390.1 million at December 31, 2006, an increase of 13.9%. On August 20, 2007, we filed a shelf registration statement with the SEC indicating that we may periodically issue up to $500.0 million in debt securities, common, preferred and depository shares and warrants. Subject to market conditions, we believe we have flexibility with respect to capitalization as a result of our access to the debt and equity markets.

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In April 2007, Max USA sold $100.0 million aggregate principal amount of 7.20% senior notes due April 14, 2017. The senior notes are guaranteed by Max Capital. The senior notes were assigned a senior unsecured debt rating of “Baa2” by Moody’s, “bbb-” by A.M. Best, “BBB+” by Fitch, and “BBB-” by S&P, all with a stable outlook. The ratings assigned by rating agencies to reinsurance and insurance companies are based upon factors and criteria established independently by each rating agency. They are not an evaluation directed to investors in our senior notes, and are not a recommendation to buy, sell or hold our senior notes. These ratings are subject to periodic review by the rating agencies or may be revised downward or revoked at the sole discretion of the rating agencies.

Max Capital’s board of directors declared dividends of $0.07 per share on each of February 9, 2007 and May 4, 2007, and $0.09 per share on each of July 27, 2007 and November 1, 2007, payable to shareholders of record on February 23, 2007, May 18, 2007, August 10, 2007 and November 15, 2007, respectively. Continuation of cash dividends in the future will be at the discretion of the board of directors and will be dependent upon our results of operations and cash flows, and our financial position and capital requirements, general business conditions, legal, tax, regulatory and any contractual restrictions on the payment of dividends and other factors the board of directors deems relevant. On February 12, 2008, Max Capital’s board of directors declared a dividend of $0.09 per share to be paid on March 11, 2008 to shareholders of record on February 26, 2008.

The financial strength ratings of our reinsurance and insurance subsidiaries are currently “A-” by A.M. Best, “A” by Fitch, and “A3” by Moody’s. These ratings reflect each rating agency’s opinion of our financial strength, operating performance and ability to meet obligations. If an independent rating agency downgrades or withdraws any of our ratings, we could be severely limited or prevented from writing any new insurance or reinsurance contracts, which would significantly and negatively affect our business. Insurer financial strength ratings are based upon factors relevant to policyholders and are not directed toward the protection of investors.

No off-balance sheet arrangements. We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Contractual Obligations

	Payment due by period (thousands of dollars)
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Swap loan obligations	$	317,777	$	16,790	$	300,987	$	—	$	—
Revolver loan obligations		50,000		50,000		—		—		—
Senior Notes		168,400		7,200		14,400		14,400		132,400
Operating lease obligations		20,968		3,799		7,539		5,663		3,967
Property and casualty losses		2,333,877		735,095		753,189		285,201		560,392
Life and annuity benefits		1,836,496		98,733		185,681		168,573		1,383,509
Deposit liabilities		239,004		48,152		111,155		12,115		67,582
Total	$	4,966,522	$	959,769	$	1,372,951	$	485,952	$	2,147,850

The reserves for losses and benefits together with deposit liabilities represent management’s estimate of the ultimate cost of settling losses, benefits and deposit liabilities. As more fully discussed in our “Critical Accounting Policies—Losses and benefits” above, the estimation of losses and benefits is based on various complex and subjective judgments. Actual losses and benefits paid may differ, perhaps significantly, from the reserve estimates reflected in our financial statements. Similarly, the timing of payment of our estimated losses and benefits is not fixed and there may be significant changes in actual payment activity. The assumptions used in estimating the likely payments due by period are based on our historical claims payment experience and industry payment patterns, but due to the inherent uncertainty in the process of estimating the timing of such payments, there is a risk that the amounts paid in any such period can be significantly different than the amounts disclosed above.

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The amounts in this table represent our gross estimates of known liabilities as of December 31, 2007 and do not include any allowance for claims for future events within the time period specified. Accordingly, it is highly likely that the total amounts paid out in the time periods shown will be greater than that indicated in the table.

Furthermore, life and annuity benefits recorded in the financial statements at December 31, 2007 are computed on a discounted basis, whereas the expected payments by period in the table above are the estimated payments at a future time and do not reflect a discount of the amount payable.

New Accounting Pronouncements

Financial Accounting Standard No. 157—Fair Value Measurements

In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standard No. 157, “Fair Value Measurements”, or FAS 157. FAS 157 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure about fair value measurements. FAS 157 nullifies the guidance included in Emerging Issues Task Force Issue No. 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities,” or EITF 02-3, that prohibited recognition of day one gains or losses on derivative transactions where model inputs that significantly impact valuation are not observable. In addition, FAS 157 prohibits the use of block discounts for large positions of unrestricted financial instruments that trade in an active market and requires an issuer to incorporate changes in its own credit spreads when determining the fair value of its liabilities. FAS 157 is effective for fiscal years beginning after November 15, 2007. The provisions of FAS 157 are to be applied prospectively, except that the provisions related to block discounts and existing derivative financial instruments measured under EITF 02-3 are to be applied as a one-time cumulative effect adjustment to opening retained earnings in the year of adoption. The adoption of FAS 157 on January 1, 2008 is not expected to have a material impact on our consolidated financial statements.

Financial Accounting Standard No. 159—The Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued Financial Accounting Standard No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, or FAS 159. FAS 159 permits an entity to choose, at specified election dates, to measure eligible financial instruments and certain other items at fair value that are not currently required to be measured at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. FAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. FAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. At the effective date, an entity may elect the fair value option for eligible items that exist at that date. The entity shall report the effect of the first re-measurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. We have elected not to apply the fair value option to any eligible assets or liabilities held as at December 31, 2007.

Financial Accounting Standard No. 160—Noncontrolling Interests in Consolidated Financial Statements – an Amendment of ARB No. 51

In December 2007, the FASB issued Financial Accounting Standard No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51”, or FAS 160. FAS 160 requires reporting entities to present noncontrolling (minority) interests as equity (as opposed to as a liability or mezzanine equity) and provides guidance on the accounting for transactions between an entity and noncontrolling interests. FAS 160 is effective for fiscal years beginning on or after December 15, 2008, except for the presentation and disclosure requirements which will be applied retrospectively for all periods presented. We are currently evaluating the effect of FAS 160 on our consolidated financial statements.

Financial Accounting Standard No. 141R—Business Combinations (Revised)

In December 2007, the FASB issued Financial Accounting Standard No. 141(R), “Business Combinations”, or FAS 141(R). FAS 141(R) requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. FAS 141(R) applies to all transactions or other events in which the reporting entity obtains control of one or more businesses, including those sometimes referred to as “true

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mergers” or “mergers of equals” and combinations achieved without the transfer of consideration, for example, by contract alone or through the lapse of minority veto rights. FAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We are currently evaluating the effect of FAS 141(R) on our consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We engage in an investment strategy that combines a fixed maturities investment portfolio and an alternative investment portfolio that employ strategies to manage investment risk. We attempt to maintain adequate liquidity in our cash and fixed maturities investment portfolio to fund operations, pay reinsurance and insurance liabilities and claims and provide funding for unexpected events. We seek to manage our credit risk through industry and issuer diversification, and interest rate risk by monitoring the duration and structure of our investment portfolio relative to the duration and structure of our liability portfolio. We are exposed to potential loss from various market risks, primarily changes in interest rates, credit spreads and equity prices. Accordingly, earnings would be affected by these changes. We manage our market risk based on Board-approved investment policies. With respect to our fixed maturities investment portfolio, our risk management strategy and investment policy is to invest in debt instruments of investment grade issuers and to limit the amount of credit exposure with respect to particular ratings categories and any one issuer. We select investments with characteristics such as duration, yield, currency and liquidity that are tailored to the cash flow characteristics of our property and casualty and life and annuity liabilities.

As of December 31, 2007, all securities held in our fixed maturities portfolio were rated BBB-/Baa3 or above. Our current policy is not to hold securities rated lower than BBB-/Baa3 in our fixed maturities investment portfolio, and to maintain a minimum weighted average credit rating quality of AA2/Aa. At December 31, 2007, the impact on the fixed maturities investment portfolio from an immediate 100 basis point increase in market interest rates would have resulted in an estimated decrease in market value of 4.04%, or approximately $148.0 million, and the impact on the fixed maturities investment portfolio from an immediate 100 basis point decrease in market interest rates would have resulted in an estimated increase in market value of 4.60%, or approximately $168.5 million.

With respect to our alternative investment portfolio, although our fund advisor is contractually obligated to abide by our investment guidelines, we do not directly control the allocation of our assets to strategies or underlying funds, nor do we control the manner in which they are invested by our fund managers. However, we consistently and systematically monitor the strategies and funds in which we are invested, and we believe our overall risk is limited as a result of our selected strategies’ low volatility and low correlation to the bond market, the stock market and each other. At December 31, 2007, the estimated impact on the alternative investment portfolio from an immediate 100 basis point increase in market interest rates would have resulted in an estimated increase in market value of 0.60%, or approximately $6.4 million, and the impact on the alternative investment portfolio from an immediate 100 basis point decrease in market interest rates would have resulted in an estimated decrease in market value of 0.60%, or approximately $6.4 million. Another method that attempts to measure portfolio risk is Value-at-Risk, or VaR. VaR is a statistical risk measure, calculating the level of potential losses that could be expected to be exceeded, over a specified holding period and at a given level of confidence, in normal market conditions, and is expressed as a percentage of the portfolio’s initial value. Since the VaR approach is based on historical positions and market data, VaR results should not be viewed as an absolute and predictive gauge of future financial performance or as a way for the Company to predict risk. At December 31, 2007 our alternative investment portfolio’s VaR was estimated to be 4.0% at the 99% level of confidence and with a three month time horizon.

Computations of the prospective effects of hypothetical interest rate changes are based on numerous assumptions, including the maintenance of the existing level and composition of fixed income security assets, and should not be relied on as indicative of future results.

Certain shortcomings are inherent in the method of analysis used in the computation of the fair value of fixed rate instruments. Actual values may differ from those projections presented should market conditions vary from assumptions used in the calculation of the fair value of individual securities, including non-parallel shifts in the term structure of interest rates and a change in individual issuer credit spreads.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Information with respect to this item is set forth under Item 15.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Part A. Evaluation of Disclosure Controls and Procedures.

Our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, the “Exchange Act”), which we refer to as disclosure controls, are controls and procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this annual report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any control system. A control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are met. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

As of December 31, 2007, an evaluation was carried out under the supervision and with the participation of our company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of disclosure controls. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls were effective to ensure that material information relating to our company is made known to management, including the Chief Executive Officer and Chief Financial Officer, particularly during the period when our periodic reports are being prepared.

Part B. Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). Our company’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. There are inherent limitations to the effectiveness of any control system. A control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are met. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our assessment, we believe that, as of December 31, 2007, the company’s internal control over financial reporting is effective based on those criteria.

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE

The information required in response to this Item is contained under the captions “Proposal One—Election Of Directors Of The Company,” “Composition, Meetings and Committees of the Board of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement, to be filed on or about March 19, 2008, with the SEC pursuant to Regulation 14A. These portions of the Proxy Statement are hereby incorporated by reference herein.

We have adopted a written code of ethics, the “Max Capital Group Ltd. Code of Business Conduct and Ethics,” that applies to all our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller and other executive officers identified pursuant to this Item 10 who perform similar functions, which we refer to as the Selected Officers. The code is posted on our website at http://www.maxcapgroup.com. We will disclose any material changes in or waivers from our code of ethics applicable to any Selected Officer on our website at http://www.maxcapgroup.com or by filing a Form 8-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required in response to this Item is contained under the captions “Compensation Discussion and Analysis,” “Summary Compensation Table,” “Grants of Plan Based Awards,” “Outstanding Equity Awards at Fiscal Year-End,” “Option Exercises and Stock Vested,” “Pension Benefits,” “Non-Qualified Deferred Compensation,” “Potential Payments Upon Termination or Change in Control,” “Director Compensation,” “Employment Agreements,” “2000 Incentive Plan,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in the Proxy Statement. These portions of the Proxy Statement are hereby incorporated by reference herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required in response to this Item is contained under the captions “Security Ownership of Certain Beneficial Owners, Officers And Directors” and “Securities Authorized for Issuance Under Equity Compensation Plans” in the Proxy Statement. These portions of the Proxy Statement are hereby incorporated by reference herein.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required in response to this Item is contained under the captions “Certain Relationships and Related Transactions,” and “Composition, Meetings, and Committees of Board of Directors” in the Proxy Statement. These portions of the Proxy Statement are hereby incorporated by reference herein.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required in response to this Item is contained under the caption “Principal Accountant Fees and Services” in the Proxy Statement. This portion of the Proxy Statement is hereby incorporated by reference herein.

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PART IV

ITEM 15. FINANCIAL STATEMENT SCHEDULES

	Page
(a)(1) Financial Statements
Report of the Independent Registered Public Accounting Firm (on the consolidated financial statements and on internal control over financial reporting)	F-1
Consolidated Balance Sheets as of December 31, 2007 and 2006	F-2
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2007, 2006 and 2005	F-3
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2007, 2006 and 2005	F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005	F-5
Notes to Consolidated Financial Statements	F-6
(a)(2) Financial Statement Schedules:
Schedule II—Condensed Financial Information of Registrant	F-34
Schedule III—Supplementary Insurance Information	F-37
Schedule IV—Supplementary Reinsurance Information	F-38

(a)(3) Exhibits

Exhibit	Description
3(i)	Memorandum of Association. (incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement No. 333-62006)
3(ii)	Amended and Restated Bye-laws of Max Capital. (incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003)
3(iii)	Certificate of Incorporation of Max USA. (incorporated by reference to Exhibit 3.4 of the Company’s Registration Statement No. 333-145585)
3(iii)	Bylaws of Max USA. (incorporated by reference to Exhibit 3.5 of the Company’s Registration Statement No. 333-145585)
4.1	Specimen Common Share Certificate. (incorporated by reference to Exhibit 4.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)

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4.2	Form of Warrant. (incorporated by reference to Exhibit 4.2 of the Company’s Registration Statement No. 333-62006)
4.3	Form of Senior Debt Indenture. (incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement No. 333-145585)
4.4	Form of Subordinated Debt Indenture. (incorporated by reference to Exhibit 4.4 of the Company’s Registration Statement No. 333-145585)
4.5	Form of Junior Subordinated Debt Indenture. (incorporated by reference to Exhibit 4.5 of the Company’s Registration Statement No. 333-145585)
4.6	Form of Senior Indenture. (incorporated by reference to Exhibit 4.6 of the Company’s Registration Statement No. 333-145585)
4.7	Form of Subordinated Indenture. (incorporated by reference to Exhibit 4.7 of the Company’s Registration Statement No. 333-145585)
4.8	Certificate of Trust. (incorporated by reference to Exhibit 4.12 of the Company’s Registration Statement No. 333-145585)
4.9	Declaration of Trust. (incorporated by reference to Exhibit 4.13 of the Company’s Registration Statement No. 333-145585)
4.10	Form of Amended and Restated Declaration of Trust. (incorporated by reference to Exhibit 4.14 of the Company’s Registration Statement No. 333-145585)
4.11	Trust Agreement. (incorporated by reference to Exhibit 4.15 of the Company’s Registration Statement No. 333-145585)
4.12	Form of Preferred Securities Guarantee Agreement. (incorporated by reference to Exhibit 4.16 of the Company’s Registration Statement No. 333-145585)
10.1	Form of Shareholders’ Agreement, dated as of December 22, 1999, among Max Capital, Max Bermuda and certain other signatories. (incorporated by reference to Exhibit 10.1 of the Company’s Registration Statement No. 333-62006)
10.2	Employment Agreement, effective as of November 13, 2006 and executed December 8, 2006, by and between Max Capital and W. Marston Becker. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on December 14, 2006)
10.3	Retirement and Separation Agreement, dated as of March 6, 2007, between Keith S. Hynes and Max Capital. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on March 12, 2007)
10.4	Employment Agreement, dated as of July 27, 2007, by and between Max Capital and Peter A. Minton. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on July 30, 2007)
10.5	Employment Agreement, dated as of July 27, 2007, by and between Max Capital and Joseph W. Roberts (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on July 30, 2007)
10.6	Employment Agreement, dated as of July 27, 2007, by and between Max Bermuda and Angelo M. Guagliano. (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on July 30, 2007)
10.7	Employment Agreement, dated as of December 8, 2006, by and between Max USA and Stephen J. Vaccaro, Jr.
10.8	2000 Stock Incentive Plan. (incorporated by reference to Exhibit 10.7 of the Company’s Registration Statement No. 333-62006)

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10.9	Amendment to the 2000 Stock Incentive Plan, approved in May 2002. (incorporated by reference to Exhibit 10.8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002)
10.10	Amendment to the 2000 Stock Incentive Plan, approved in April 2005. (incorporated by reference to Exhibit 10.7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005)
10.11	Form of Stock Option Agreement.
10.12	Form of Restricted Stock Unit Agreement.
10.13	Forms of Restricted Stock Award Agreements.
10.14	Form of Director Restricted Stock Award Agreement. (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007)
10.15	Credit Agreement, dated as of August 7, 2007, among Max Bermuda and Max Capital, as borrowers, various financial institutions as the lenders, ING Bank N.V., London Branch and Citibank, NA, as co-syndication agents, Bank of America, National Association, as fronting bank, as administrative agent, and as letter of credit administrator for the lenders and Banc of America Securities LLC, as sole lead arranger and book manager. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on August 13, 2007)
10.16	Credit Agreement, dated December 22, 2006, by and between Max Bermuda as borrower and The Bank of Nova Scotia as the Lender. (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on December 22, 2006)
10.17	Amendment No. 1 to Credit Agreement with The Bank of Nova Scotia. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on December 21, 2007)
10.18	Letter of Credit Reimbursement Agreement, dated as of November 23, 2004, between Max Bermuda and ING Bank N.V., London Branch. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on November 29, 2004)
10.19	Investment Management Agreement dated as of May 1, 2000, between General Re-New England Asset Management, Inc. and Max Bermuda. (incorporated by reference to Exhibit 10.13 of the Company’s Registration Statement No. 333-62006)
10.20	Total Return Swap Confirmation, dated as of February 18, 2003, between Max Bermuda and Canadian Imperial Bank of Commerce. (incorporated by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002)
10.21	Amendment, dated February 28, 2007, to the Total Return Swap Confirmation, dated as of February 18, 2003, between Max Bermuda and Canadian Imperial Bank of Commerce.
10.22	Second Amended and Restated Customer Agreement and Trading Authorization, dated as of February 14, 2006, between Max Diversified and Alstra Capital Management, LLC. (incorporated by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005)
10.23	Purchase Agreement, dated April 11, 2007, by and between Max USA, Max Capital, as guarantor, and Citigroup Global Markets, Inc. as representative of the initial purchasers. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on April 17, 2007)
10.24	Indenture, dated April 15, 2007, among Max USA, as issuer, Max Capital, as guarantor, and The Bank of New York, as trustee. (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on April 17, 2007)

74

10.25	Officer’s Certificate of Max USA, dated April 16, 2007 (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on April 17, 2007)
10.26	Accelerated Share Repurchase Agreement, dated December 24, 2007. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on December 28, 2007)
10.27	Indemnification Agreement. (incorporated by reference to Exhibit 10.1 of the Company’s Registration Statement No. 333-145585)
14.1	Code of Business Conduct and Ethics, dated February 9, 2007. (incorporated by reference to Exhibit 14.1 of the Company’s Current Report on Form 8-K filed with the SEC on February 15, 2007)
21.1	Schedule of Group Companies.
23.1	Consent of KPMG.
24.1	Power of Attorney for officers and directors of Max Capital. (included on the signature page of this filing).
31.1	Certification of the Chief Executive Officer of Max Capital filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer of Max Capital filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer of Max Capital furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer of Max Capital furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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.

MAX CAPITAL GROUP LTD.

/s/    W. MARSTON BECKER        

W. Marston Becker

Chief Executive Officer

February 19, 2008

76

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints W. Marston Becker, his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments or supplements to this Form 10-K and to file the same with all exhibits thereto and other documents in connection therewith, with the SEC, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing necessary or appropriate to be done with this Form 10-K and any amendments or supplements hereto, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

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.

/s/    W. MARSTON BECKER         W. Marston Becker Chief Executive Officer and Director (Principal executive officer)	/s/    JOSEPH W. ROBERTS         Joseph W. Roberts Executive Vice President and Chief Financial Officer (Principal financial and accounting officer)
Date: February 19, 2008	Date: February 19, 2008
/s/    MARIO P. TORSIELLO         Mario P. Torsiello Director	/s/    ZACK H. BACON, III         Zack H. Bacon, III Director
Date: February 19, 2008	Date: February 19, 2008
/s/    GORDON CHEESBROUGH         Gordon Cheesbrough Director	/s/    JAMES L. ZECH         James L. Zech Director
Date: February 19, 2008	Date: February 19, 2008
/s/    WILLIAM KRONENBERG III         William Kronenberg III Director	/s/    WILLIAM H. HEYMAN         William H. Heyman Director
Date: February 19, 2008	Date: February 19, 2008
/s/    WILLIS T. KING, JR.         Willis T. King, Jr. Director	/s/    PETER A. MINTON         Peter A. Minton Director
Date: February 19, 2008	Date: February 19, 2008
/s/    STEVEN M. SKALA         Steven M. Skala Director	/s/    K. BRUCE CONNELL         K. Bruce Connell Director
Date: February 19, 2008	Date: February 19, 2008

77

Report of the Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Max Capital Group Ltd.:

We have audited the accompanying consolidated balance sheets of Max Capital Group Ltd. as of December 31, 2007 and 2006, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedules II to IV. We also have audited Max Capital Group Ltd.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Max Capital Group Ltd.’s management is responsible for these consolidated 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 their report under Item 9A, “Controls and Procedures”. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules, and an opinion on the Company’s internal control over financial reporting based on our 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 consolidated 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.

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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.

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.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Max Capital Group Ltd. as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Also in our opinion, Max Capital Group Ltd. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ KPMG

Chartered Accountants

Hamilton, Bermuda

February 19, 2008

F-1

MAX CAPITAL GROUP LTD.

Consolidated Balance Sheets

December 31, 2007 and 2006

(Expressed in thousands of United States Dollars, except per share amounts)

	2007			2006
Assets
Cash and cash equivalents	$	397,656		$	441,895
Fixed maturities, available for sale at fair value		3,663,226			3,028,108
Alternative investments, at fair value		1,061,734			1,065,874
Accrued interest income		49,100			38,922
Premiums receivable		432,965			390,889
Losses and benefits recoverable from reinsurers		578,333			538,009
Funds withheld		13,823			15,385
Deferred acquisition costs		44,187			49,064
Prepaid reinsurance premiums		130,071			104,443
Trades pending settlement		112,423			136,563
Other assets		53,684			39,832
Total assets	$	6,537,202		$	5,848,984
Liabilities
Property and casualty losses	$	2,333,877		$	2,335,109
Life and annuity benefits		1,203,509			895,560
Deposit liabilities		220,513			204,389
Funds withheld from reinsurers		169,263			254,723
Unearned property and casualty premiums		439,581			436,476
Reinsurance balances payable		99,221			79,506
Accounts payable and accrued expenses		57,565			43,160
Bank loans		330,000			210,000
Senior notes		99,779			–
Total liabilities		4,953,308			4,458,923
Shareholders’ equity
Preferred shares (par value $1.00) 20,000,000 shares authorized; no shares issued or outstanding		—			—
Common shares (par value $1.00) 200,000,000 shares authorized 57,515,075 (2006 - 60,276,560) shares issued and outstanding		57,515			60,277
Additional paid-in capital		844,455			950,862
Unearned stock grant compensation		—			(17,570	)
Accumulated other comprehensive loss		(20,341	)		(21,688	)
Retained earnings		702,265			418,180
Total shareholders’ equity		1,583,894			1,390,061
Total liabilities and shareholders’ equity	$	6,537,202		$	5,848,984

See accompanying notes to consolidated financial statements

F-2

MAX CAPITAL GROUP LTD.

Consolidated Statements of Income and Comprehensive Income

Years Ended December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

	2007			2006			2005
Revenues
Gross premiums written	$	1,078,286		$	865,197		$	1,246,031
Reinsurance premiums ceded		(281,696	)		(230,546	)		(198,974	)
Net premiums written	$	796,590		$	634,651		$	1,047,057
Earned premiums	$	1,074,173		$	875,244		$	1,247,584
Earned premiums ceded		(256,268	)		(210,236	)		(194,085	)
Net premiums earned		817,905			665,008			1,053,499
Net investment income		188,206			150,030			106,835
Net gains on alternative investments		186,721			84,750			39,885
Net realized losses on sale of fixed maturities		(4,017	)		(5,798	)		(743	)
Other income		745			1,021			4,635
Total revenues		1,189,560			895,011			1,204,111
Losses and expenses
Losses and benefits		675,996			497,969			1,039,465
Acquisition costs		61,360			78,933			76,224
Interest expense		42,663			13,832			22,764
General and administrative expenses		106,714			86,289			55,181
Total losses and expenses		886,733			677,023			1,193,634
Income before taxes		302,827			217,988			10,477
Income tax (benefit) expense		(422	)		1,100			972
Net income		303,249			216,888			9,505
Change in net unrealized appreciation (depreciation) of fixed maturities, net of tax		369			(30,441	)		(13,364	)
Foreign currency translation adjustment		978			3,772			(3,882	)
Comprehensive income (loss)	$	304,596		$	190,219		$	(7,741	)
Basic earnings per share	$	5.06		$	3.64		$	0.20
Diluted earnings per share	$	4.75		$	3.43		$	0.18

See accompanying notes to consolidated financial statements

F-3

MAX CAPITAL GROUP LTD.

Consolidated Statements of Changes in Shareholders’ Equity

Years Ended December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

	2007			2006			2005
Common shares
Balance - beginning of year	$	60,277		$	58,829		$	45,826
Issue of shares		1,527			1,449			13,338
Repurchase of shares		(4,289	)		(1	)		(335	)
Balance - end of year		57,515			60,277			58,829
Additional paid-in capital
Balance - beginning of year		950,862			921,384			643,444
Reclassification of unearned stock grant compensation		(26,357	)		—			—
Issue of common shares		19,930			27,122			297,117
Direct equity offering expenses		—			—			(13,134	)
Repurchase of shares		(110,066	)		(17	)		(7,025	)
Stock option amortization		10,086			2,373			982
Balance - end of year		844,455			950,862			921,384
Loans receivable from common share sales
Balance - beginning of year		—			(465	)		(10,515	)
Loans granted		—			—			—
Loans repaid		—			465			10,050
Balance - end of year		—			—			(465	)
Unearned stock grant compensation
Balance - beginning of year		(17,570	)		(14,574	)		(13,294	)
Stock grants awarded		(16,481	)		(17,068	)		(11,294	)
Amortization		7,694			14,072			10,014
Reclassification of unearned stock grant compensation		26,357			—			—
Balance - end of year		—			(17,570	)		(14,574	)
Accumulated other comprehensive (loss) income
Balance - beginning of year		(21,688	)		4,981			22,227
Holding losses on fixed maturities arising in year, net of tax		(3,630	)		(36,239	)		(14,107	)
Net realized losses included in net income, net of tax		3,999			5,798			743
Currency translation adjustments		978			3,772			(3,882	)
Balance - end of year		(20,341	)		(21,688	)		4,981
Retained earnings
Balance - beginning of year		418,180			215,565			215,015
Net income		303,249			216,888			9,505
Dividends paid		(19,164	)		(14,273	)		(8,955	)
Balance - end of year		702,265			418,180			215,565
Total shareholders’ equity	$	1,583,894		$	1,390,061		$	1,185,720

See accompanying notes to consolidated financial statements

F-4

MAX CAPITAL GROUP LTD.

Consolidated Statements of Cash Flows

Years Ended December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

	2007			2006			2005
Operating activities
Net income	$	303,249		$	216,888		$	9,505
Adjustments to reconcile net income to net cash from operating activities:
Stock based compensation		17,780			16,445			10,996
Amortization of premium on fixed maturities		5,146			6,052			9,293
Accretion of deposit liabilities		4,607			(6,513	)		4,652
Net realized losses on sale of fixed maturities		4,017			5,798			743
Changes in:
Alternative investments		4,103			160,626			(107,787	)
Accrued interest income		(10,178	)		(6,290	)		(8,375	)
Premiums receivable		(42,076	)		7,777			(135,952	)
Losses and benefits recoverable from reinsurers		(37,102	)		(84,368	)		(113,518	)
Funds withheld		1,562			1,547			667
Deferred acquisition costs		4,877			19,951			(14,245	)
Prepaid reinsurance premiums		(25,698	)		(20,950	)		(4,156	)
Trades pending settlement		24,140			(131,998	)		(4,565	)
Other assets		(5,169	)		(16,831	)		3,383
Property and casualty losses		(11,348	)		329,077			550,933
Life and annuity benefits		252,601			41,336			188,123
Funds withheld from reinsurers		(85,460	)		(17,269	)		(13,068	)
Unearned property and casualty premiums		4,128			(6,500	)		(4,657	)
Reinsurance balances payable		19,715			(11,275	)		40,523
Accounts payable and accrued expenses		14,405			15,049			(32,967	)
Cash from operating activities		443,299			518,552			379,528
Investing activities
Purchases of fixed maturities		(1,459,417	)		(1,108,748	)		(1,789,339	)
Sales of fixed maturities		428,522			555,918			1,181,516
Redemptions of fixed maturities		466,988			165,119			58,061
Purchase of Max Specialty		(28,400	)		—			—
Cash used in investing activities		(592,307	)		(387,711	)		(549,762	)
Financing activities
Net proceeds from issuance of common shares		4,976			11,503			286,027
Repurchase of common shares		(114,355	)		(18	)		(7,360	)
Net proceeds from bank loans		120,000			10,000			15,000
Net proceeds from issuance of senior notes		99,497			—			—
Dividends		(19,164	)		(14,273	)		(8,955	)
Additions to deposit liabilities		19,253			25,587			9,772
Payments of deposit liabilities		(9,630	)		(40,013	)		(55,575	)
Notes and loans repaid		—			465			10,050
Cash from (used in) financing activities		100,577			(6,749	)		248,959
Effect of exchange rate on cash		4,192			3,772			(3,882	)
Net (decrease) increase in cash and cash equivalents		(44,239	)		127,864			74,843
Cash and cash equivalents, beginning of year		441,895			314,031			239,188
Cash and cash equivalents, end of year	$	397,656		$	441,895		$	314,031
Supplemental Disclosure of Cash Flow Information
Interest paid	$	21,514		$	12,384		$	10,269
Taxes paid	$	1,879		$	1,430		$	1,058

See accompanying notes to consolidated financial statements

F-5

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

1. General

Max Capital Group Ltd., formerly known as Max Re Capital Ltd. (“Max Capital” and, collectively with its subsidiaries, the “Company”) was incorporated on July 8, 1999 under the laws of Bermuda. The Company’s principal operating subsidiary is Max Bermuda Ltd., formerly known as Max Re Ltd. (“Max Bermuda”). Max Bermuda is registered as a Class 4 insurer and long-term insurer under the insurance laws of Bermuda. The Company’s European activities are conducted from Dublin, Ireland through Max Europe Holdings Limited and its two wholly owned operating subsidiaries, Max Re Europe Limited and Max Insurance Europe Limited. In December 2006, the Company formed Max USA Holdings Ltd. (“Max USA”) as a holding company for its U.S. insurance operations. In April 2007, Max USA acquired Max Specialty Insurance Company (“Max Specialty”), a Delaware domiciled excess and surplus insurance company. Max Specialty offers property and casualty coverage as an eligible non-admitted insurer on an excess and surplus basis in the United States. In December 2007, the Company formed three wholly owned services companies which will provide administrative services to the Company starting in January 2008.

2. Significant accounting policies

(a) Basis of presentation

The consolidated financial statements include the financial statements of Max Capital Group Ltd. and all of its subsidiaries. All significant inter-company balances and transactions have been eliminated.

The accompanying financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require 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 period. Actual results could differ from those estimates.

Certain reclassifications have been made to the prior year reported amounts to conform to the current year presentation.

(b) Premium revenue recognition

Property and Casualty

Premiums written are earned on a pro-rata basis over the period the coverage is provided. Reinsurance premiums are recorded at the inception of the policy and are estimated based upon information in underlying contracts and information provided by clients and/or brokers. Changes in reinsurance premium estimates are expected and may result in significant adjustments in any period. These estimates change over time as additional information regarding changes in underlying exposures insured is obtained. Any subsequent differences arising on such estimates are recorded as premiums written in the period they are determined. Insurance premiums are recorded at the inception of the policy and are earned on a pro-rata basis over the period of coverage. Unearned premiums represent the portion of premiums written which relate to the unexpired terms of policies in force. Premiums ceded are similarly pro-rated over the period the coverage is provided with the unearned portion being deferred as prepaid reinsurance premiums.

Certain contracts that the Company writes are retrospectively rated and additional premium is due should losses exceed pre-determined, contractual thresholds. These required additional premiums are based upon contractual terms and the only element of management judgment involved is with respect to the estimate of the amount of losses that the Company expects to be ceded to it. Additional premiums are recognized at the time loss thresholds specified in the contract are exceeded and are earned over the policy period. Changes in estimates of losses recorded on contracts with additional premium features will result in changes in additional premiums based on contractual terms.

Certain contracts that the Company writes, particularly the property and casualty catastrophe reinsurance risks, provide for reinstatement of coverage. Reinstatement premiums are the premiums for the restoration of the insurance or reinsurance limit of a contract to its full amount after a loss occurrence by the insured or reinsured. The Company accrues for reinstatement premiums resulting from losses recorded. Such accruals are based upon contractual terms and the only element of management judgment involved is with respect to the amount of losses recorded. Changes in estimates of losses recorded on contracts with reinstatement premium features will result in changes in reinstatement premiums based on contractual terms. Reinstatement premiums are recognized at the time losses are recorded and are earned on a pro rata basis over the coverage period.

F-6

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

2. Summary of significant accounting policies (continued)

(b) Premium revenue recognition (continued)

Life and Annuity

Reinsurance premiums from traditional life and annuity policies with life contingencies are generally recognized as revenue when due from policyholders. Traditional life policies include those contracts with fixed and guaranteed premiums and benefits. Benefits and expenses are matched with such income to result in the recognition of profit over the life of the contracts.

Premiums from annuity contracts without life contingencies are reported as annuity deposits. Policy benefits and claims that are charged to expenses include benefit claims incurred in the period in excess of related policyholders’ account balances.

Deposits

Short duration reinsurance contracts entered into by the Company that are not deemed to transfer significant underwriting and timing risk are accounted for as deposits, whereby liabilities are initially recorded at the same amount as assets received. An initial accretion rate is established based on actuarial estimates whereby the deposit liability is increased to the estimated amount payable over the term of the contract. This accretion charge is presented in the period as either interest expense, where the contract does not transfer underwriting risk, or losses, benefits and experience refunds where the contract does not transfer significant timing risk. Long duration contracts written by the Company that do not transfer significant mortality or morbidity risks are also accounted for as deposits. The Company periodically reassesses the amount of deposit liabilities and any changes to the estimated ultimate liability is recognized as an adjustment to earnings to reflect the cumulative effect since the inception of the contract and by an adjustment to the future accretion rate of the liability over the remaining estimated contract term.

(c) Investments

Investments in securities with fixed maturities are classified as available for sale and are carried at fair value with any unrealized gains and losses included in accumulated other comprehensive income as a separate component of shareholders’ equity. Fair value of investments in fixed maturities is generally based on quoted prices for identical or similar instruments in active markets or model-derived valuations from independent pricing sources in which all significant inputs and significant value drivers are observable in active markets. The ability to obtain quoted market prices is reduced in periods of decreasing liquidity, and this increases the use of model-derived valuations and the uncertainty surrounding the fair value estimates. Fair value estimates are obtained from multiple independent pricing sources in an effort to mitigate some of the uncertainty surrounding the fair value estimates. The cost of fixed maturities is adjusted for amortization of premiums and discounts. Realized gains and losses on investments are recognized in net income using the specific identification method and include adjustments to the net realizable value of investments for declines in value that are considered other than temporary. Investment income is recognized when earned and includes interest income together with amortization of premium and discount on fixed maturities.

Alternative investments represent a diversified portfolio of (i) limited partnerships and stock investments in trading entities that invest in a range of financial products including U.S. and non-U.S. securities and financial instruments and (ii) a reinsurance private equity investment. Investments in limited partnerships and trading entities are classified as trading securities and are carried at the net asset value reported by the respective entity. These entities generally carry their trading positions and investments, the majority of which have underlying securities with quoted market prices, at fair value as determined by their respective investment managers. For underlying securities that do not have quoted market prices, fair value is estimated by the fund manager. As a result, it is possible that the fair value estimate may be significantly different from actual proceeds realized upon sale. The change in net asset value is included in net gains on alternative investments and recognized in net income. Investments in reinsurance private equity investments where the Company has a meaningful ownership position and significant influence over operating and financial policies of the investee are carried under the equity method of accounting. Under this method, the investments are initially recorded at cost and adjusted periodically to recognize the Company’s proportionate share of income or loss and dividends from the investments. The Company believes this approximates fair value for these equity investments. The Company’s share of income or loss from these investments is included in net gains on alternative investments and recognized in net income. The Company’s share of unrealized gains and losses on fixed maturities held by these unquoted equity investments are recorded in accumulated other comprehensive income as a separate component of shareholders’ equity.

(d) Fee revenue recognition

Transaction structuring and advisory fees are earned as the services generating the fees are performed.

F-7

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

2. Summary of significant accounting policies (continued)

(e) Losses and benefits

Property and Casualty Losses

The liability for losses, including loss adjustment expenses, represents estimates of the ultimate cost of all losses incurred but not paid as of the balance sheet date. In estimating reserves, the Company utilizes a variety of standard actuarial methods. Although these actuarial methods have been developed over time, assumptions about anticipated size of loss and loss emergence patterns are subject to fluctuations. Newly reported loss information from clients is the principal contributor to changes in the loss reserve estimates. These estimates, which generally involve actuarial projections, are based upon an assessment of known facts and circumstances, as well as estimates of future trends in claims severity and frequency, judicial theories of liability factors, including the actions of third parties, which are beyond the Company’s control.

The Company relies on data reported by clients when calculating reserves. The quality of the data varies from client to client. On a periodic basis, the clients’ loss data is analyzed by the Company’s actuarial and claims management teams to ascertain its quality and credibility. This process may involve comparisons with submission data and industry loss data, claims audits and inquiries about the methods of establishing case reserves associated with large industry events. There is often a time lag between reinsurance clients establishing case reserves and re-estimating their reserves, and notifying the Company of the new or revised case reserves. When determining reserves, the Company also considers historical data, industry loss trends, legal developments, changes in social attitudes and economic conditions, including the effects of inflation.

The Company believes the provision for outstanding losses and benefits will be adequate to cover the ultimate net cost of losses incurred to the balance sheet date but the provision is necessarily an estimate and may ultimately be settled for a significantly greater or lesser amount. These estimates are reviewed regularly and any adjustments to the estimates are recorded in the period they are determined.

Life and Annuity Benefits

The development of policy reserves requires management to make estimates and assumptions regarding mortality, morbidity, lapse, expense and investment experience. Such estimates are primarily based on historical experience and information provided by ceding companies. Actual results could differ materially from these estimates. Management monitors actual experience and, where circumstances warrant, will revise its assumptions and the related reserve estimates. These revisions are recorded in the period they are determined.

(f) Acquisition costs

Acquisition costs consist of commissions and fees paid to brokers and consultants and ceding commissions paid to the Company’s clients and are net of ceding commissions recovered by the Company from its reinsurers. Acquisition costs are amortized over the period in which the related premiums are earned or, for universal life reinsurance contracts and for deferred annuities, as a percentage of estimated gross profit. Deferred acquisition costs are regularly reviewed to determine if they are recoverable from future income, including investment income, by evaluating whether a loss is probable on the unexpired portion of policies in force. A premium deficiency loss is recognized when it is probable that expected future claims will exceed anticipated future premiums, reinsurance recoveries and anticipated investment income.

(g) Translation of foreign currencies

Assets and liabilities of foreign entities, whose functional currency is not the U.S. dollar, are translated at year end exchange rates. Revenue and expenses of such foreign entities are translated at average exchange rates during the year. The effect of the translation adjustments for foreign entities is included in accumulated other comprehensive income.

Other foreign currency assets and liabilities that are considered monetary items, are translated at exchange rates in effect at the balance sheet date. Foreign currency revenues and expenses are translated at transaction date exchange rates. These exchange gains and losses are included in the determination of net income.

(h) Cash and cash equivalents

The Company considers all time deposits and money market instruments with an original maturity of ninety days or less as equivalent to cash.

F-8

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

2. Summary of significant accounting policies (continued)

(i) Earnings per share

Basic earnings per share is based on weighted average common shares outstanding and excludes any dilutive effects of warrants, options and convertible securities. Diluted earnings per share assumes the conversion of dilutive convertible securities and the exercise of all dilutive stock options and warrants using the treasury stock method.

(j) Goodwill and intangible assets

The Company accounts for goodwill and intangible assets in accordance with Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets”. The Company does not amortize goodwill or identifiable intangible assets with indefinite lives, but rather re-evaluates on a yearly basis at December 31, or whenever changes in circumstances warrant, the recoverability of the assets. If it is determined that an impairment exists, the Company adjusts the carrying value of the assets to fair value.

The Company has recorded the purchase of numerous U.S. state licenses as intangible assets with indefinite lives as they provide a legal right to transact business indefinitely.

(k) Stock-based compensation

The Company adopted Statement of Financial Accounting Standard No. 123R, “Share-Based Payment” (“FAS 123R”) effective January 1, 2006, using the modified prospective method to account for share based payments made to employees. This statement requires all companies to measure and record compensation cost for all share-based payment awards (including employee stock options) at grant-date fair value. FAS 123R requires consideration of expected forfeitures in determining share-based employee compensation expenses as well as the immediate expensing of share-based awards granted to retirement-eligible employees.

(l) Income taxes

Income taxes have been provided in accordance with the provisions of Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes” (“FAS 109”), on those operations which are subject to income taxes. Deferred tax assets and liabilities result from temporary differences between the amounts recorded in the consolidated financial statements and the tax basis of the Company’s assets and liabilities, using enacted tax rates applicable to taxable income in the years in which those temporary differences are expected to be recovered or settled. Such temporary differences are primarily due to net operating loss carryforwards, and to the tax basis difference on unearned premium reserves, deferred compensation, net deferred policy acquisition costs, and net unrealized appreciation on investments. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance against deferred tax assets is recorded if it is more likely than not that all, or some portion, of the benefits related to deferred tax assets will not be realized. The Company considers future taxable income and feasible tax planning strategies in assessing the need for a valuation allowance.

The Company adopted the provisions of FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”) as of January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition and is effective for fiscal years beginning after December 15, 2006.

(m) Fair value of financial instruments

The fair values of financial instruments not disclosed elsewhere in the financial statements approximate their carrying value due to their short-term nature or because they earn or attract interest at market rates.

F-9

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

2. Summary of significant accounting policies (continued)

(n) Application of new accounting standards

In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure about fair value measurements. FAS 157 nullifies the guidance provided by EITF 02-3 that prohibits recognition of day one gains or losses on derivative transactions where model inputs that significantly impact valuation are not observable. In addition, FAS 157 prohibits the use of block discounts for large positions of unrestricted financial instruments that trade in an active market and requires an issuer to incorporate changes in its own credit spreads when determining the fair value of its liabilities. FAS 157 is effective for fiscal years beginning after November 15, 2007. The provisions of FAS 157 are to be applied prospectively, except that the provisions related to block discounts and existing derivative financial instruments measured under EITF 02-3 are to be applied as a one-time cumulative effect adjustment to opening retained earnings in the year of adoption. The adoption of FAS 157 on January 1, 2008 is not expected to have a material impact on the Company’s consolidated financial statements.

3. Investments

(a) The fair values and amortized cost of fixed maturities at December 31, 2007 and 2006 were as follows:

2007	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair Value
U.S. Government and Agencies	$	711,391	$	11,593	$	(8,661	)	$	714,323
U.S. Corporate Securities		1,691,881		8,763		(33,278	)		1,667,366
Other Corporate Securities		17,413		44		(48	)		17,409
Asset and Mortgage Backed Securities(1)		756,493		4,086		(7,968	)		752,611
Collateralized Mortgage Obligations		510,180		4,767		(3,430	)		511,517
	$	3,687,358	$	29,253	$	(53,385	)	$	3,663,226
2006	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair Value
U.S. Government and Agencies	$	563,248	$	4,903	$	(7,932	)	$	560,219
U.S. Corporate Securities		1,417,312		4,599		(18,180	)		1,403,731
Other Corporate Securities		32,525		107		(353	)		32,279
Asset and Mortgage Backed Securities(1)		599,342		847		(7,389	)		592,800
Collateralized Mortgage Obligations		441,046		2,060		(4,027	)		439,079
	$	3,053,473	$	12,516	$	(37,881	)	$	3,028,108

⁽¹⁾ Included within Asset and Mortgage Backed Securities are securities issued by U.S. Agencies with a fair value of $305,016 (2006 - $313,016).

F-10

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

3. Investments (continued)

The portfolio of investment grade fixed maturities includes mortgage-backed and asset-backed securities and collateralized mortgage obligations. These types of securities have cash flows that are backed by the principal and interest payments of a group of underlying mortgages or other receivables. During 2007, delinquency and default rates have increased on these types of securities, and particularly on securities backed by sub-prime mortgages. Generally, sub-prime mortgages are considered to be those made to borrowers who do not qualify for market interest rates for one or more possible reasons, such as a low credit score, a limited or lack of credit history, or a lack of earnings documentation. As a result of the increasing default rates of sub-prime borrowers, there is a greater risk of defaults on mortgage-backed and asset-backed securities and collateralized mortgage obligations, especially those that are non-investment grade. Therefore, fixed maturity securities backed by sub-prime mortgages have exhibited significant declines in fair value and liquidity. These factors combined with the contraction in liquidity in the principal markets for these securities makes the estimate of fair value increasingly uncertain. The fair values of the Company’s holdings in securities exposed to sub-prime mortgages are generally not based on quoted prices for identical securities, but are based on model-derived valuations from independent pricing sources in which all significant inputs and significant value drivers are observable in active markets. Fair value estimates are obtained from multiple sources in an effort to mitigate some of the uncertainty surrounding the fair value estimates. Should it become necessary to liquidate these securities within a short period of time, the actual realized proceeds may be significantly different from the fair values estimated as at December 31, 2007.

Management believes the Company’s exposure to sub-prime credit risk is limited although there can be no assurance that events in the sub-prime mortgage sector will not adversely affect the value of the Company’s investments. At December 31, 2007 securities with significant exposure to sub-prime borrowers totaled $54,181 in fair value, $58,086 in amortized cost, and $58,331 in par value. By fair value, 90% of these securities are AAA-rated with the remainder AA-rated. The weighted average life of these securities is 3.0 years. Management has determined that a write-down for impairment of these securities is not necessary based on a consideration of relevant factors including prepayment rates, subordination levels, default rates, credit ratings, weighted average life and credit default insurance. Together with the Company’s investment managers, management continues to monitor potential exposure and the Company will make adjustments to the investment portfolio as appropriate.

The following table sets forth certain information regarding the investment ratings (provided by major rating agencies) of fixed maturities at December 31, 2007 and 2006.

	2007			2006
	Fair Value		%	Fair Value		%
U.S. Government and Agencies (1)	$	1,019,339	27.8	$	873,235	28.8
AAA		1,630,939	44.5		1,115,110	36.8
AA		409,058	11.2		312,020	10.3
A		564,174	15.4		704,340	23.3
BBB		39,716	1.1		23,403	0.8
	$	3,663,226	100.0	$	3,028,108	100.0

⁽¹⁾ Included within U.S. Government and Agencies are Agency Mortgage Backed Securities with a fair value of $305,016 (2006 - $313,016).

(b) The maturity distribution for fixed maturities held at December 31, 2007 was as follows:

	Amortized Cost		Fair Value
Within one year	$	295,482	$	295,670
From one to five years		1,119,188		1,123,129
From five to ten years		472,986		467,100
More than ten years		1,799,702		1,777,327
	$	3,687,358	$	3,663,226

Actual maturities could differ from expected contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.

F-11

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

3. Investments (continued)

(c) Investment income earned for the years ended December 31, 2007, 2006 and 2005 was as follows:

	2007			2006			2005
Interest earned on fixed maturities, cash and cash equivalents	$	193,430		$	157,915		$	117,677
Interest earned on funds withheld		2,945			1,015			670
Amortization of premium on fixed maturities		(5,146	)		(6,052	)		(9,293	)
Investment expenses		(3,023	)		(2,848	)		(2,219	)
	$	188,206		$	150,030		$	106,835

(d) The net realized losses and the change in net unrealized appreciation (depreciation) on fixed maturities and reinsurance private equity investments (collectively “investments”) for the years ended December 31, 2007, 2006 and 2005 were as follows:

	2007			2006			2005
Net realized losses:
Gross realized gains	$	11,643		$	11,143		$	18,874
Gross realized losses		(15,660	)		(16,941	)		(19,617	)
Net realized losses on sale of fixed maturities		(4,017	)		(5,798	)		(743	)
Net change in unrealized appreciation (depreciation) of investments		369			(30,441	)		(13,364	)
Total net realized gains (losses) and change in unrealized depreciation on investments	$	(3,648	)	$	(36,239	)	$	(14,107	)

(e) The Company endeavors to tailor the maturities of its fixed maturities portfolio to the expected timing of its loss and benefit payments. Due to fluctuations in interest rates, it is likely that over the period a fixed maturity security is held there will be periods, perhaps greater than twelve months, when the investment’s fair value is less than its cost resulting in unrealized losses. The Company has the intent and ability to hold those securities in an unrealized loss position until such time as they reach maturity or the fair value increases. The only time the Company would expect to realize an other than temporary impairment on a fixed maturity security is if there were concern about receiving the interest payments and the maturity value of the investment. The Company performs regular reviews of its fixed maturities portfolio and utilizes a model that considers numerous indicators in order to identify investments that are showing signs of potential other than temporary impairments. The indicators include the issuer’s financial condition and ability to make future scheduled interest and principal payments, the nature of collateral or other credit support and significant economic events that have occurred that affect the industry in which the issuer participates. For the year ended December 31, 2007 the Company has recorded an other than temporary impairment of $1,089, which is included in realized losses on the consolidated statements of income and comprehensive income.

Of the total holding of 1,408 securities, 737 had unrealized losses at December 31, 2007. Fixed maturities with unrealized losses and the duration such conditions have existed at December 31, 2007 and 2006 were as follows:

	Less than 12 months				12 months or longer				Total
2007	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government and Agencies	$	244,684	$	8,591	$	23,632	$	70	$	268,316	$	8,661
U.S. Corporate Securities		1,045,321		32,668		26,530		610		1,071,851		33,278
Other Corporate Securities		6,972		48		—		—		6,972		48
Asset and Mortgage Backed Securities		331,995		7,820		5,622		148		337,617		7,968
Collateralized Mortgage Obligations		182,716		3,430		—		—		182,716		3,430
	$	1,811,688	$	52,557	$	55,784	$	828	$	1,867,472	$	53,385

F-12

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

3. Investments (continued)

	Less than 12 months				12 months or longer				Total
2006	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government and Agencies	$	318,008	$	7,017	$	31,030	$	915	$	349,038	$	7,932
U.S. Corporate Securities		849,830		17,239		27,420		941		877,250		18,180
Other Corporate Securities		25,360		353		—		—		25,360		353
Asset and Mortgage Backed Securities		376,658		7,304		4,914		85		381,572		7,389
Collateralized Mortgage Obligations		215,135		4,005		816		22		215,951		4,027
	$	1,784,991	$	35,918	$	64,180	$	1,963	$	1,849,171	$	37,881

(f) The majority of the Company’s alternative investments at December 31, 2007 comprise a funds portfolio owned by Max Diversified and managed by Alstra Capital Management, LLC (“the Manager”), an affiliate of one of the Company’s directors. As of December 31, 2007, Max Diversified was invested in 35 underlying alternative investment funds representing the following investment strategies: distressed investing, diversified arbitrage, emerging market, event driven arbitrage, fixed income arbitrage, global macro, long/short credit, long/short equity, and opportunistic investing.

The Company is able to liquidate the alternative investments held through Max Diversified on the same terms that the underlying funds can be liquidated. In general, the funds in which Max Diversified is invested require 30 days notice of liquidation, and may be liquidated on a monthly, quarterly or longer basis. In accordance with the Company’s investment guidelines, a minimum of 80% of the alternative investment portfolio must be maintained in funds with monthly or quarterly liquidity.

Prior to October 1, 2005, the Manager was a subsidiary of Moore Capital Management, LLC (“MCM”) and an affiliate of certain of the Company’s shareholders. As of October 1, 2005, the senior management team of the Manager became the majority shareholder of the Manager. Certain funds in the portfolio are managed by MCM. For the year ended December 31, 2007, the Company paid MCM $6,930 (2006 - $3,436; 2005 - $3,909) for investment management services. In addition, as the fund advisor of Max Diversified, the Manager earned $14,705 for the year ended December 31, 2007 (2006 - $8,896; 2005 - $7,916).

All investment fees incurred on the alternative investments are deducted from net gains on alternative investments in the accompanying consolidated statements of income and comprehensive income.

(g) In May 2001, the Company made an initial equity investment of $15,000 for 7.5% of the ordinary shares of Grand Central Re Limited (“Grand Central Re”), a Bermuda domiciled reinsurance company. The investment in Grand Central Re is recorded using the equity method of accounting and is classified as an alternative investment in the accompanying consolidated balance sheets. The Board of Directors of Grand Central Re placed the company into run-off in 2004. As a result of this decision, Grand Central Re requested and received permission from the Bermuda Minister of Finance to return a portion of its capital to shareholders in 2005. As a result of capital being returned the Company’s remaining equity investment is $4,500 at December 31, 2007 (2006 - $4,500).

Max Managers Ltd. provides Grand Central Re with insurance management services under an insurance management agreement. Fees for such services for the year ended December 31, 2007 were approximately $800 (2006 - $800; 2005 - $4,624) and are included in other income in the consolidated statements of income and comprehensive income.

Max Bermuda entered into a quota share retrocession agreement with Grand Central Re, effective January 1, 2002, amending the quota share arrangement with Grand Central Re that commenced January 1, 2001. The 2002 quota share reinsurance agreement with Grand Central Re requires each of the Company and Grand Central Re to retrocede a portion of their respective gross premiums written from certain transactions to the other party in order to participate on a quota share basis. Max Bermuda also entered into an aggregate stop loss contract with Grand Central Re, effective January 1, 2003, whereby Grand Central Re provided aggregate reinsurance protection to Max Bermuda on one of its underlying reinsurance contracts. This underlying contract was commuted in September 2007, and as a result the loss recoverable from Grand Central Re has been adjusted to a final settlement amount. Max Bermuda did not cede any new business to Grand Central Re in 2007, 2006 or 2005.

F-13

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

3. Investments (continued)

The accompanying consolidated balance sheets and consolidated statements of income and comprehensive income include, or are net of, the following amounts related to the quota share retrocession and aggregate stop loss agreements with Grand Central Re:

	2007			2006		2005
Balance Sheet
Losses and benefits recoverable from reinsurers	$	117,752		$	222,087	$	237,422
Deposit liabilities		28,292			29,137		36,396
Funds withheld from reinsurers		141,206			221,371		229,046
Reinsurance balances payable		23,025			25,133		30,367
	2007			2006		2005
Income Statement
Reinsurance premiums ceded	$	(387	)	$	3,238	$	31,132
Earned premiums ceded		(387	)		3,238		37,882
Other income		800			830		4,624
Losses and benefits		(6,949	)		1,801		41,076
Interest expense		13,919			9,354		7,351

The variable quota share retrocession agreement with Grand Central Re was principally written on a funds withheld basis. The rate of return on funds withheld is based on the average of two total return interest rate indices. The interest expense recognized by the Company will fluctuate from period to period due to changes in the indices. The Company records the changes in interest expense through the statement of income and comprehensive income on a monthly basis.

The Company believes that the terms of the insurance management, quota share retrocession and aggregate stop loss agreements are comparable to terms that the Company would expect to negotiate in similar transactions with unrelated parties.

4. Business Combination

On April 2, 2007, Max USA acquired 100% of the outstanding and issued common shares of Max Specialty, an inactive U.S.-domiciled excess and surplus lines insurer. This transaction, together with the incorporation of Max USA in December of 2006, provided the Company with a U.S.-based platform from which to provide eligible non-admitted excess and surplus lines insurance within the United States. The total purchase price was $41,915. Goodwill and intangible assets with indefinite lives arising from the acquisition of this U.S.-domiciled platform were $11,975 and $8,400 respectively, and are included in other assets on the Company’s consolidated balance sheet.

At the date of acquisition, a party related to the seller (“the guarantor”) assumed all known, unknown and contingent liabilities of Max Specialty relating to events occurring on or before the acquisition date. In addition, the guarantor entered into a reinsurance agreement to fully assume $23,159 of outstanding loss reserves of Max Specialty on the acquisition date. These loss reserves and a reinsurance recoverable of the same amount were recorded on the date of acquisition. To the extent the guarantor does not meet its obligation under these agreements, Max Specialty remains liable for these liabilities.

In addition to the loss reserves and related reinsurance recoverable, the assets and liabilities of Max Specialty and Max USA included fixed maturity securities on deposit with regulatory authorities of $10,087, cash and accrued interest of $9,913, tangible assets of $1,540 and insurance licenses of $8,400. These assets were recorded at their fair values on the date of acquisition, with the resulting excess purchase price being recorded as goodwill.

F-14

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

5. Goodwill and intangible assets

Goodwill and intangible assets with indefinite lives are included within other assets on the consolidated balance sheet. As at December 31, 2007 and 2006 goodwill totaled $11,975 and $nil, respectively. As at December 31, 2007 and 2006 intangible assets totaled $8,400 and $nil, respectively. The goodwill and intangible assets were assessed for impairment as at December 31, 2007 and no impairment was identified.

6. Property and casualty losses and loss adjustment expenses

The establishment of the provision for outstanding losses and loss adjustment expenses is based on known facts and interpretation of circumstances and is therefore a complex and dynamic process influenced by a large variety of factors. These factors include the Company’s experience with similar cases and historical trends involving claim payment patterns, pending levels of unpaid claims, product mix or concentration, claim severity and frequency patterns such as those caused by natural disasters, fires, or accidents, depending on the business assumed.

Other factors include the continually evolving and changing regulatory and legal environment, actuarial studies, professional experience and expertise of the Company’s management and independent adjusters retained to handle individual claims, the quality of the data used for projection purposes, existing claims management and settlement practices, the effect of inflationary trends on future claims settlement costs, court decisions, economic conditions and public attitudes. In addition, time can be a critical part of the provision determination, since the longer span between incidence of a loss and the payment or settlement of the claims, the more variable the ultimate settlement amount can be. Consequently, the establishment of the provision for outstanding losses and benefits relies on the judgement and opinion of a large number of individuals, on historical precedent and trends, on prevailing legal, economical, social and regulatory trends and on expectations as to future developments. The process of determining the provision necessarily involves risks that the actual results will deviate, perhaps substantially, from the best estimate made.

The summary of changes in outstanding property and casualty losses at December 31, 2007, 2006 and 2005 is as follows:

	2007			2006			2005
Gross balance at January 1	$	2,335,109		$	2,006,032		$	1,455,099
Less: Reinsurance recoverables and deferred charges		(495,547	)		(409,395	)		(298,086	)
Net balance at January 1		1,839,562			1,596,637			1,157,013
Incurred losses related to:
Current year		394,146			430,396			588,876
Prior years		(63,752	)		(10,177	)		139,377
Total incurred		330,394			420,219			728,253
Paid losses related to:
Current year		(20,300	)		(15,688	)		(65,596	)
Prior years		(361,702	)		(169,008	)		(217,637	)
Total paid		(382,002	)		(184,696	)		(283,233	)
Foreign currency revaluation		6,894			7,402			(5,396	)
Net balance at December 31		1,794,848			1,839,562			1,596,637
Plus: Reinsurance recoverables and deferred charges		539,029			495,547			409,395
Gross balance at December 31	$	2,333,877		$	2,335,109		$	2,006,032

F-15

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

6. Property and casualty losses and loss adjustment expenses (continued)

Year ended December 31, 2007

Incurred losses related to prior years of $(63,572) for the year ended December 31, 2007 are comprised of the following components:

• The settlement of a large block of prior period reinsurance reserves resulting in a net favorable development of $15,200 and net paid losses related to prior years of $131,888;

• Favorable development of $13,000 on one alternative risk reinsurance contract where reserves were released based on updated information received from a client. Due to contractual features requiring additional premiums and interest thereon in the event of additional losses in excess of pre-determined thresholds, an offsetting decrease in additional premium was recorded and earned in the amount of $15,208;

• Adverse development of $20,031 on a marine reinsurance quota share contract that had losses in relation to the 2005 hurricanes. As a result of this development the contract has reached the aggregate limit;

• Favorable development of $5,637 arising from changes in reinsurance premium estimates. Changes in premium estimates occur on prior year contracts each year as the Company receives additional information on the underlying exposures insured and the associated loss is recorded, at the original loss ratio, concurrently with the premium adjustment;

• The net favorable loss development for the Company’s reinsurance segment of $40,943, excluding the development described above, arising from the re-estimation of liabilities is the result of the quarterly and annual actuarial review process. During the year ended December 31, 2007, a large number of contracts were adjusted to reflect either favorable or adverse development which has aggregated to produce net favorable development. There were no individual contracts or lines of business with significant development. Marine, medical malpractice, professional liability and workers compensation all had between $5,000 and $10,000 in favorable development, with most other lines of business having between $nil and $5,000 in favorable development; and

• The net favorable loss development for the Company’s insurance segment of $8,823 arising from the re-estimation of liabilities principally relates to property contracts which had exposure to the 2005 hurricanes.

Year ended December 31, 2006

Incurred losses related to prior years of ($10,177) for the year ended December 31, 2006 are comprised of the following components:

• Favorable development of $4,252 arising from changes in premium estimates. Changes in premium estimates occur on prior year contracts each year as the Company receives additional information on the underlying exposures insured and the associated loss is recorded, at the original loss ratio, concurrently with the premium adjustment; and

• The net favorable loss development of $6,716 arising from the re-estimation of liabilities principally relates to the Company’s 2003 excess liability insurance products, which are developing more favorably than originally estimated. Accordingly, the Company reduced gross reserves by $35,500 and losses recoverable from reinsurers by $15,000, to reflect the change in estimates. In addition, there has been partially offsetting adverse development on the property and casualty reinsurance business, including $8,600 in relation to the Company’s 2005 hurricane losses.

Year ended December 31, 2005

Incurred losses related to prior years of $139,377 for the year ended December 31, 2005 are comprised of the following components:

• Amortization of deferred charges on retroactive contracts of $4,407;

• Favorable development of $386 arising from changes in premium estimates. Changes in premium estimates occur on prior year contracts each year as the Company receives additional information on the underlying exposures insured and the associated loss is recorded, at the original loss ratio, concurrently with the premium adjustment; and

• The net unfavorable loss development of $134,584 arising from the re-estimation of liabilities is related to the Company’s reinsurance segment. The net adverse development primarily relates to two alternative risk reinsurance contracts where reserves were strengthened based on additional loss activity reported to our client and loss activity greater than originally estimated. Due to contractual features requiring additional premiums and interest thereon in the event of additional losses in excess of pre-determined thresholds, additional premiums were recorded and earned in the amount of $181,996. The net effect of the development on income was a charge of $25,208. Additional details on the two contracts and the information that resulted in the recognition of additional loss activity follows.

F-16

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

6. Property and casualty losses and loss adjustment expenses (continued)

The first contract is an alternative risk transfer excess of loss contract that covers workers compensation business written by our client in 2001. The contract has two provisions for additional premiums when subject losses reach specific thresholds. The Company has historically found the client’s estimate of ultimate losses to be below the level estimated by the Company. At December 31, 2004, the Company’s estimate was $212,000 compared to the client’s loss estimate of $199,300. During 2005, the client’s loss estimate increased to a level that exceeded the Company’s estimate due to additional loss activity reported to our client. Based on the additional information the Company determined the need to record additional losses to the limit of the contract and, accordingly, it recognized $59,000 in additional losses during 2005.

The second contract is a three year whole account coverage alternative risk transfer excess of loss contract that incepted in 2002. The contract has three provisions for additional premiums when subject losses reach specific thresholds and depending on the type of losses. While the Company’s recorded net loss estimate at December 31, 2004 was consistent with amounts being reported by the client, the number and value of losses reported by the client was higher than originally expected on the contract. Consequently, during 2005 the Company initiated and conducted a claims audit of the client’s records to verify the loss estimates. Based on the results of the claims audit and additional actuarial analysis completed in 2005, the Company determined that loss activity was greater than originally estimated and that losses under the contract would reach the aggregate limits. Accordingly the Company recognized $152,600 in additional losses during 2005.

Included in deposit liabilities is $157,179 (2006 - $137,323) related to reinsurance contracts that do not transfer sufficient risk to be accounted for as reinsurance.

7. Life and annuity benefits

Life and annuity benefits at December 31, 2007 and 2006 was as follows:

	2007		2006
Life	$	136,412	$	139,988
Annuities		892,745		560,932
Accident and health		174,352		194,640
	$	1,203,509	$	895,560

Losses recoverable relating to life and annuity contracts of $40,469 in 2007 (2006 - $42,462) are included in losses and benefits recoverable from reinsurers in the accompanying consolidated balance sheets.

All annuities included in life and annuity benefits in the accompanying consolidated balance sheets are not subject to discretionary withdrawal. Included in deposit liabilities at December 31, 2007 are annuities of $4,625 (2006 - $6,004), which are subject to discretionary withdrawal. Deposit liabilities also include $49,288 (2006 - $51,486) representing the account value of a universal life reinsurance contract as prescribed under Statement of Financial Accounting Standard No. 97 “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments.”

8. Reinsurance

The Company utilizes quota share reinsurance and retrocession agreements principally to allow the Company to provide additional underwriting capacity to clients while reducing the net liability on the portfolio of risks. The Company utilizes excess of loss reinsurance to protect against single large events, including natural catastrophes. The Company’s reinsurance and retrocession agreements provide for recovery of a portion of losses and benefits from reinsurers. Losses and benefits recoverable from reinsurers are recorded as assets. Losses and benefits expenses are net of losses and benefits recoverable of $134,184 in 2007 (2006 - $113,899; 2005 - $163,318) under these agreements. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company regularly evaluates the financial condition of its reinsurers. With the exception of Grand Central Re which is rated “NR4” by A.M. Best Company, all of the Company’s remaining recoverables are with reinsurers rated “A- (excellent)” or higher by A.M. Best Company. The Company retains funds from Grand Central Re amounting to approximately 107.5% of the loss recoverable from them. The Company has net uncollateralized recoverables of $443,129 which are divided between more than 30 reinsurers rated “A-” or better by A.M. Best Company.

F-17

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

8. Reinsurance (continued)

The effect of reinsurance and retrocessional activity on premiums written and earned for the years ended December 31, 2007, 2006 and 2005 was as follows:

	Premiums written									Premiums earned
Property and casualty	2007			2006			2005			2007			2006			2005
Direct	$	431,169		$	396,594		$	355,296		$	415,764		$	373,913		$	301,213
Assumed		345,156			423,555			615,720			356,448			456,283			671,356
Ceded		(281,162	)		(229,816	)		(197,505	)		(255,734	)		(209,506	)		(192,616	)
Net	$	495,163		$	590,333		$	773,511		$	516,478		$	620,690		$	779,953
	Premiums written									Premiums earned
Life and annuity	2007			2006			2005			2007			2006			2005
Assumed	$	301,961		$	45,048		$	275,015		$	301,961		$	45,048		$	275,015
Ceded		(534	)		(730	)		(1,469	)		(534	)		(730	)		(1,469	)
Net	$	301,427		$	44,318		$	273,546		$	301,427		$	44,318		$	273,546
Total	$	796,590		$	634,651		$	1,047,057		$	817,905		$	665,008		$	1,053,499

9. Bank loans

In February 2003, the Company completed a sale of 127,549 shares of its subsidiary, Max Diversified to a third party financial institution (the “Bank”) for a fair value of $150,000 (the “notional amount”). Simultaneous with the sale, the Company entered into a total return swap with the Bank whereby the Company receives the return earned on the Max Diversified shares in exchange for the payment of a variable rate of interest based on LIBOR plus a spread. The terms of the share sale obligate the Bank to sell the shares to the Company and give the Company the right to repurchase the shares at fair value at termination of the total return swap. On February 28, 2007 the Company amended the swap transaction. The notional amount under the swap was increased to $235,000 and the number of shares sold to the Bank was increased to 143,952. In addition, the amendment, among other things: (i) extended the termination date under the swap to February 28, 2010; (ii) increased the maximum notional amount under the swap to $300,000; (iii) decreased the monthly excess collateral requirement under the swap from 50% to 33% of the notional amount; and (iv) permits the Company to accelerate the swap termination date to a business day no earlier than February 28, 2009. Max Diversified shares with a fair value of $93,433 at December 31, 2007 were pledged to the Bank as collateral and to which the Company is thus exposed to credit risk. The swap transaction contains provisions for earlier termination at the Company’s option or in the event that the Company fails to comply with certain covenants, including maintaining a minimum financial strength rating and a minimum Max Diversified net asset value.

Under GAAP, the non-controlling interest in Max Diversified and the total return swap are recorded on a combined basis and accounted for as a financing transaction. The effect of combining the transactions results in the notional amount being presented as a bank loan, with changes in the fair value of the Max Diversified shares increasing or decreasing this notional amount. Interest expense on the notional amount is included within interest expense on the consolidated statements of income and comprehensive income. The net amount receivable or due under the total return swap is included in accounts payable. At December 31, 2007 and 2006, the net amounts receivable under the total return swap included in accounts payable were $1,327 and $3,487, respectively. For the years ended December 31, 2007, 2006 and 2005, the interest expense on the loan was $15,886, $12,358 and $8,047, respectively.

Changes in the notional amount previously included in accounts payable at December 31, 2006 and 2005, of $60,000 and $50,000, respectively, have been reclassified to bank loans to conform to the presentation adopted in the current year. Cash flows from operating activities for the years ended December 31, 2006 and 2005 have been correspondingly reduced by $15,000 and $10,000, respectively, with cash flows provided by financing increased by $15,000 and $10,000, respectively. This reclassification has no effect on the net income or retained earnings of any period.

F-18

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

9. Bank loans (continued)

On April 3, 2007 the Company borrowed $50,000 under a revolving loan facility for the capitalization of Max USA. This loan renews at intervals of 1-6 months at the Company’s option, at which time the interest rate is reset to LIBOR plus a premium based on the Company’s current debt rating. As of December 31, 2007, $50,000 remains outstanding on this loan at a 5.63% interest rate. The fair value of this loan approximates the carrying value as of December 31, 2007. Interest expense in connection with this loan was $2,591 for the year ended December 31, 2007.

10. Senior notes

On April 16, 2007, Max USA privately issued $100,000 principal amount of 7.20% senior notes, due April 14, 2017 (the “senior notes”), with interest payable on April 16 and October 16 of each year, beginning on October 16, 2007. The senior notes are Max USA’s senior unsecured obligations and rank equally in right of payment with all existing and future senior unsecured indebtedness of the Company. The senior notes are fully and unconditionally guaranteed by Max Capital. Interest expense in connection with these senior notes was $5,100 for the year ended December 31, 2007. The effective interest rate related to the senior notes, based on the net proceeds received, is approximately 7.27%. The fair value of the senior notes was $105,890 as of December 31, 2007. The net proceeds from the sale of the senior notes were $99,497 and they were used to repay a bank loan used to acquire and capitalize Max Specialty.

11. Pension and deferred compensation plans

The Company sponsors a number of defined contribution retirement plans including a plan under the Bermuda National Pension Scheme Act, 1998, a qualified 401k plan for U.S. citizens, a separately administered defined contribution plan for the Irish subsidiary companies as well as a deferred compensation plan. The Company also has established a qualified 401k plan for its U.S. subsidiary. Under these plans, employees’ contributions are matched by the Company up to 10% of salary. Company contributions are subject to vesting provisions. Pension expenses totaled $2,626 for the year ended December 31, 2007 (2006 - $1,754; 2005 - $1,522).

12. Shareholders’ equity

Common Shares

The holders of common shares are entitled to one vote per paid up share subject to certain provisions of the Company’s bye-laws that reduce the total voting power of any U.S. shareholder owning, directly or indirectly, beneficially or otherwise to less than 9.5% of total voting power of our capital stock unless waived by the Board of Directors.

The Company’s board of directors declared dividends of $0.07 per share on each of February 9, 2007 and May 4, 2007, and $0.09 per share on July 27, 2007 and November 1, 2007 payable to shareholders of record on February 23, 2007, May 18, 2007, August 10, 2007 and November 15, 2007, respectively.

During the year ended December 31, 2007; the Company repurchased 4,289,251 common shares at an average price of $26.66 per common share for a total amount of $114,355, including the costs incurred to effect the repurchases. At December 31, 2007, the remaining authorization under the Company’s share repurchase program was $75,245.

F-19

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

12. Shareholders’ equity (continued)

Warrants

In connection with the issuance of certain shares, the Company has issued warrants to purchase the Company’s common shares. The warrants may be exercised at any time up to their expiration dates, which range from December 22, 2009 to August 17, 2011. Warrants are issued with exercise prices approximating their fair value on the date of issuance.

Warrant related activity is as follows:

	Warrants Outstanding		Warrants Exercisable	Weighted Average Exercise Price		Weighted Average Fair Value		Range of Exercise Prices
Balance, December 31, 2005	9,138,211		9,138,211	$	15.31	$	5.77	$	15.00-$18.00
Warrants exercised	(338,304	)		$	15.35
Balance, December 31, 2006	8,799,907		8,799,907	$	15.31	$	5.76	$	15.00-$18.00
Warrants exercised	(1,068,933	)		$	15.32
Balance, December 31, 2007	7,730,974		7,730,974	$	15.31	$	5.76	$	15.00-$18.00

13. Stock incentive plan

In June 2000, the shareholders of the Company approved the adoption of a Stock Incentive Plan (“the Plan”) under which it may award, subject to certain restrictions, Incentive Stock Options (“ISOs”), Non-Qualified Stock Options (“NQSOs”), restricted shares, restricted stock units, share awards or other awards. In May 2002 and April 2005, the shareholders of the Company approved the adoption of amendments to the Plan, increasing the maximum aggregate number of common shares available for awards under the Plan to 8,000,000. Only eligible employees of the Company are entitled to ISOs, while NQSOs may be awarded to eligible employees, non-employee Directors and consultants. The Plan is administered by the Compensation Committee of the Board of Directors (“the Committee”).

Options that have been granted under the Plan have an exercise price equal to or greater than the fair market value of the Company’s common stock on the date of grant, and have a maximum ten-year term. The fair value of awards granted under the Plan are measured as of the grant date and expensed ratably over the vesting period of the award. All awards provide for accelerated vesting upon a change in control of the Company. Shares issued under the Plan are made available from authorized but unissued shares.

The Company adopted Statement of Financial Accounting Standard No. 123R “Share-Based Payment” (“FAS 123R”) effective January 1, 2006 using the modified prospective method to account for share based payments made to employees. The modified prospective method is similar to the modified prospective method described in Statement of Financial Accounting Standard No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure.” Under this method, compensation cost is recognized beginning with the effective date (a) based on the requirements of FAS 123R for all share based payments granted after the effective date and (b) based on the requirements of FAS 123R for all awards granted to employees prior to the effective date of FAS 123R that remain unvested on the effective date.

FAS 123R requires consideration of expected forfeitures in determining share-based employee compensation expenses as well as the immediate expensing of share-based awards granted to retirement-eligible employees. The Company has considered expected forfeitures and awards granted to retirement-eligible employees in the determination of stock-based compensation expense and they did not have a material effect on operating results during the year.

F-20

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

13. Stock incentive plan (continued)

If the Company were to recognize compensation expense over the relevant service period under the fair value method of FAS 123R with respect to stock options granted for the year ended December 31, 2002 and all prior years, net income would have decreased from the amount reported for the year ended December 31, 2005, resulting in pro forma net income and earnings per share as follows:

	2005
Net income, as reported	$	9,505
Add: Stock-based employee compensation expense included in reported net income		982
Deduct: Stock-based employee compensation expense determined under fair value method for all awards		(2,204	)
Pro forma net income	$	8,283
Earnings per share, as reported
Basic	$	0.20
Diluted	$	0.18
Earnings per share, pro forma
Basic	$	0.17
Diluted	$	0.16

The Company granted 101,081, 940,884 and 64,123 stock options for the years ended December 31, 2007, 2006 and 2005, respectively. In accordance with FAS 123R, the fair value of options granted is estimated on the date of grant using the Black-Scholes option pricing method with the following weighted average assumptions:

	2007		2006		2005
Option valuation assumptions:
Expected option life	7 years		7 years		7 years
Expected dividend yield	1.48	%	0.91	%	0.73	%
Expected volatility	21.54	%	15.16	%	22.55	%
Risk-free interest rate	4.66	%	4.61	%	4.65	%
Forfeiture rate	0	%	0	%	0	%

The Company recognized $2,886, $2,373 and $982 of stock-based compensation expense related to stock option awards for the years ended December 31, 2007, 2006 and 2005, respectively. The Company did not capitalize any cost of stock-based option award compensation. As of December 31, 2007, the total compensation cost related to non-vested stock option awards not yet recognized was $2,609, which is expected to be recognized over a weighted average period of 2.97 years.

Total intrinsic value of stock options exercised during the years ended December 31, 2007, 2006 and 2005 was $5,000, $3,968 and $1,412, respectively. The intrinsic value of stock options outstanding at December 31, 2007 is $16,203 (vested options -$15,051).

F-21

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

13. Stock incentive plan (continued)

A summary of Plan related activity follows:

	Awards Available for Grant		Options Outstanding		Options Exercisable	Weighted Average Exercise Price		Fair Value of Options		Range of Exercise Prices
Balance, December 31, 2004	1,344,921		2,168,979		1,314,512	$	15.29	$	5.15	$	10.26-$ 22.74
Increase in shares available	3,000,000		—
Options granted	(64,123	)	64,123			$	25.49	$	7.02	$	23.08-$ 26.70
Options exercised	—		(166,233	)		$	15.88			$	15.00-$ 19.48
Stock grants	(1,250	)	—
Restricted stock issued	(525,650	)	—
Restricted stock forfeited	9,717		—
Balance, December 31, 2005	3,763,615		2,066,869		1,557,371	$	15.54	$	5.17	$	10.26-$ 26.70
Increase in shares available	—		—
Options granted	(940,884	)	940,884			$	27.06	$	7.08	$	23.21-$ 36.26
Options exercised	—		(455,020	)		$	15.51			$	11.50-$ 16.00
Options forfeited	—		(1,400	)		$	20.94			$	11.19-$ 24.84
Restricted stock issued	(770,078	)	—
Restricted stock forfeited	88,737		—
Balance, December 31, 2006	2,141,390		2,551,333		1,692,204	$	19.82	$	5.85	$	10.26-$ 36.26
Increase in shares available	—		—
Options granted	(101,081	)	101,081			$	27.00	$	6.00	$	24.40-$ 32.82
Options exercised	—		(466,665	)		$	15.01			$	10.26-$ 19.48
Options forfeited	—		—
Restricted stock units issued	(295,232	)	—
Restricted stock issued	(707,439	)	—
Restricted stock forfeited	19,690		—
	1,057,328		2,185,749		1,560,310	$	21.18	$	6.04	$	10.95-$ 36.26

Restricted Stock Awards

Restricted stock issued under the Plan have terms set by the Committee. These shares contain certain restrictions relating to, among other things, vesting, forfeiture in the event of termination of employment and transferability. Restricted stock awards are valued equal to the market price of the Company’s common stock on the date of grant. At the time of grant, the fair value of the stock awarded is recorded as unearned stock grant compensation. The unearned compensation is charged to income over the vesting period. Generally, restricted stock awards vest after three or four years. Total compensation cost recognized for restricted stock awards recorded in general and administrative expenses was $14,894, $14,072 and $10,014 for years ended December 31, 2007, 2006 and 2005, respectively.

A summary of the Company’s non-vested restricted stock awards as of December 31, 2007, and changes during the year ended December 31, 2007, follow:

	Non-Vested Restricted Stock		Weighted Average Grant Date Fair Value
Balance, December 31, 2006	1,660,602		$	23.50
Restricted Stock Granted	707,439		$	24.23
Restricted Stock Vested	(540,563	)	$	23.20
Restricted Stock Forfeited	(19,690	)	$	24.68
Balance, December 31, 2007	1,807,788		$	24.19

F-22

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

14. Taxation

Max Capital and Max Bermuda are incorporated in Bermuda, and pursuant to Bermuda law are not taxed on either income or capital gains. They have each received an assurance from the Bermuda Minister of Finance under the Exempted Undertaking Tax Protection Act, 1966 of Bermuda that if there is enacted in Bermuda any legislation imposing tax computed on profits or income, or computed on any capital asset, gain or appreciation, then the imposition of any such tax will not be applicable until March 2016. The Company’s subsidiaries that are based in the United States and Ireland are subject to the tax laws of those jurisdictions and the jurisdictions in which they operate. The tax years open to examination by the U.S. Internal Revenue Service for the U.S. subsidiaries are the years 2003 to the present. The tax years open to examination by the Irish Revenue Commissioners for the Irish-based subsidiaries are the years 2003 to the present.

The Company adopted the provisions of FIN 48 as of January 1, 2007. For the year ended December 31, 2007, the Company did not record any unrecognized tax benefits or expenses as a result of the adoption of FIN 48 and there was no adjustment to opening retained earnings. The Company has not recorded any interest or penalties during the year ended December 31, 2007.

The Company records income taxes during the year based on the estimated effective annual rates for each of the years ended December 31, 2007, 2006 and 2005. Interest and penalties related to uncertain tax positions, of which there have been none, would be recognized in income tax expense.

The components of income taxes attributable to operations for the years ended December 31, 2007, 2006 and 2005 were as follows:

	2007			2006			2005
Current expense:
United States	$	—		$	—		$	—
Ireland		1,442			1,529			526
		1,442			1,529			526
Deferred (benefit) expense:
United States		(893	)		—			—
Ireland		(971	)		(429	)		446
		(1,864	)		(429	)		446
Income tax (benefit) expense on net income	$	(422	)	$	1,100		$	972
Income tax (benefit) expense on net income	$	(422	)	$	1,100		$	972
Income tax expense on other comprehensive income		893			—			—
Total income tax	$	471		$	1,100		$	972

The expected tax provision computed on pre-tax income at the weighted average tax rate has been calculated as the sum of the pre-tax income in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. Statutory tax rates of 34% and 12.5% have been used for the United States and Ireland, respectively. A reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate follows:

	2007			2006			2005
Expected income tax (benefit) expense computed on pre-tax income at weighted average income tax rate	$	(4,996	)	$	1,647		$	1,372
Addition to (reduction in) income tax (benefit) expense resulting from:
Valuation allowance on deferred tax assets		4,680			—			—
Income tax benefit on intercompany transactions		(144	)		(550	)		(370	)
Prior year adjustment		(501	)		3			(30	)
Permanent differences		539			—			—
Income tax (benefit) expense	$	(422	)	$	1,100		$	972

F-23

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

14. Taxation (continued)

The tax effects of temporary differences that give rise to significant portions of the deferred tax provision are as follows:

	2007		2006		2005
Deferred tax asset:
Net operating loss carryforward	$	4,678	$	—	$	—
Deferred acquisition costs, net		782		—		—
Net unearned property and casualty premiums		131		—		—
Deferred compensation		431		—		—
Capitalized professional fees		287		—		—
Other		5		—		—
Gross deferred tax asset		6,314		—		—
Less valuation allowance		4,680		—		—
Deferred tax asset		1,634		—		—
Deferred tax liability:
Net unrealized appreciation on fixed maturities		893		—		—
Goodwill amortization		277		—		—
Other		34		—		—
Deferred tax liability		1,204		—		—
Net deferred tax asset	$	430	$	—	$	—

At December 31, 2007 and 2006, the Company has net operating loss carryforwards in its U.S. operating subsidiaries totaling $13,726 and $nil, respectively. Such net operating losses are currently available to offset future taxable income of the subsidiaries. Under applicable law, the U.S. net operating loss carryforwards expire between 2026 and 2027.

The Company has provided a valuation allowance to reduce certain deferred tax assets to an amount which management expects to more likely than not be realized. Adjustments to the valuation allowance are made when there is a change in management’s assessment of the amount of deferred tax assets that are realizable.

15. Statutory requirements and dividend restrictions

Under the Bermuda Insurance Act, 1978 and related regulations, Max Bermuda is required to maintain certain levels of solvency and liquidity. The minimum statutory capital and surplus required at December 31, 2007 was approximately $270,000 and actual statutory capital and surplus was approximately $1,600,000. The principal difference between statutory capital and surplus and shareholders’ equity presented in accordance with GAAP is deferred acquisition costs, which are non-admitted assets for statutory purposes.

Max Bermuda is also required under its Class 4 license to maintain a minimum liquidity ratio whereby the value of its relevant assets is not less than 75% of the amount of its relevant liabilities for general business. Relevant assets include cash and cash equivalents, fixed maturities, alternative investments, accrued interest income, premiums receivable, losses recoverable from reinsurers and funds withheld. The relevant liabilities are total general business insurance reserves and total other liabilities, less sundry liabilities. As of December 31, 2007, the Company met the minimum liquidity ratio requirement.

Under the Irish Insurance Acts 1909 to 2000, regulations made under those Acts, and regulations relating to insurance and reinsurance business made under the European Communities Act, 1972 and directions issued under those regulations, Max Insurance Europe Limited and Max Re Europe Limited are required to maintain technical reserves and a minimum solvency margin. As of December 31, 2007, Max Insurance Europe Limited and Max Re Europe Limited maintain sufficient technical reserves and met the minimum solvency margin requirement.

F-24

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

15. Statutory requirements and dividend restrictions (continued)

Max Specialty files financial statements prepared in accordance with statutory accounting practices prescribed or permitted by U.S. insurance regulators. Statutory net income and statutory surplus, as reported to the insurance regulatory authorities, differ in certain respects from the amounts prepared in accordance with GAAP. The main differences between statutory net income and GAAP net income relate to deferred acquisition costs and deferred income taxes. In addition to deferred acquisition costs and deferred income tax assets, other differences between statutory surplus and GAAP shareholders’ equity are unrealized appreciation or decline in value of investments and non-admitted assets.

The Company’s ability to pay dividends is subject to certain regulatory restrictions on the payment of dividends by its subsidiaries. The payment of such dividends is limited by applicable regulations and statutory requirements of Bermuda, Ireland and the United States. Max Bermuda, Max Insurance Europe Limited and Max Re Europe Limited are prohibited from declaring or paying a dividend if such payment would reduce their statutory surplus below the required minimum. The laws of the domicile state of Delaware govern the amount of dividends that may be paid by Max Specialty. Max Bermuda is also subject to certain restrictions under its credit facilities that affect its ability to pay dividends to the Company. The Company paid dividends of $0.32 per share in 2007 compared to $0.24 per share and $0.18 per share during 2006 and 2005, respectively.

16. Earnings per share

The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2007, 2006 and 2005.

	2007		2006		2005
Basic earnings per share:
Net income	$	303,249	$	216,888	$	9,505
Weighted average common shares outstanding		59,892,414		59,655,636		48,685,954
Basic earnings per share	$	5.06	$	3.64	$	0.20
Diluted earnings per share:
Net income	$	303,249	$	216,888	$	9,505
Weighted average ordinary shares outstanding - basic	$	59,892,414	$	59,655,636	$	48,685,954
Conversion of warrants		3,467,554		3,201,888		3,146,532
Conversion of options		479,264		401,276		723,529
Weighted average ordinary shares outstanding - diluted		63,839,232		63,258,800		52,556,015
Diluted earnings per share	$	4.75	$	3.43	$	0.18

17. Commitments and contingencies

(a) Concentrations of credit risk

The Company’s portfolio of cash and fixed maturities is managed following prudent standards of diversification. Specific provisions limit the allowable holdings of a single issue and issuers. The Company believes that there are no significant concentrations of credit risk associated with its portfolio of fixed maturities.

The Company’s portfolio of alternative investments is managed pursuant to guidelines that emphasize diversification and liquidity. Pursuant to these guidelines, the Manager of Max Diversified’s portfolio is responsible for managing and monitoring risk across a variety of investment funds and vehicles, markets and counterparties. The Company believes that there are no significant concentrations of credit risk associated with its alternative investments.

The Company’s investments are held by three different custodians. These custodians are all large financial institutions which are highly regulated. These institutions have controls over their investment processes which are certified annually.

F-25

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

17. Commitments and contingencies (continued)

(b) Lease commitments

The Company and its subsidiaries lease office space in the countries in which they operate under operating leases, which expire at various dates through 2012. Total rent expense for the years ended December 31, 2007, 2006 and 2005 was $2,583, $1,706, and $1,414, respectively. The rent and maintenance expense under operating leases will range from $3,799 to $7,539 over the next five years.

(c) Credit facilities

The Company has three credit facilities as of December 31, 2007. The Company entered into its primary credit facility on August 7, 2007 with Bank of America and various other financial institutions. This credit agreement replaced a credit agreement dated as of June 1, 2005 with Bank of America and various other financial institutions. The primary facility provides for a $450,000 five-year senior secured credit facility for letters of credit to be issued for the account of Max Bermuda and certain of its insurance subsidiaries and a $150,000 five-year unsecured senior credit facility for letters of credit to be issued for the account of Max Bermuda and certain of its insurance subsidiaries and loans to Max Bermuda and Max Capital. Subject to certain conditions and at the request of Max Bermuda, the aggregate commitments of the lenders under the primary facility may be increased up to a total of $800,000, provided that the unsecured commitments may not exceed 25% of the aggregate commitments under the primary facility. At December 31, 2007, letters of credit totaling $364,339 were outstanding under this facility compared to $380,324 at December 31, 2006 under the replaced credit agreement. At December 31, 2007, fixed maturities and cash equivalents with a fair value of $449,786 were pledged as collateral for these letters of credit compared to $445,141 at December 31, 2006 under the replaced credit agreement. As of December 31, 2007, there was a $50,000 unsecured loan outstanding to Max Capital under this facility, as described in Note 9.

In December 2006, the Company entered into a $100,000 letter of credit facility with The Bank of Nova Scotia. At December 31, 2007 a letter of credit totaling $4,498 was issued and outstanding under this facility. The letter of credit has been collateralized by fixed maturities and cash equivalents with a fair value of $5,030 at December 31, 2007. There were no letters of credit issued or outstanding under this facility at December 31, 2006.

In November 2004, the Company entered into a $20,000 letter of credit facility with ING Bank N.V., London Branch (“ING”). At December 31, 2007 and December 31, 2006, letters of credit totaling $20,000 and $20,000 respectively, were issued by ING under this facility. All letters of credit issued under this facility are collateralized by a portion of the Company’s invested assets. Fixed maturities and cash equivalents with a fair value of $25,262 and $23,566 at December 31, 2007 and 2006, respectively, were pledged as collateral for these letters of credit.

Each of the credit facilities requires that the Company and/or certain of its subsidiaries comply with certain covenants, including a minimum consolidated tangible net worth and restrictions on the payment of dividends. The Company was in compliance with all the covenants of each of its letter of credit facilities at December 31, 2007.

18. Subsequent events

Accelerated Share Repurchase Agreement

On December 24, 2007, the Company entered into an agreement effective January 2, 2008 (the “ASR Agreement”), to purchase $50,000 of its common shares from an investment bank pursuant to an accelerated share repurchase program. Under this program, the Company acquired and cancelled 1,419,769 shares on January 24, 2008. When the ASR Agreement expires, the Company expects to receive and subsequently cancel between 157,752 and 387,811 additional shares, with the actual number being determined by the volume weighted average price of the Company’s shares over the period from January 24, 2008 to the date of termination. Apart from the Company’s payment of $50,000 on January 4, 2008, the Company will make no further payments under this ASR Agreement.

Common Shares

On February 8, 2008, under the Board-approved repurchase program, the Company repurchased all of the common shares issued upon the exercise of outstanding warrants by one of the Company’s original shareholders. A total of 1,031,178 common shares were repurchased at a price of $28.78 per common share for a total of $29,675.

On each of February 8 and 12, 2008, the Company’s Board of Directors authorized an increase in the share repurchase program. Following this increase, the amount remaining under the Company’s share repurchase program was $100,000.

F-26

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

19. Segment information

The Company operates in four segments: property and casualty reinsurance, property and casualty insurance, U.S. excess and surplus lines insurance and life and annuity reinsurance. Within the property and casualty reinsurance segment, the Company offers quota share and excess of loss capacity providing coverage for a portfolio of underlying risks written by the Company’s clients. In the property and casualty insurance segment, the Company generally offers excess of loss capacity on specific risks related to individual insureds. The U.S. excess and surplus lines insurance segment comprises the underwriting operations of the Company’s U.S.-based business, which offers property and casualty insurance as an eligible non-admitted insurer on an excess and surplus basis in the United States. Within the life and annuity reinsurance segment, the Company currently offers reinsurance products focusing on existing blocks of business, which take the form of co-insurance transactions. In co-insurance transactions, risks are reinsured on the same basis as the original policies. The Company also has a corporate function that manages the Company’s investment and financing activities.

The U.S. excess and surplus lines insurance segment has its own portfolio of fixed maturities investments. The investment income earned by the Company’s U.S. subsidiaries is reported in that segment. Invested assets relating to the three non-U.S. segments are managed on a consolidated basis. Consequently, investment income on this consolidated portfolio and gains on the alternative investment portfolio (collectively referred to as the “non-U.S. portfolio”) are not directly captured in the non-U.S. segment results. However, because of the longer duration of liabilities on casualty business and life and annuity business, investment returns are important in evaluating the profitability of these segments. Accordingly, the Company allocates investment returns from the non-U.S. portfolio to each non-U.S. segment. This is based on a notional allocation of invested assets from the total portfolio using durations that are determined based on estimated cash flows into and out of each non-U.S. segment. The balance of investment returns are allocated to the corporate function. The investment returns for the Company’s strategic private equity reinsurance investments are allocated entirely to the corporate function.

F-27

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

19. Segment information (continued)

A summary of operations by segment for the years ended December 31, 2007, 2006 and 2005 were as follows:

	Property & Casualty												Life & Annuity
2007	Reinsurance			Insurance			Excess & Surplus			Total			Reinsurance			Corporate			Consolidated
Revenues
Gross premiums written	$	345,156		$	382,926		$	48,243		$	776,325		$	301,961		$	—		$	1,078,286
Reinsurance premiums ceded		(44,565	)		(201,987	)		(34,610	)		(281,162	)		(534	)		—			(281,696	)
Net premiums written	$	300,591		$	180,939		$	13,633		$	495,163		$	301,427		$	—		$	796,590
Earned premiums	$	356,448		$	398,776		$	16,988		$	772,212		$	301,961		$	—		$	1,074,173
Earned premiums ceded		(43,501	)		(199,223	)		(13,010	)		(255,734	)		(534	)		—			(256,268	)
Net premiums earned		312,947			199,553			3,978			516,478			301,427			—			817,905
Net investment income		41,025			16,160			5,974			63,159			33,936			91,111			188,206
Net gains on alternative investments		53,021			14,271			—			67,292			60,713			58,716			186,721
Net realized gains on sale of fixed maturities		—			—			—			—			—			(4,017	)		(4,017	)
Other income		—			—			—			—			—			745			745
Total revenues		406,993			229,984			9,952			646,929			396,076			146,555			1,189,560
Losses and expenses
Losses and benefits		173,317			153,816			3,261			330,394			345,602			—			675,996
Acquisition costs		60,910			(1,162	)		376			60,124			1,236			—			61,360
Interest expense		11,890			—			—			11,890			6,864			23,909			42,663
General and administrative expenses		28,394			19,348			17,430			65,172			2,813			38,729			106,714
Total losses and expenses		274,511			172,002			21,067			467,580			356,515			62,638			886,733
Income before taxes	$	132,482		$	57,982		$	(11,115	)	$	179,349		$	39,561		$	83,917		$	302,827
Loss ratio *		55.4	%		77.1	%		82.0	%		64.0	%		***
Combined ratio **		83.9	%		86.2	%		n/a			88.2	%		***

* The loss ratio is calculated by dividing losses and benefits by net premiums earned.

** The combined ratio is calculated by dividing the sum of losses and benefits, acquisition costs and general and administrative expenses by net premiums earned.

*** Loss ratio and combined ratio are not provided for life and annuity products as the Company believes these ratios are not appropriate measures for life and annuity underwriting.

F-28

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

19. Segment information (continued)

	Property & Casualty											Life & Annuity
2006	Reinsurance			Insurance			Excess & Surplus		Total			Reinsurance			Corporate			Consolidated
Revenues
Gross premiums written	$	423,555		$	396,594		$	—	$	820,149		$	45,048		$	—		$	865,197
Reinsurance premiums ceded		(35,267	)		(194,549	)		—		(229,816	)		(730	)		—			(230,546	)
Net premiums written	$	388,288		$	202,045		$	—	$	590,333		$	44,318		$	—		$	634,651
Earned premiums	$	456,283		$	373,913		$	—	$	830,196		$	45,048		$	—		$	875,244
Earned premiums ceded		(33,470	)		(176,036	)		—		(209,506	)		(730	)		—			(210,236	)
Net premiums earned		422,813			197,877			—		620,690			44,318			—			665,008
Net investment income		38,613			14,852			—		53,465			29,013			67,552			150,030
Net gains on alternative investments		20,167			5,168			—		25,335			22,901			36,514			84,750
Net realized gains on sale of fixed maturities		—			—			—		—			—			(5,798	)		(5,798	)
Other income		—			—			—		—			—			1,021			1,021
Total revenues		481,593			217,897			—		699,490			96,232			99,289			895,011
Losses and expenses
Losses and benefits		296,036			124,183			—		420,219			77,750			—			497,969
Acquisition costs		77,330			(136	)		—		77,194			1,739			—			78,933
Interest expense		(3,828	)		—			—		(3,828	)		5,233			12,427			13,832
General and administrative expenses		23,484			15,641			—		39,125			3,038			44,126			86,289
Total losses and expenses		393,022			139,688			—		532,710			87,760			56,553			677,023
Income before taxes	$	88,571		$	78,209		$	—	$	166,780		$	8,472		$	42,736		$	217,988
Loss ratio *		70.0	%		62.8	%		—		67.7	%		***
Combined ratio **		93.9	%		70.6	%		—		86.4	%		***

* The loss ratio is calculated by dividing losses and benefits by net premiums earned.

** The combined ratio is calculated by dividing the sum of losses and benefits, acquisition costs and general and administrative expenses by net premiums earned.

*** Loss ratio and combined ratio are not provided for life and annuity products as the Company believes these ratios are not appropriate measure for life and annuity underwriting.

F-29

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

19. Segment information (continued)

	Property & Casualty											Life & Annuity
2005	Reinsurance			Insurance			Excess & Surplus		Total			Reinsurance			Corporate			Consolidated
Revenues
Gross premiums written	$	615,720		$	355,296		$	—	$	971,016		$	275,015		$	—		$	1,246,031
Reinsurance premiums ceded		(51,767	)		(145,738	)		—		(197,505	)		(1,469	)		—			(198,974	)
Net premiums written	$	563,953		$	209,558		$	—	$	773,511		$	273,546		$	—		$	1,047,057
Earned premiums	$	671,356		$	301,213		$	—	$	972,569		$	275,015		$	—		$	1,247,584
Earned premiums ceded		(64,287	)		(128,329	)		—		(192,616	)		(1,469	)		—			(194,085	)
Net premiums earned		607,069			172,884			—		779,953			273,546			—			1,053,499
Net investment income		33,244			10,402			—		43,646			26,370			36,819			106,835
Net gains on alternative investments		18,527			3,521			—		22,048			18,374			(537	)		39,885
Net realized gains on sale of fixed maturities		—			—			—		—			—			(743	)		(743	)
Other income		—			—			—		—			—			4,635			4,635
Total revenues		658,840			186,807			—		845,647			318,290			40,174			1,204,111
Losses and expenses
Losses and benefits		552,795			175,458			—		728,253			311,212			—			1,039,465
Acquisition costs		73,617			110			—		73,727			2,497			—			76,224
Interest expense		11,527			—			—		11,527			3,315			7,922			22,764
General and administrative expenses		15,023			9,857			—		24,880			3,487			26,814			55,181
Total losses and expenses		652,962			185,425			—		838,387			320,511			34,736			1,193,634
Income (loss) before taxes	$	5,878		$	1,382		$	—	$	7,260		$	(2,221	)	$	5,438		$	10,477
Loss ratio *		91.1	%		101.5	%		—		93.4	%		***
Combined ratio **		105.7	%		107.3	%		—		106.0	%		***

* The loss ratio is calculated by dividing losses and benefits by net premiums earned.

** The combined ratio is calculated by dividing the sum of losses and benefits, acquisition costs and general and administrative expenses by net premiums earned.

*** Loss ratio and combined ratio are not provided for life and annuity products as the Company believes these ratios are not appropriate measures for life and annuity underwriting.

F-30

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

19. Segment information (continued)

The Company’s clients are principally located in two geographic regions: North America and Other (predominantly in Europe).

Financial information relating to gross premiums written and reinsurance premiums ceded by geographic region for the years ended December 31, 2007, 2006 and 2005 was as follows:

	2007			2006			2005
North America	$	587,680		$	553,413		$	812,860
Other (predominantly in Europe)		490,607			311,784			433,171
Reinsurance ceded – North America		(227,743	)		(171,248	)		(163,947	)
Reinsurance ceded – Other (predominantly in Europe)		(53,954	)		(59,298	)		(35,027	)
	$	796,590		$	634,651		$	1,047,057

The three largest clients accounted for 19.3%, 6.3% and 2.7%, of the Company’s gross premiums written during the year ended December 31, 2007. There were no clients that accounted for more than 5% of the Company’s gross premiums written during the year ended December 31, 2006. Three customers accounted for 11.5%,10.2% and 7.4%, respectively, of the Company’s gross premiums written during the year ended December 31, 2005.

20. Quarterly financial results (unaudited)

	Quarter Ended
2007	March 31			June 30			September 30			December 31
Revenues
Gross premiums written	$	213,598		$	241,502		$	222,989		$	400,197
Net premiums earned	$	139,422		$	138,011		$	177,554		$	362,918
Net investment income		42,817			46,369			49,665			49,355
Net gains on alternative investments		54,112			68,087			14,487			50,035
Net realized losses on sale of fixed maturities		(1,043	)		(282	)		(1,650	)		(1,042	)
Other income		174			169			244			158
Total revenues		235,482			252,354			240,300			461,424
Losses and expenses
Losses and benefits		107,015			106,501			121,353			341,127
Acquisition costs		14,926			19,732			12,105			14,597
Interest expense		8,107			8,328			13,673			12,555
General and administrative expenses		25,196			26,762			27,783			26,973
Total losses and expenses		155,244			161,323			174,914			395,252
Income before taxes	$	80,238		$	91,031		$	65,386		$	66,172
Income tax expense (benefit)		245			(3,109	)		(1,380	)		3,822
Net income	$	79,993		$	94,140		$	66,766		$	62,350
Basic earnings per share	$	1.32		$	1.55		$	1.12		$	1.07
Diluted earnings per share	$	1.24		$	1.45		$	1.05		$	1.00

F-31

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

20. Quarterly financial results (unaudited) (continued)

	Quarter Ended
2006	March 31			June 30			September 30			December 31
Revenues
Gross premiums written	$	255,924		$	283,967		$	177,854		$	147,452
Net premiums earned	$	159,757		$	199,189		$	147,081		$	158,981
Net investment income		34,029			36,497			38,668			40,836
Net gains on alternative investments		54,859			(5,636	)		(31,004	)		66,531
Net realized gains (losses) on sale of fixed maturities		(1,676	)		(5,285	)		(288	)		1,451
Other income		500			165			167			189
Total revenues		247,469			224,930			154,624			267,988
Losses and expenses
Losses and benefits		125,599			165,324			89,186			117,860
Acquisition costs		21,543			18,847			18,979			19,564
Interest expense		3,295			4,673			(1,650	)		7,514
General and administrative expenses		21,509			16,048			21,301			27,431
Total losses and expenses		171,946			204,892			127,816			172,369
Income before taxes	$	75,523		$	20,038		$	26,808		$	95,619
Income tax expense		250			306			311			233
Net income	$	75,273		$	19,732		$	26,497		$	95,386
Basic earnings per share	$	1.27		$	0.33		$	0.45		$	1.59
Diluted earnings per share	$	1.19		$	0.31		$	0.42		$	1.51

F-32

MAX CAPITAL GROUP LTD.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(Expressed in thousands of United States Dollars, except per share amounts)

20. Quarterly financial results (unaudited) (continued)

	Quarter Ended
2005	March 31		June 30		September 30			December 31
Revenues
Gross premiums written	$	455,689	$	245,107	$	288,047		$	257,188
Net premiums earned	$	308,324	$	192,656	$	295,777		$	256,742
Net investment income		23,689		24,965		27,002			31,179
Net gains on alternative investments		14,377		3,597		35,642			(13,731	)
Net realized gains (losses) on sale of fixed maturities		390		813		1,624			(3,570	)
Other income		1,318		1,182		1,088			1,047
Total revenues		348,098		223,213		361,133			271,667
Losses and expenses
Losses and benefits		268,298		156,458		367,681			247,028
Acquisition costs		21,502		17,921		20,492			16,309
Interest expense		3,057		10,139		2,720			6,848
General and administrative expenses		15,079		12,116		14,195			13,791
Total losses and expenses		307,936		196,634		405,088			283,976
Income (loss) before taxes	$	40,162	$	26,579	$	(43,955	)	$	(12,309	)
Income tax expense		178		194		289			311
Net income	$	39,984	$	26,385	$	(44,244	)	$	(12,620	)
Basic earnings (loss) per share	$	0.87	$	0.57	$	(0.96	)	$	(0.22	)
Diluted earnings (loss) per share	$	0.80	$	0.53	$	(0.96	)	$	(0.22	)

F-33

SCHEDULE II

MAX CAPITAL GROUP LTD.

Supplementary Insurance Information (Unaudited)

Balance Sheet

December 31, 2007and 2006

(Expressed in thousands of U.S. Dollars)

	December 31, 2007			December 31, 2006
Assets
Cash and cash equivalents	$	17,368		$	21,742
Investments in Subsidiaries		1,731,735			1,364,940
Due from affiliated companies		(110,626	)		28,041
Other assets		531			412
Total Assets	$	1,639,008		$	1,415,135
Liabilities
Bank Loan		50,000			—
Accounts payable and accrued expenses		5,114			3,386
Total Liabilities		55,114			3,386
Shareholders’ Equity
Preferred shares (par value $1) 20,000,000 shares authorized; no shares issued or outstanding					—
Common shares (par value $1) 200,000,000 shares authorized; 57,515,075 shares issued and outstanding (2006 – 60,276,560)		57,515			60,277
Addition paid-in capital		844,455			950,862
Unearned stock grant compensation		(20,341	)		(17,570	)
Accumulated other comprehensive income (loss)		—			—
Retained earnings		702,265			418,180
Total Shareholders’ Equity	$	1,583,894		$	1,411,749
Total Liabilities and Shareholders’ Equity	$	1,639,008		$	1,415,135

See accompanying report

F-34

SCHEDULE II (Continued)

MAX CAPITAL GROUP LTD.

Supplementary Insurance Information

Statement of Income and Comprehensive Income

For the years ended December 31, 2007, 2006 and 2005

(Expressed in thousands of U.S. Dollars)

	Year ended December 31, 2007		Year ended December 31, 2006		Year ended December 31, 2005
Revenue
Net investment income	$	318,105	$	219,899	$	12,119
Expenses
Interest Expense		4,004		—		—
General and administrative expenses		10,852		3,011		2,614
Net Income	$	303,249	$	216,888	$	9,505
Unrealized gains arising during the year		—		—		—
Adjustments for re-classification of (gains) realized in income		—		—		—
Comprehensive Income	$	303,249	$	216,888	$	9,505

See accompanying report

F-35

SCHEDULE II (Continued)

MAX CAPITAL GROUP LTD.

Supplementary Insurance Information

Statement of Cash Flows

For the years ended December 31, 2007, 2006 and 2005

(Expressed in thousands of U.S. Dollars)

	Year ended December 31, 2007			Year ended December 31, 2006			Year ended December 31, 2005
Operating activities:
Net income	$	303,249		$	216,888		$	9,505
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization of unearned stock based compensation		17,780			16,445			10,996
Other assets		(119	)		121			159
Accounts payable and accrued expenses		1,728			1,725			1,184
Due from affiliated companies		138,667			6,573			(20,688	)
Equity in net earnings of subsidiaries		(317,137	)		(219,381	)		(11,589	)
Net cash used in (provided by) operating activities		144,168			22,371			(10,433	)
Investing activities:
Investments in subsidiaries		(70,000	)		(15,000	)		(272,515	)
Dividends received		—			—			13,660
Net cash used in (provided by) investing activities		(70,000	)		(15,000	)		(258,855	)
Financing Activities:
Net proceeds from issuance of common shares		4,976			11,503			286,027
Repurchase of common shares		(114,355	)		(18	)		(7,360	)
Proceeds from bank loan		50,000			—			—
Notes and loans repaid		—			465			10,050
Dividend paid		(19,163	)		(14,273	)		(8,955	)
Net cash (provided by) used in financing activities		(78,542	)		(2,323	)		279,762
Increase in cash and cash equivalents		(4,374	)		5,048			10,474
Cash and cash equivalents, beginning of period		21,742			16,694			6,220
Cash and cash equivalents, end of period	$	17,368		$	21,742		$	16,694

See accompanying report

F-36

SCHEDULE III

MAX CAPITAL GROUP LTD.

Supplementary Insurance Information

December 31, 2007, 2006 and 2005

(Expressed in thousands of U.S. Dollars)

Year ended December 31, 2007

	Deferred Acquisition Costs			Reserve for Losses and Loss Expenses		Unearned Premiums		Net Premiums Earned		Net investment income and Net gains on alternative investments		Losses and Loss Expense		Amortization of Deferred Acquisition Costs			Net Premiums Written		Other Operating Expenses
Property & Casualty Reinsurance	$	24,767		$	1,441,993	$	224,137	$	312,947	$	94,046	$	173,317	$	60,910		$	300,591	$	28,394
Property & Casualty Insurance		12,194			866,782		184,189		199,553		30,431		153,816		(1,162	)		180,939		19,348
Life Reinsurance		7,607			1,203,509		—		301,427		94,649		345,602		1,236			301,427		2,813
U.S. -based excess and surplus lines		(381	)		25,102		31,255		3,978		5,974		3,261		376			13,633		17,430
Not allocated to segments		—			—		—		—		149,827		—		—			—		38,729
Total		44,187			3,537,386		439,581		817,905		374,927		675,996		61,360			796,590		106,714

Year ended December 31, 2006

	Deferred Acquisition Costs		Reserve for Losses and Loss Expenses		Unearned Premiums		Net Premiums Earned		Net investment income and Net gains on alternative investments	Losses and Loss Expense		Amortization of Deferred Acquisition Costs			Net Premiums Written		Other Operating Expenses
Property & Casualty Reinsurance	$	34,569	$	1,702,222	$	231,726	$	422,813	58,780	$	296,036	$	77,330		$	388,288	$	23,484
Property & Casualty Insurance		5,887		632,887		204,750		197,877	20,020		124,183		(136	)		202,045		15,641
Life Reinsurance		8,608		895,560		—		44,318	51,914		77,750		1,739			44,318		3,038
Not allocated to segments		—		—		—		—	104,066		—		—			—		44,126
Total		49,064		3,230,669		436,476		665,008	234,780		497,969		78,933			634,651		86,289

Year ended December 31, 2005

	Deferred Acquisition Costs		Reserve for Losses and Loss Expenses		Unearned Premiums		Net Premiums Earned		Net investment income and Net gains on alternative investments	Losses and Loss Expense		Amortization of Deferred Acquisition Costs		Net Premiums Written		Other Operating Expenses
Property & Casualty Reinsurance	$	44,858	$	1,549,972	$	261,522	$	607,069	51,771	$	552,795	$	73,617	$	563,953	$	15,023
Property & Casualty Insurance		3,711		456,060		181,454		172,884	13,923		175,458		110		209,558		9,857
Life Reinsurance		20,446		854,224		—		273,546	44,744		311,212		2,497		273,546		3,487
Not allocated to segments		—		—		—		—	36,282		—		—		—		26,814
Total		69,015		2,860,256		442,976		1,053,499	146,720		1,039,465		76,224		1,047,057		55,181

See accompanying report

F-37

SCHEDULE IV

MAX CAPITAL GROUP LTD.

Reinsurance

December 31, 2007, 2006 and 2005

(Expressed in thousands of U.S. Dollars)

	Direct Gross Premium		Ceded to Other Companies		Assumed from Other Companies		Net Amount		Percentage of Amount Assumed to Net
Year ended December 31, 2007	$	431,169	$	281,696	$	647,117	$	796,590	81	%
Year ended December 31, 2006	$	396,594	$	230,546	$	468,603	$	634,651	74	%
Year ended December 31, 2005	$	355,296	$	198,974	$	890,735	$	1,047,057	85	%

See accompanying report

F-38