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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K



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Annual Report Pursuant to Section 13 or 15(D) of the

Securities Exchange Act of 1934



For the fiscal year ended December 31, 2002



Commission File Number 000-33047



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MAX RE CAPITAL LTD.

(Exact name of registrant as specified in its charter)



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|Bermuda                                                        |  | Not Applicable                         
|-------------------------------------------------------------- |  | ---------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



Ascot
House

28 Queen Street

Hamilton, HM 11

Bermuda

(Address of principal executive offices)



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Registrants telephone number, including area code: (441) 296-8800



Securities registered pursuant to Section 12(b) of the Act:



|Title of each class: |  | Name of each exchange on which registered:
|-------------------- |  | ------------------------------------------
|None                 |  | None                                      



Securities registered pursuant to Section 12(g) of the Act:



Common Shares, Par Value $1.00 per share (the Common Shares)



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



Indicate by check mark if disclosure of
delinquent files 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 definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.  x



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No ̈



The aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant as of June 30, 2002 was $354,425,099, based on the closing price of the registrants common shares on June 28, 2002, 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 March 14, 2003 was 38,183,879.



Documents incorporated by reference:



Portions of the proxy statement for the registrants annual meeting of shareholders to be held on May 1, 2003, to be filed subsequently with the Securities and Exchange Commission pursuant to Regulation 14A, are incorporated by
reference in Part III of this Annual Report on Form 10-K.



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TABLE OF CONTENTS



|         |  |                                                                                       |  | Page
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I   |  |                                                                                       |  | 1   
|ITEM 1.  |  | BUSINESS                                                                              |  | 1   
|ITEM 2.  |  | PROPERTIES                                                                            |  | 17  
|ITEM 3.  |  | LEGAL PROCEEDINGS                                                                     |  | 17  
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 17  
|        
|PART II  |  |                                                                                       |  | 18  
|ITEM 5.  |  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                 |  | 18  
|ITEM 6.  |  | SELECTED FINANCIAL DATA                                                               |  | 19  
|ITEM 7.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 20  
|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 30  
|ITEM 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           |  | 31  
|ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  |  | 31  
|        
|PART III |  |                                                                                       |  | 31  
|ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                    |  | 31  
|ITEM 11. |  | EXECUTIVE COMPENSATION                                                                |  | 32  
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                        |  | 32  
|ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                        |  | 32  
|ITEM 14. |  | DISCLOSURE CONTROLS AND PROCEDURES                                                    |  | 32  
|        
|PART IV  |  |                                                                                       |  | 33  
|ITEM 15. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                       |  | 33  



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PART I



ITEM 1.
BUSINESS



References
in this Annual Report on Form 10-K to Max Re Capital or the Company refer to Max Re Capital Ltd., a Bermuda company, and, unless the context otherwise requires or is otherwise as expressly stated, its direct and indirect subsidiaries, Max Re Ltd., a
Bermuda company licensed under the laws of Bermuda as a Class 4 insurer and long-term insurer (Max Re), Max Re Europe Limited, a reinsurance company incorporated and operated in Dublin, Ireland (Max Re Europe), Max Re
Diversified Strategies Ltd., a Bermuda company that invests in entities that pursue alternative investment strategies (Max Re Diversified), and Max Re Managers Ltd., a Bermuda company licensed under the laws of Bermuda as an insurance
manager (Max Re Managers).



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. The Company intends 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 the Companys 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 the Company or the Companys
management. When the Company makes forward-looking statements, it is basing them on managements beliefs and assumptions, using information currently available to it. 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 elsewhere herein and in documents filed by the Company with the Securities and Exchange Commission) include, without
limitation, acceptance in the market of the Companys reinsurance products, general economic conditions and conditions specific to the reinsurance and insurance markets in which the Company operates, pricing competition, the amount of
underwriting capacity from time to time in the market, material fluctuations in interest rate levels, tax and regulatory changes and conditions, rating agency policies and practices, claims development, 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 may adversely impact the Companys investment portfolio or impede the
Companys access to, or increase the cost of, financing its operations. The Company cautions that the foregoing list of important factors is not intended to be, and is not, exhaustive. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information, future events or otherwise. If one or more of these or other risks or uncertainties materialize, or if the Companys underlying assumptions prove to be incorrect,
actual results may vary materially from what the Company projected. Any forward-looking statements in this Form 10-K reflect the Companys



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current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the
Companys operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to the Company or individuals acting on the Companys behalf are expressly qualified in
their entirety by this paragraph.



General Description



Max Re Capital is a holding company formed
in July 1999 under the laws of Bermuda. Through its subsidiaries Max Re and Max Re Europe, the Company provides customized multi-line reinsurance and insurance products. Max Re Diversified holds all of the Companys alternative investments,
other than reinsurance private equity investments that are held by Max Re. Max Re Managers provides reinsurance underwriting and administrative services on a fee basis. The Company commenced operations in January 2000.



In December 1999, the Company raised gross proceeds of $331
million from an initial private placement of its Common Shares and non-voting common shares of Max Re, par value $1.00 per share (Max Re Non-Voting Common Shares). In March 2000, the Company completed a second private placement of the
Common Shares which raised an additional $180 million of gross proceeds. The Company used substantially all of the net proceeds of these offerings to capitalize its reinsurance operations.



On August 14, 2001, the Company raised gross proceeds of $192 million in its initial public offering of
Common Shares. Total proceeds received, net of underwriting discounts and commissions, were $179.5 million. Substantially all of the net proceeds were contributed to Max Re in support of its reinsurance operations. The Companys Common Shares
are listed on the Nasdaq National Market under the symbol MXRE and the Bermuda Stock Exchange under the symbol MXRE BH.



Business Segments



The Company operates in the reinsurance and insurance business, offering both property and casualty and life and annuity, including
disability, products. The table below sets forth the Companys gross premiums written by type of risk for the years ended December 31, 2002, 2001 and 2000. Additional information about the Companys business segments is set forth in Note
16 to the audited consolidated financial statements of the Company included herein.



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Segment
Analysis of Gross Premiums Written



Gross
premiums written, by type of risk assumed, for the years ended December 31, 2002, 2001 and 2000 was as follows:



|                                                     |  | 2002                   |         |                                      | 2001           |   |                        | 2000           |                                     
|---------------------------------------------------- |  | ---------------------- | ------- | ------------------------------------ | -------------- | - | ---------------------- | -------------- | ------------------------------------
|                                                     |  | 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:                               |  |                        |         |                                      |                |   |                        |                |                                     
|Workers Compensation                                |  | $                      | 88,431  |                                      | 13.7           | % |                        | $              | 300,327                             
|Automobile                                           |  |                        |        |                                      |               |   |                        |                |                                    
|General Liability                                    |  |                        | 50,613  |                                      | 7.8            | % |                        |                |                                    
|Professional Liability                               |  |                        | 31,350  |                                      | 4.8            | % |                        |                |                                    
|Directors and Officers                               |  |                        | 76,638  |                                      | 11.8           | % |                        |                |                                    
|Medical Malpractice                                  |  |                        |        |                                      |               |   |                        |                | 48                                  
|Accident and Health                                  |  |                        | 116,325 |                                      | 18.0           | % |                        |                |                                     
|Whole Account                                        |  |                        | 232,554 |                                      | 35.9           | % |                        |                | 196,077                             
|Other                                                |  |                        | 36,823  |                                      | 5.7            | % |                        |                |                                    
|                                                     |  |                        |         |                                      |                |   |                        |                |                                     
|Aggregate Property and Casualty                      |  | $                      | 632,734 |                                      | 97.7           | % |                        | $              | 496,452                             
|                                                     |  |                        |         |                                      |                |   |                        |                |                                     
|Life and Annuity:                                    |  |                        |         |                                      |                |   |                        |                |                                     
|Disability                                           |  | $                      | 14,656  |                                      | 2.3            | % |                        | $              | 109,983                             
|Structured Settlement                                |  |                        |        |                                      |               |   |                        |                | 100,128                             
|Waiver of Premium                                    |  |                        |        |                                      |               |   |                        |                |                                    
|Life                                                 |  |                        |        |                                      |               |   |                        |                |                                    
|Pre Need                                             |  |                        |        |                                      |               |   |                        |                | 3,988                               
|                                                     |  |                        |         |                                      |                |   |                        |                |                                     
|Aggregate Life and Annuity                           |  | $                      | 14,656  |                                      | 2.3            | % |                        | $              | 214,099                             
|                                                     |  |                        |         |                                      |                |   |                        |                |                                     
|Aggregate Life and Annuity and Property and Casualty |  | $                      | 647,390 |                                      | 100.0          | % |                        | $              | 710,551                             
|                                                     |  |                        |         |                                      |                |   |                        |                |                                     



The
majority of the Companys clients are insurers and reinsurers located in North America. The Company sources business throughout Europe, which represented approximately 36.3%, 27.6% and 15.3%, of gross premiums written for the years ended
December 31, 2002, 2001 and 2000, respectively. Through Max Re Europe, the Company is able to offer its products to prospective clients located in member countries of the European Union. Calculated based on the location of the cedent, the Company
derived approximately 99.0%, 100% and 100% of gross premiums written for the years ended December 31, 2002, 2001 and 2000, respectively, from business outside of Bermuda, approximately 63.7%, 72.4% and 84.7%, respectively, of which was derived from
cedents located in the United States.



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For the years
ended December 31, 2002, 2001, and 2000, the Company derived approximately 97.7%, 69.9%, and 30.8%, respectively, of its gross premiums written from property and casualty products and 2.3%, 30.1% and 69.2%, respectively, from life and annuity
products. Due to continual changes in industry cycles, the Company anticipates that the percentages of premiums written will fluctuate regularly between its property and casualty products and life and annuity products.



Description of Business



The Company is a Bermuda-based provider of reinsurance and
insurance products for both the property and casualty and life and annuity, including disability, markets. To manage its reinsurance and insurance liability exposure, allocate investments and assess overall risk, the Company models its underwriting
and investments on an integrated basis.



The
Companys integrated risk management, together with the flexibility provided by features of the Companys structured and alternative risk transfer products, allows the Company to invest a portion of its assets in alternative investments,
in addition to a high grade fixed maturities investment portfolio. While the Companys alternative investments, which consist of funds held by Max Re Diversified and private equity investments in reinsurance companies held by Max Re, have
greater liquidity constraints than publicly traded stocks and bonds, the Company believes that its alternative investments portfolio will allow for higher risk adjusted investment returns.



Reinsurance Products



Property and Casualty Reinsurance Products



The Company offers structured risk transfer, alternative risk transfer and traditional reinsurance products,
as well as insurance products, in the property and casualty market. The Company often customizes its reinsurance products in an effort to satisfy particular client needs. The structured risk transfer and alternative risk transfer reinsurance
products that the Company offers have several features that differ from traditional reinsurance products. These features require the client to share in its own loss results. Features that the Company includes in its structured risk transfer and
alternative risk transfer reinsurance products include: (i) premium refunds if the losses the Company incurs under a reinsurance contract are more favorable than those projected at the time of execution of the reinsurance contract; (ii) loss sharing
provisions that may require a client to share in a portion of its losses resulting from ceded risks; (iii) additional premium amounts if the Company incurs losses under the reinsurance contracts that are less favorable than those projected at the
time of execution of the reinsurance contract; and (iv) underwriting terms that limit the Companys maximum aggregate exposure. Structured risk transfer and alternative risk transfer products are distinguished from each other based on the
amount of risk transferred to the Company, with alternative risk transfer products transferring more risk to the Company.



The Company also offers traditional reinsurance products that do not typically include certain features described above and, accordingly,
the traditional products expose the Company to greater reinsurance loss than the structured or alternative risk transfer products. Generally, the Companys traditional reinsurance products are written on market terms with participation by other
reinsurers.



The Companys primary focus is
on the casualty classes, such as workers compensation, casualty, product liability, professional/medical malpractice and structured settlements, with a lesser focus on automobile, property, fire, catastrophe, accident, homeowners, bankers,
fidelity, marine, cargo, aviation and credit financial loss.



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The Company
typically writes its 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 the Companys
clients. With treaty reinsurance contracts, the Company does not evaluate separately each of the individual risks assumed under the contracts and is largely dependent on the individual underwriting decisions made by the ceding client. Accordingly,
the Company carefully reviews and analyzes the ceding clients risk management and underwriting practices in deciding whether to provide treaty reinsurance and in appropriately pricing the treaty.



The Companys contracts are written on either a quota
share, also known as proportional or pro rata, basis or on an excess of loss basis. With respect to quota share reinsurance, the Company shares the premiums as well as the losses and expenses in an agreed proportion with the ceding client. With
respect to excess of loss reinsurance, the Company generally receives the premium for the risk assumed and indemnifies the ceding client against all or a specified portion of losses and expenses in excess of a specified dollar or percentage amount.
In both types of contracts, the Company may provide a ceding commission to the client. For the years ended December 31, 2002, 2001 and 2000, $275.5 million, $94.1 million and $nil, respectively, of gross premiums written were written on a quota
share basis and $357.2 million, $402.4 million and $126.3 million, respectively, were written on an excess of loss basis.



The Company often writes property and casualty excess of loss reinsurance in layers. The Company seeks to accept the risk just above the
ceding clients retention up to a specified amount. Liability above and below the Companys specified layer is either ceded to another reinsurer in one or more layers or is retained by the ceding client. A loss that reaches into the
Companys layer will create a loss for the Company, but may not for other reinsurers on higher layers.



Life and Annuity, Including Disability, Reinsurance Products



The Companys life and annuity, including disability, products focus on existing blocks of business.
They typically take the form of co-insurance structures, where generally the risk is reinsured on the same basis as that of the original policy. In a co-insurance transaction, the Company receives a percentage of the gross premium charged to the
policyholder by the client less an expense allowance that the Company grants to the client, as the primary insurer. By transferring liabilities and the related assets to the Company in these co-insurance transactions, the Company seeks to allow its
life and annuity clients to achieve significant capital relief and improved returns on equity.



The life and annuity risks the Company underwrites include mortality and investment risks and, to a lesser extent, early surrender and lapse risks. The disability products the Company underwrites
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. 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. Generally, most life reinsurance is written on a yearly renewable term basis, where the predominant risk is the mortality of the insured. However, other types of life and fixed annuity
reinsurance, such as reinsurance of whole life policies or structured settlements, typically involve a certain level of investment risk, with the reinsurer often reinsuring a percentage of the ceding clients investment risk.



The Company seeks to write life and annuity reinsurance
agreements with respect to individual and group life insurance products, including disability, whole life, universal life, variable life, corporate owned life, fixed annuities, variable annuities and structured settlements.



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Pricing of the
Companys life and annuity reinsurance products is based on actuarial models which incorporate a number of factors, including assumptions for mortality, morbidity, expenses, demographics, persistency for life and health products, investment
returns, certain macroeconomic factors, such as inflation, and certain regulatory factors, such as taxation and minimum surplus requirements for all products.



Enterprise Risk Reinsurance Products



The Company offers enterprise risk financing directly to corporations and captive insurance companies of large global corporations.
Enterprise risk financing products are alternative risk transfer property and casualty and life and annuity products that are offered to corporations or their captive insurers rather than non-captive insurers. They are designed to enable
corporations to eliminate existing liabilities from their balance sheets in order to improve ratings or in preparation for mergers, acquisitions or recapitalizations.



Insurance Products



In the first quarter of 2003, the Company began offering property and casualty insurance products, primarily
to health care, industrial and pharmaceutical clients.



Duration



The average
duration of the Companys reinsurance liabilities as of December 31, 2002 was approximately 4.5 years. This average duration was calculated using the actuarial estimates of cash flow of the contracts in force. The actuarial estimates of cash
flow of the contracts include assumptions as to the size and timing of payments due from the Company under the contracts. Variations in the Companys actual experience from its assumptions may cause the average duration of its reinsurance
liabilities to be shorter or longer.



Underwriting and Risk
Management



The Company believes its
underwriting of structured and alternative risk transfer products is suitable for assuming risks that result in loss payments to clients over many years. The Company attempts to manage its underwriting exposures by diversifying across many
underlying insureds with small policy limits per insured. The Companys largest underlying exposure in the property and casualty reinsurance business is workers compensation, (including reinsurance written as such and workers
compensation exposure embedded in other types of contracts such as accident and health and whole account), which has attractive features of payments over many years and low statutorily defined cash payout amounts. With its life reinsurance products,
the Companys focus is on reinsuring blocks of business having small policy limits spread across a large population and avoids high policy limit exposures.



The Company seeks to reduce the volatility transmitted from underlying risks assumed through its written
business by setting and maintaining overall aggregate limits on liabilities, sub-limits on liabilities, attachment points for liabilities and contract terms providing for additional premium where losses are worse than expected.



The Company manages its overall risk by attempting to manage
the volatility of its asset mix in the context of its liabilities. The Company believes that its portfolio of underwriting risks benefits from diversification and complements its investment strategy. The Company accesses the retrocession and capital
markets to transfer risk to other parties when competitive advantages permit them to assume a risk



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for a lower price. The Company also manages the amount of leverage that it employs on the liability side of the business based upon continual
assessment of the risks and opportunities in the capital and underwriting markets.



The Company uses a series of proprietary and non-proprietary actuarial and financial models in an effort to analyze the underlying risk characteristics of its liabilities and assets. The Company
conducts both transaction-by-transaction modeling as well as portfolio aggregation modeling. The Company then analyzes these modeling efforts on an integrated basis in an effort to determine the correlation between the underwriting risks and the
investment risks and what the ultimate impact adverse events might have on the Companys surplus.



The Company utilizes 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 its products. In addition, the Company attempts to manage capital adequacy by incorporating value at risk and risk based capital analyses into its modeling.
Through the use of value at risk analysis, the Company seeks to adequately measure the financial risk inherent in each transaction and the portfolio overall, and the potential for adverse scenarios producing projected losses and potential negative
cash flow. Additionally, by employing a risk based capital analysis, rather than using premium income as a measure of risk, the Company is able to obtain an estimate of the amount of capital to be allocated to each transaction and its portfolio of
liabilities. The Company believes that its analysis of loss payment patterns enables it to generate meaningful projections of the total and interim cash flows of its reinsurance portfolio. The Company then uses the projections to determine the
profile of liquidity and investment returns required of its investment portfolio. The Company believes that this integrated approach allows it to optimize the use of its capital by providing a dynamic measurement of risk and return to evaluate
competing reinsurance and insurance and investment opportunities.



Due Diligence



The
Company performs a significant amount of due diligence on every material transaction that it considers underwriting, and performs regular monitoring and periodic due diligence on the transactions that it underwrites. Generally, the Company
complements its internal skills with reputable third party resources. Third party actuaries, attorneys, claim adjusters and other professionals perform on-site client due diligence on the Companys behalf and assist the Company in modeling
transactions and contract documentation.



Retrocessional and
Balance Sheet Protections



As part of the
underwriting process, the Company reinsures, or retrocedes, portions of certain risks for which it has accepted liability. In these transactions, the Company cedes to another reinsurer, called the retrocessionaire, all or part of the reinsurance
risk that the Company has assumed. However, these arrangements do not legally discharge the Company from its liability with respect to the obligations it has reinsured.



The Company prefers to cede risk to a retrocessionaire on a funds withheld basis. Retroceding risk on this
basis allows the Company to cede risk while maintaining control of the assets. The Company may offer a retrocessionaire the ability to receive an adjustment of the premium if the losses incurred by the Company on the underlying reinsurance contract
are more favorable than those projected at the time the contract is executed.



The Company utilizes retrocessional arrangements, such as quota share reinsurance, excess of loss reinsurance and stop-loss contracts that are available in the retrocessional market as a means to



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manage risk on the products it writes. In quota share reinsurance arrangements, the retrocessionaire shares a proportional part of the
Companys premiums and losses associated with the risks being reinsured, while in excess of loss reinsurance and stop-loss contracts, the retrocessionaire agrees to cover all losses in excess of the amount of risk the Company has retained,
subject in some cases to negotiated limits. The Companys strategy includes purchasing reinsurance to limit losses on a single risk or transaction, or on a whole portfolio basis, as the need arises.



The Company entered into a quota share retrocession agreement
with Grand Central Re Limited, a Bermuda reinsurer (Grand Central Re), effective as of January 1, 2002, amending the quota share arrangement with Grand Central Re that was effective as of January 1, 2001. The 2002 quota share reinsurance
contract 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 co-insurance basis.



The amount of risk the Company retains differs
in each retrocession transaction it underwrites. The Company may retain higher amounts of net risk on transactions where it believes it can monitor outcomes with a high degree of accuracy or where larger blocks of business offer the Company the
possibility of higher returns without retaining excessive risk. The Companys underwriting policy is to retain a maximum net exposure of not more than 5% of its shareholders equity for any individual contract it writes.



Since the Company is liable with respect to the reinsurance
that it cedes in the event that a retrocessionaire is unable to meet its obligations assumed under a retrocession agreement, the financial strength of each retrocessionaire is evaluated and monitored. Two retrocessionaires accounted for 60.9% and
36.5% of the Companys losses recoverable from reinsurers as of December 31, 2002. Both retrocessionaires have a financial strength rating of A by A.M. Best Company as of February 28, 2003.



Reserves



To recognize liabilities for unpaid losses and loss adjustment expenses, the Company establishes reserves,
which are balance sheet liabilities representing estimates of future amounts needed to pay losses and related expenses with respect to insured events which have occurred on or before the balance sheet date, including events which have occurred but
have not been reported by the ceding client.



In
accordance with Bermuda insurance regulations, the Company establishes and carries as liabilities actuarially determined reserves calculated to meet the Companys estimated future obligations. The adequacy of the Companys reserves is
reviewed annually by outside actuaries. The Company maintains its reserves on both a Bermuda regulatory and U.S. generally accepted accounting principles basis. Future policy benefits and losses constitute the majority of the Companys
financial obligations.



The Companys
property and casualty reserves are compiled on a transaction-by-transaction basis and are computed on an undiscounted basis. The reserves include amounts for claims reported but not yet paid, known as case reserves, claims incurred but not reported,
known as IBNR, as well as amounts for unearned premiums and premium deposits. The Company establishes life and annuity reserves on a discounted basis. It establishes reserves at a level that, together with additions from future premiums to be
received and interest on the reserves compounded annually at certain assumed rates, the Company believes to be sufficient to meet its estimated policy obligations when those obligations become payable.



Upon receipt of a notice of claim from a ceding client, the
Company establishes its own case reserve for the estimated amount of the ultimate settlement, if any. Case reserves usually are based upon



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the amount of reserves advised by the ceding client supplemented by the Companys own actuarial analysis and models.



The Company also establishes reserves to provide for IBNR
claims and the estimated expenses of adjusting and settling claims, including legal and other fees, known as loss adjustment expenses. The Company calculates IBNR and loss adjustment expense reserves by using generally accepted actuarial reserving
techniques to project the ultimate liability for losses and loss adjustment expenses. The Company periodically revises these reserves to adjust for changes in the expected loss development pattern over time.



In evaluating its loss exposure, the Company reviews loss
reports received from its clients to confirm that submitted claims are covered under the contract terms, establishes reserves on an individual client basis and monitor the adequacy of its reserves. When setting reserves, the Company also takes into
account industry loss activity, as well as other industry trends, to facilitate its evaluation of its overall reserve profile.



Losses and loss adjustment expenses, net of related reinsurance recoverables, are charged to income as incurred. Unpaid losses and loss
adjustment expenses represent the accumulation of case reserves, reserves for incurred but not reported losses and loss adjustment expenses.



The Company regularly reviews and updates its methods of determining estimates for reported and unreported losses and establishing
resulting reserves and related reinsurance recoverable, and adjustments resulting from this review are reflected in income in the period such adjustments are determined. In connection with the process, the Company relies upon the basic assumption
that past experience, adjusted for the effect of current developments and likely trends, is an appropriate basis for predicting future events. However, estimation of loss reserves is a difficult process, especially in view of changes in the legal
environment that affect the development of loss reserves. Therefore, quantitative techniques frequently have to be supplemented by subjective considerations and managerial judgment.



During the loss settlement period, which can be many years in duration, additional facts regarding individual
claims and trends usually become known. As these become apparent, it usually becomes necessary to refine and adjust the reserves upward or downward. Even then, the ultimate net liability may be less than or greater than the Companys revised
estimates.



Marketing



The Company believes that diversity in its sources of
business reduces the potential adverse effect arising from the termination of any one of its business relationships. The Companys marketing plan calls for the development of relationships with potential clients that the Company believes have a
need for reinsurance, based on regulatory filings, industry knowledge and market trends. Given the nature of its business, the Company targets clients through broker markets, existing relationships and non-traditional marketing channels.



The Company uses independent professional
brokers to market and obtain a majority of its property and casualty business. For the years ended December 31, 2002, 2001 and 2000, intermediaries and brokerage firms accounted for 79.9%, 71.4%, and 37.0%, respectively, of gross premiums written.
For the years ended December 31, 2002, 2001, and 2000, the top three producing intermediaries and brokerage firms accounted for 25%, 24% and 18%; 26%, 16% and 11%; and 12%, 9% and 7%, respectively, of gross premiums written.



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In addition to
using independent professional brokers, the Company attempts to capitalize on managements existing relationships with insurance and reinsurance companies, large global corporations and financial intermediaries to develop and underwrite
business.



Additionally, the Company is
developing distribution sources outside of the traditional direct and broker markets. The Company believes that significant business can be obtained through relationships with banks, commercial investment houses, securities brokers and professional
services firms. The Companys representatives periodically attend conferences held in and outside the United States, and provide exhibits, attend receptions and engage in other informational activities at these events to share and discuss
recent trends and advances in the reinsurance and risk management industry. Representatives are not permitted to discuss specific client products while in the United States or other jurisdictions where the Company does not have the required licenses
to conduct business. The Company has developed operating guidelines designed to facilitate compliance with these restrictions as and when operations involve any such jurisdictions.



Overview of Investments



The Company seeks to earn a superior risk-adjusted total return on its assets by engaging in an investment strategy that combines a fixed
maturities investment portfolio and an alternative investment portfolio that employs strategies to manage investment risk. The Company diversifies its portfolio to limit volatility and attempts to maintain adequate liquidity in its fixed maturities
portfolio to fund operations and protect against unexpected events. The Company seeks to manage its 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 managers of the fixed maturities and alternative investment portfolios are selected by the Companys board of directors (the Board of Directors), through its
finance and investment committee. The Board of Directors periodically reviews the 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, 2002,
approximately 68% of the Companys investment portfolio was invested in fixed maturities securities and approximately 32% was invested in alternative investments. The Company generally intends to allocate between 50% and 80% of its investment
portfolio in cash and fixed maturities securities and between 20% and 50% in alternative investments. However, this allocation can vary from the targeted amounts because of cash flow and market value variations at specific points in time.



Aggregate Portfolio Results



The following table shows the performance of the
Companys fixed maturities investments, alternative investments and aggregate investment portfolio for the years ended December 31, 2002, 2001 and 2000:



|                                      |  | Annual Rate of Return(1) Year ended December 31, 2002 |   |  | Annual Rate of Return(1) Year ended December 31, 2001 |   |  | Annual Rate of Return(1) Year ended December 31, 2000 |  
|------------------------------------- |  | ----------------------------------------------------- | - |  | ----------------------------------------------------- | - |  | ----------------------------------------------------- | -
|Fixed Maturities Investment Portfolio |  | 8.59                                                  | % |  | 8.55                                                  | % |  | 9.61                                                  | %
|Alternative Investment Portfolio(2)   |  | 5.24                                                  |   |  | 6.69                                                  |   |  | 4.22                                                  |  
|Aggregate Portfolio(3)                |  | 7.37                                                  |   |  | 7.78                                                  |   |  | 7.81                                                  |  
|Lehman Brothers Aggregate Index®      |  | 10.41                                                 |   |  | 8.32                                                  |   |  | 11.63                                                 |  
|S&P 500®with dividends reinvested     |  | (22.09                                                | ) |  | (11.87                                                | ) |  | (9.10                                                 | )

---



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|(1) |  | Annual rate of return means the annual 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 one hundred (100).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Max Re Diversified holds all of the Companys alternative investments other than reinsurance private equity investments that are held by Max Re.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | The aggregate portfolio consists of both the fixed maturities investment portfolio and the alternative investment portfolio.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------



This performance information should not be relied upon as a
representation of future results. Future results may vary and these variations may be significant.



Fixed Maturities Investment Portfolio



Based on fair values at December 31, 2002, approximately 68% of the Companys total investment portfolio was invested in cash and fixed maturities and was managed by General Re-New England Asset
Management, Inc. The Companys fixed maturities investment portfolio is managed conservatively and comprised of liquid, high quality securities. At December 31, 2002, the fixed maturities investment portfolio had a dollar-weighted average
rating of AA+, an average duration of approximately 3.95 years and an average book yield to maturity of 4.41%.



The investment strategy and guidelines for the Companys fixed maturities investment portfolio emphasize diversification and
preservation of principal. Under the current fixed maturities investment guidelines, the Company may not purchase a security for the portfolio unless it has a minimum rating of BAA3/BBB-, or its equivalent, from at least one nationally recognized
statistical rating organization. In addition, a minimum weighted average credit quality rating of AA2/Aa, or its equivalent, must be maintained for the fixed maturities investment portfolio as a whole. The fixed maturities investment guidelines
provide that the fixed maturities investment portfolio may not be leveraged.



The fixed maturities investment portfolio provides liquidity for day-to-day operations. The Company believes that it is able to satisfy its foreseeable cash needs from its cash and fixed maturities
investments. Accordingly, the Company believes that its fixed maturities investment guidelines reduce the likelihood of having to liquidate any portion of the Companys alternative investment portfolio to meet near term cash flow needs.



Additional information about the Companys
fixed maturities investments can be found in Notes 2 and 3 to the audited consolidated financial statements of the Company included herein.



Alternative Investment Portfolio



Based on fair values at December 31, 2002, approximately 32% of the Companys investment portfolio was invested in alternative
investments. Max Re Diversified holds all of the Companys alternative investments other than reinsurance private equity investments that are held by Max Re. Max Re Diversified is managed by Moore Capital Management, LLC (Moore
Capital) and as of December 31, 2002, was invested in approximately 40 underlying alternative investment funds that currently represent ten investment strategies. These strategies were selected because of their low correlation with the stock
market, the bond market and each other. At December 31, 2002, the types of fund strategies in which Max Re Diversified had invested were Long/Short Equities, Convertible Arbitrage, Global Macro, Event Driven Arbitrage, Diversified Arbitrage, Fixed
Income Arbitrage, Distressed Investing, Emerging



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Markets, Commodities Trading and Opportunistic Investing. The Companys alternative investment guidelines also provide that Max Re
Diversified may be invested in Merger Arbitrage.



The Companys alternative investment portfolio is invested in accordance with investment guidelines, which may be amended from time to time by the Companys Board of Directors. The alternative investment guidelines
currently mandate, among other things:



| |  |  | investment in a minimum of five distinct alternative investment strategies;
| | - |  | ---------------------------------------------------------------------------



| |  |  | no one strategy may represent more than 30% of the book value of the alternative investment portfolio, with further concentration limits imposed on certain
strategies;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | investments with less than quarterly liquidity may not exceed 15% of the portfolio; and
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | no more than 10% of the book value of the alternative investment portfolio may be invested in a single fund, except there is no applicable limit to a fund of funds.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under the terms of the
Companys customer agreement and trading authorization contract with Moore Capital, Moore Capital may make discretionary investment determinations so long as those determinations comply with the Companys alternative investment guidelines.
Moore Capital did not receive fees as the alternative investment portfolio manager for Max Re Diversified from the Companys inception through 2002. However, effective January 1, 2003, Max Re Diversified will begin paying Moore Capital a fee of
70 basis points plus 7.5% of the return in excess of a 10% threshold on the net asset value of funds in which Max Re Diversified is invested and that are not managed directly by Moore Capital. At December 31, 2002, approximately $497.7 million, or
85.7%, of Max Re Diversifieds investments were in funds not managed directly by Moore Capital.



A summary of the underlying strategies in which the Company may invest its alternative investment portfolio is as follows:



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 create 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, most managers 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.
The securities purchased and sold in this strategy are generally common stocks of publicly traded companies.



Convertible Arbitrage. Funds that pursue a convertible arbitrage strategy typically simultaneously make purchases 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 markets. 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 the 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.



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



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macroeconomic conditions. A macro fund will typically buy or sell securities such as Treasury bills and government notes and bonds, foreign
currencies and common stocks of individual companies or futures contracts on stock indices such as the S&P 500®. Macro funds typically purchase both securities, such as
common stocks or government bonds, as well as derivatives of such securities. Such derivatives would include futures and forward contracts as well as options. The principal risk of this strategy is that funds pursuing the strategy may incorrectly
predict macroeconomic trends.



Event-Driven
Arbitrage. Funds that pursue an event driven arbitrage strategy seek to achieve arbitrage profits by investing in 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.



Diversified Arbitrage. Funds classified as diversified
arbitrage simultaneously pursue a variety of market neutral strategies such as convertible arbitrage and merger 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 those strategies perceived to offer the greatest potential for returns in any given environment.



Fixed Income Arbitrage. Funds classified as fixed income arbitrage 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 maturity market, such as mortgage backed securities or asset backed securities.



Distressed Investing. Funds that pursue distressed
investing purchase securities of companies experiencing financial stress. Typically, these companies are engaged in debt restructuring or subject to provisions of Federal bankruptcy laws.



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.



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



Opportunistic Investing. The Companys principal opportunistic investment is in a fund that focuses on distressed loan investment opportunities in Japan. Such 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 work out each of the individual loans for greater than
its purchase price from the selling institution. The securities purchased in this strategy are normally private debt obligations for which there is no public market.



Merger Arbitrage. Funds that pursue a merger arbitrage strategy typically simultaneously make
purchases of common stock of a company being acquired or merged and execute a short sale of the common stock of the acquiring company.



In addition to funds held through Max Re Diversified, the Companys alternative investment portfolio includes private equity
investments in reinsurance entities made by Max Re. Current investments include Grand Central Re, a multi-line property and casualty and life and annuity reinsurer, and DaVinci Re Holdings Ltd., and its operating subsidiary DaVinci Reinsurance Ltd.,
a Bermuda property catastrophe reinsurer.



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As of December
31, 2002, the Companys alternative investment portfolio was allocated as follows:



|                                       |  | Fair Value     |         | Percentage of Fair Value of Alternative Investment Portfolio |      
|-------------------------------------- |  | -------------- | ------- | ------------------------------------------------------------ | -----
|                                       |  | (in thousands) |         |                                                              |      
|Long/short equity                      |  | $              | 59,222  |                                                              | 9.1  
|Convertible arbitrage                  |  |                | 36,290  |                                                              | 5.6  
|Global macro                           |  |                | 93,240  |                                                              | 14.3 
|Event driven arbitrage                 |  |                | 48,286  |                                                              | 7.4  
|Diversified arbitrage                  |  |                | 123,173 |                                                              | 18.9 
|Fixed income arbitrage                 |  |                | 47,164  |                                                              | 7.2  
|Distressed investing                   |  |                | 79,445  |                                                              | 12.1 
|Emerging markets                       |  |                | 24,971  |                                                              | 3.8  
|Commodities trading                    |  |                | 33,440  |                                                              | 5.1  
|Opportunistic investing                |  |                | 33,617  |                                                              | 5.1  
|Merger arbitrage                       |  |                |        |                                                              |     
|                                       |  |                |         |                                                              |      
|Total Max Re Diversified               |  |                | 578,848 |                                                              | 88.6 
|Reinsurance investments                |  |                | 74,317  |                                                              | 11.4 
|                                       |  |                |         |                                                              |      
|Total Alternative Investment Portfolio |  | $              | 653,165 |                                                              | 100.0
|                                       |  |                |         |                                                              |      



The
Company is able to liquidate the alternative investment portfolio held through Max Re Diversified on the same terms that the underlying funds can be liquidated. In general, the funds in which the alternative investment portfolio is invested require
30 days notice of liquidation, and may be liquidated on a monthly, quarterly or longer basis. In accordance with the alternative investment guidelines, a minimum of 85% of the alternative investment portfolio held through Max Re Diversified
must be maintained in funds with monthly or quarterly liquidity. As of December 31, 2002, the liquidity profile of the alternative investments held through Max Re Diversified was:



| |  |  | monthly                            35.8%
| | - |  | ----------------------------------------

| |  |  | quarterly                           54.7%
| | - |  | -----------------------------------------

| |  |  | other                                   9.5%
| | - |  | --------------------------------------------



Once a notice of withdrawal is
given, the Company is subject to periods extending up to 60 days before the investment must be returned by an investment fund. As a result of these delays, the Company may realize significant losses in the alternative investment portfolio if it is
unable to withdraw its money during a period when the alternative investments are performing poorly. Although the Company believes that its fixed maturities investment portfolio provides sufficient liquidity to satisfy the claims of its insureds and
ceding clients, in the event that the Company were required to access assets invested in the alternative investment portfolio, its ability to do so may be impaired by these liquidity constraints.



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



Competition



The reinsurance and insurance industry is highly competitive. Reinsurance and insurance companies compete on the basis of many factors,
including premium charges, ability to structure



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innovative terms and conditions in product offerings, the general reputation and perceived financial strength of the reinsurer or insurer,
relationships with reinsurance and insurance intermediaries, ratings assigned by independent rating agencies, speed of claims payment and administrative activities and experience in the particular risk to be underwritten.



The Company competes directly with numerous independent
reinsurance companies, captive insurance companies, insurance companies, subsidiaries or affiliates of established insurance companies, reinsurance departments of primary insurance companies and underwriting syndicates from countries throughout the
world in the Companys chosen product lines. Many of these competitors are well established, have significant operating histories and have developed longstanding customer relationships. Competitors that offer on a worldwide basis reinsurance
products similar to products the Company offers include ACE Limited, American International Group, Inc., Berkshire Hathaway, Inc., Swiss Reinsurance Company and XL Capital Ltd., all of which are larger companies, have higher credit ratings and have
greater credit capacity than the Company. Additionally, the potential for improvement in pricing levels and contract terms for property and casualty business, resulting primarily from the September 11, 2001 tragedy, has attracted new competitors
with fresh capital to the industry.



Ratings



Ratings are an important factor in
establishing the competitive position of insurance and reinsurance companies and are important to the Companys ability to market its products. Max Re is currently rated A- (excellent) by A.M. Best Company and A (strong)
by Fitch, Inc. These ratings reflect each rating agencys opinion of Max Res financial strength, operating performance and ability to meet obligations. They are not evaluations directed toward the protection of investors.



Administration



The Company provides most of its own management and
administrative services, setting and administering its policy benefit and loss reserves. As a result of its marketing and underwriting strategies, which focus on large, customized transactions, the claims function is less labor-intensive compared to
more traditional reinsurance companies. Consequently, the Companys underwriters, chief risk officer and actuaries perform traditional claims tasks such as monitoring claims and reserving. The Company also engages third parties to administer
claims on some of the business that the Company reinsures. In addition, the Company hires third party claims specialists from time to time to assist in evaluating loss exposure and establishing reserving practices and other claims-paying procedures
when the Company writes business that is highly specialized.



The Company, together with the clients, selects an independent third party claims administrator to administer the losses and benefit payments of the clients primary insureds that are covered in the reinsurance transaction. At
December 31, 2002, approximately 34% of the Companys property and casualty losses and life and annuity benefit reserves were administered by third party administrators. The Company is responsible for the benefit payment expense charged by the
third party administrators. The Company and its clients enter into contracts with long-term cancellation provisions with the third party administrators. If a third party administrator contract is terminated, the Company and the client would have to
identify and contract with a substitute third party administrator.



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Regulation



Bermuda



The Insurance Act 1978, and amendments thereto and related
regulations of Bermuda, regulates the reinsurance business of Max Re. In addition, the Insurance Act regulates the reinsurance management business of Max Re Managers. The Insurance Act imposes solvency and liquidity standards and auditing and
reporting requirements and grants to the Bermuda Supervisor of Insurance powers to supervise, investigate and intervene in the affairs of Bermuda insurance and reinsurance companies. Max Re is required to prepare annual statutory financial
statements and file an annual statutory financial return.



Max Re Diversified was formed in the Bahamas in 1999. Max Re Diversified obtained a permit in 2001 from the Minister of Finance of Bermuda and the Bermuda Monetary Authority pursuant to Section 134 of the Companies Act 1981, enabling
it to engage in or carry on the business of managing and investing assets of Max Re Capital and its subsidiaries in and from Bermuda. By obtaining this permit, Max Re Diversified became subject to the conditions of the permit and to regulation under
the Companies Act 1981 and the Investment Business Act 1998. In November 2002, Max Re Diversified changed its domicile from the Bahamas to Bermuda.



Max Re Capital, Max Re, Max Re Managers and Max Re Diversified are required to comply with the provisions of the Companies Act regulating
the payment of dividends and making distributions from contributed surplus.



United States and Other Jurisdictions



Max Re is currently not licensed or admitted as an insurer in any jurisdiction except Bermuda. The insurance laws of each state in the United States and of many other jurisdictions regulate the sale of
insurance and reinsurance within their jurisdiction by insurers, such as Max Re, which are not licensed or admitted to do business within such jurisdictions. The Company conducts its business through its Bermuda office and does not intend to conduct
any activities that may constitute the transaction of the business of insurance in any jurisdiction in which it is 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 nonadmitted
reinsurers if certain prescribed security arrangements are made. Because Max Re is not licensed, accredited or approved in any jurisdiction except Bermuda, in certain instances the Companys reinsurance customers require it to obtain a letter
of credit or enter into other security arrangements.



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Ireland



Under the Insurance Act, 2000 of Ireland,
Max Re Europe is required to comply with the regulations for the reinsurance business, which are applied by the Minister for Enterprise, Trade and Employment, the Irish insurance regulator.



Employees



As of December 31, 2002, the Company had 29 employees. All of the employees, except for some members of
senior management who are employed by Max Re Capital, are employees of Max Re or Max Re Europe.



Available Information



The Companys 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 its Annual General Meeting of
Shareholders are made available, free of charge, on its web site, http://www.maxre.bm, as soon as reasonably practicable after such reports have been filed with or furnished to the Securities and Exchange Commission.



ITEM 2.
PROPERTIES



The
Company leases office space in Hamilton, Bermuda and Dublin, Ireland, the locations in which it operates. The Company has secured office space on a long-term basis in a new building in Bermuda, which the Company believes will be adequate for
anticipated future operations. The lease in Ireland is currently on a month-to-month basis. Although sufficient to conduct current operations, the Company is seeking to lease replacement space in Dublin, Ireland on a long-term basis to support
future operations.



ITEM 3.
LEGAL PROCEEDINGS



At
December 31, 2002, the Company was not a party to any material litigation or arbitration. The Company anticipates that it may become subject to litigation and arbitration from time to time in the ordinary course of business.



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, 2002.



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PART II



ITEM 5.
MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



(A) Market Information



The Companys Common Shares began trading on the Nasdaq National Market under the symbol MXRE on August 14, 2001. Prior to that time, there was no trading market for the Common Shares. The
following table sets forth for the periods indicated the high and low closing sale price of the Common Shares on the Nasdaq National Market.



|                                    |  | Fiscal 2002
|----------------------------------- |  | -----------
|                                    |  | High       
|First Quarter                       |  | $          
|Second Quarter                      |  | $          
|Third Quarter                       |  | $          
|Fourth Quarter                      |  | $          
|                                   
|                                    |  | Fiscal 2001
|                                    |  | High       
|Third Quarter (beginning August 14) |  | $          
|Fourth Quarter                      |  | $          



The
Common Shares began trading on the Bermuda Stock Exchange (BSX), under the symbol MXRE BH on December 17, 2001. For the period December 18, 2001 through June 18, 2002, the last day a closing price was reported by the BSX, the high and
low price of the Common Shares on the BSX was $15.50 and $13.70.



(B) Holders



As of March
14, 2003, the number of holders of record of the Common Shares was approximately 136.



(C) Dividends



The Company began paying a quarterly cash dividend of $0.02 per Common Share ($0.08 annually) in the fourth quarter of 2001. Prior to that time, the Company had never declared or paid any dividends on its Common Shares. Any
determination to pay cash dividends will be at the discretion of the Board of Directors and will be 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.



The Companys ability to pay dividends depends, in part, on the ability of its subsidiaries to pay dividends to it. Max Re is subject
to Bermuda regulatory constraints that affect its ability to pay dividends to the Company. Under the Insurance Act 1978 of Bermuda and related regulations, Max Re 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 Insurance Act and related regulations. In addition, as a long-term insurer Max Re must maintain long-term business assets of a value of at
least $250,000 greater than its long-term business liabilities and is



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prohibited from declaring or paying dividends unless the value of its long-term business assets exceeds the amount of its long-term business
liabilities, as certified by its approved actuary, by the amount of the dividend and at least $250,000. 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 1981, each of the Company, Max Re, Max Re Managers and Max Re 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. Accordingly, the Company cannot assure shareholders that it will declare or pay dividends in
the future. In addition, Max Res letter of credit facility with Bank of America, N.A., Citibank, N.A., Fleet National Bank and ING Bank N.V., London Branch prohibits Max Re from paying dividends at any time that it is in default under the
facility, which will occur if the Companys shareholders equity is less than $470 million or Max Res shareholders equity is less than $540 million as well as in certain other circumstances. Similarly, Max Res letter of
credit facility with the New York branch of Bayerische Hypo- und Vereinsbank AG (HVB) prohibits it from paying dividends at any time that it is in default under the facility, which will occur if Max Res shareholders equity is
less than $400 million as well as in certain other circumstances.



ITEM 6. SELECTED FINANCIAL DATA



The following table of selected financial data should be read in conjunction with the audited consolidated financial statements of the Company 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,                                      |      
|-------------------------------------------------------------------------- |  | ------------------------------------------------------------ | -----
|                                                                           |  | 2002                                                         |      
|                                                                           |  | (dollars in millions, except percentages and per share
data) |      
|Gross premiums written                                                     |  | 647                                                          | .4   
|Net premiums earned                                                        |  | 388                                                          | .0   
|Net investment income                                                      |  | 64                                                           | .4   
|Net gain on alternative investments                                        |  | 32                                                           | .1   
|Income (loss) before minority interest                                     |  | (7                                                           | .1)  
|Fixed maturities and cash                                                  |  | 1,371                                                        | .7   
|Alternative investments                                                    |  | 653                                                          | .2   
|Total Assets                                                               |  | 2,643                                                        | .4   
|Combined shareholders equity (shareholders equity and minority
interest) |  | 710                                                          | .7   
|Combined book value per share                                              |  | 15                                                           | .75  
|Diluted earnings per share                                                 |  | (0                                                           | .15) 
|Cash dividends per share                                                   |  | 0                                                            | .08  
|Return on average combined equity                                          |  | (1                                                           | .01%)



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|       
|-------
|ITEM 7.



The
following is a discussion and analysis of the Companys results of operations for the year ended December 31, 2002 compared to the year ended December 31, 2001, and for the year ended December 31, 2001 compared to the year ended December 31,
2000 and also a discussion of the Companys financial condition as of December 31, 2002. Certain results for the year ended December 31, 2002 discussed herein differ from those reported in the Companys earnings release dated February 3,
2003 due to additional information pertaining to 2002 that was received subsequent to the earnings release date. The Company does not believe that these results materially differ from those reported in the earnings release. 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.



Overview



The Company is a Bermuda-based provider of reinsurance and insurance products for both the property and casualty and the life and annuity,
including disability, markets. The property and casualty market has been presenting more opportunities to the Company than the life and annuity market since the September 11, 2001 tragedy, which has increased demand for property and casualty
products. Further, a weak global economy and corrections in the global capital markets over the last several years have resulted in a widening pricing gap between buyers and sellers for the type of life and annuity reinsurance products that the
Company offers. The Company anticipates continuing greater demand for its property and casualty products than for its life and annuity products for the foreseeable future.



To manage reinsurance and insurance liability exposure, allocate investable assets and assess overall
enterprise risk, the Company models its underwriting and investment activities on an integrated basis. The Companys integrated risk management as well as features of its structured and alternative risk transfer reinsurance products provide
flexibility in making decisions regarding investments. The Companys investments are currently comprised of a high grade fixed maturities portfolio, an alternative investment portfolio that is currently employing ten strategies designed to
provide diversification and to generate positive returns while attempting to reduce the frequency and severity of loss outcomes and is currently invested in approximately 40 underlying trading entities and two strategic reinsurance private equity
investments. Based on fair value at December 31, 2002, the allocation of invested assets was approximately 68% in cash and fixed maturities and 32% in alternative investments.



The Companys principal operating subsidiary is Max Re. At December 31, 2002, Max Re had $701.4 million
of shareholders equity. The Company conducts its European activities through Max Re Europe. The Company also provides reinsurance underwriting and administrative services on a fee basis through Max Re Managers. The Company holds all of its
alternative investments in Max Re Diversified other than reinsurance private equity investments that are held by Max Re.



Drivers of Profitability



Revenues



The Company derives revenues from three principal sourcespremiums from reinsurance and insurance business, income from its
investment portfolio and, to a lesser extent, management fees from underwriting services. Reinsurance and insurance premiums are a function of the amount and type of contracts written as well as prevailing market prices. Premiums are earned over the
terms of the underlying contracts. Each of the Companys reinsurance contracts contains unique pricing, terms and



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conditions and expected profit margins. Therefore, the amount of premiums is not necessarily an accurate indicator of the Companys
anticipated profitability.



The Companys
net investment income is a function of the average invested assets and the average yield that the Company earns on those invested assets. The investment yield on the Companys fixed maturities portfolio is a function of market interest rates as
well as the credit quality and maturity of its fixed maturities holdings. In addition, the Company realizes capital gains or losses on its fixed maturities investment portfolio as a result of changing market conditions, including, but not limited
to, changes in market interest rates and changes in the markets perception of the credit quality of the Companys fixed maturities holdings. The Companys net gains on alternative investments is a function of the success of the funds
in which such portfolio is invested, which depends on, among other things, the underlying strategies of the funds, the ability of the fund managers to execute the fund strategies and general economic conditions and the underlying operating results
of the private equity reinsurance investments. The Company earns investment income primarily on invested assets, but it also earns investment income from premium and loss deposits withheld by its clients.



Expenses



Expenses consist primarily of three typeslosses,
benefits and experience refunds, acquisition costs, and general and administrative expenses. Losses, benefits and experience refunds are based on the amount and type of reinsurance and insurance contracts written by the Company during the current
reporting period and information received during the current reporting period from ceding companies pertaining to contracts written in prior years. The Company records losses, benefits and experience refunds based on an actuarial analysis of an
estimate of the expected losses, benefits and experience refunds to be incurred on each contract written. The ultimate losses, benefits and experience refunds depend on the actual costs to settle claims. The Company increases or decreases losses,
benefits and experience refund estimates as actual claim reports are received. The Companys ability to estimate losses, benefits and experience refunds accurately at the time of pricing its contracts is a critical factor in determining
profitability.



Acquisition costs consist
principally of ceding commissions paid to ceding companies and brokerage expenses, and typically represent a percentage of the premiums on reinsurance and insurance contracts written. These costs are generally deferred and amortized over the period
in which the related premiums are earned.



General and administrative expenses are principally employee salaries and related personnel costs, rent and other operating costs. These costs are primarily fixed in nature and do not vary with the amount of premiums written.



Critical Accounting Policies:



The Companys consolidated financial statements are
prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), which require management to make estimates and assumptions. The Company believes that the following accounting policies affect
the more significant judgments and estimates used in the preparation of its consolidated financial statements.



Revenue recognition



The Company follows FAS No. 60, Accounting and Reporting by Insurance Enterprises, FAS No. 97, Accounting and Reporting
by Insurance Enterprises for Certain Long-Duration Contracts and Realized Gains and Losses from the Sale of Investments, and FAS No. 113, Accounting and Reporting



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for Reinsurance of Short-Duration and Long-Duration Contracts, in determining the accounting for its reinsurance and insurance
products. Assessing whether or not the contracts it writes meets the conditions for risk transfer requires judgment. The determination of risk transfer is fundamental to the Companys determination of gross premiums written and is based, in
part, on the use of actuarial and pricing models and assumptions.



The Companys premiums are recorded at the inception of each contract, principally based upon contract terms and information received from ceding clients and their brokers. For excess of loss contracts, the amount of
premium is usually contractually documented at inception, and no management judgment is necessary in accounting for this. Premiums are earned on a pro rata basis over the coverage period. For quota share or proportional contracts, gross premiums
written are normally estimated at inception by the ceding client. The Company accounts for such premiums using the initial estimates, and then adjusts them as advised by its clients. The Company also accrues for reinstatement and additional premiums
resulting from losses. Such accruals are based upon actual contractual terms, and the only element of management judgment involved is with respect to the amount of losses, benefits and experience refunds, as described below.



Reinstatement and additional premiums are recognized and
earned at the time losses are reported to the Company. Reinstatement premiums are the premiums charged for the restoration of the reinsurance limit of a contract to its full amount after payment by the reinsurer of losses as a result of an
occurrence. Additional premiums are premiums charged based on loss experience during the policy term or coverage period.



Losses, benefits and experience refunds



Under GAAP, the Company is not permitted to establish loss reserves until the occurrence of an event that may give rise to a loss. Once
such an event occurs, the Company establishes reserves based upon estimates of total losses incurred by the ceding client as a result of the event and the Companys estimate of the portion of such loss it has reinsured. As a result, only loss
reserves applicable to losses incurred up to the reporting date may be recorded, with no allowance for the provision of a contingency reserve to account for expected future losses.



Setting appropriate reserves for losses, benefits and experience refunds is an inherently uncertain process.
Losses, benefits and experience refunds reserves represent estimates, at a given point in time, of the ultimate settlement costs of losses incurred (including IBNR losses, which are losses that have been incurred but not yet reported to the
insurer). The Company regularly reviews and updates these estimates using the most current information available and employing actuarial methods. Consequently, the ultimate liability for a loss is likely to differ from the original estimate.
Whenever the Company determines that any existing reserves for losses, benefits and experience refunds are inappropriate or inadequate, it is required to record a change in estimate, increasing or decreasing reserves with a corresponding reduction
or increase, which could be material, in its operating results in the period in which the deficiency or redundancy is identified. Adjustments resulting from changes in the Companys estimates are recorded in the period such adjustments are
determined. The establishment of new reserves, or the adjustment of reserves for reported claims, could result in significant upward or downward changes to the Companys financial condition or results of its underwriting activities in the
period such amounts are reported.



The
Companys reinsurance and insurance reserves are actuarial projections as of the balance sheet date of the ultimate unpaid losses and benefits associated with its reinsurance and insurance contracts. Considerable judgment is required to
evaluate losses and benefits and establish liabilities for losses and benefits. The Company employs different types of actuarial loss reserving techniques and



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several models to assist in the setting and regular review of reserves. The actuarial loss reserves techniques and models employed are
principally based on paid and incurred loss development methods. Further, the Company retains an independent actuarial firm to annually review the adequacy of the reserves as determined by management. Additional information regarding losses,
benefits and experience refund amounts incurred will be revealed over time and the estimates of such amounts may need to be revised, resulting in gains and losses in the periods determined.



Investments



The Companys investments are carried at fair value or
amounts that approximate fair value. Fair value for the Companys investments in fixed maturities is based generally on quoted market prices, dealer quotes or pricing models. At December 31, 2002, the valuation of approximately 95% of the
Companys fixed maturities portfolio was based on quoted market prices. Fair value for the Companys alternative investments is generally based on the net asset value reported by the respective investment fund managers or, for its
reinsurance equity investments, 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. The Company relies principally on the financial
reports from these entities for recording the net gains on alternative investments in its statement of income. For its equity investments, the Company initially records the investments at cost and periodically adjusts the carrying values to
recognize its proportionate share of income or loss 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 the
Companys investments carried under the equity method of accounting could result in losses.



See Note 2 to the audited consolidated financial statements of the Company included herein for the Companys significant accounting policies.



Results of Operations



Year ended December 31, 2002 compared to year ended December 31, 2001



Gross premiums written. Gross
premiums written for the year ended December 31, 2002 were $647.4 million compared to $710.6 million for the year ended December 31, 2001, a decrease of 8.9%. Gross premiums written for property and casualty were $632.7 million for the year ended
December 31, 2002 compared to $496.5 million for the year ended December 31, 2001. Gross premiums written for property and casualty increased principally due to increased demand for, and improved pricing of, the Companys products and the
expansion of the product offering to include traditional property and casualty reinsurance risks during 2002. Gross premiums written for life and annuity were $14.7 million for the year ended December 31, 2002 compared to $214.1 million for the year
ended December 31, 2001. The Company believes that the lack of life and annuity underwriting production during the year ended December 31, 2002 is attributable to the current low interest rate environment and weak global economy. The demand for the
type of life and annuity reinsurance that the Company offers is typically weak during periods when interest rates are low.



Premiums ceded. Premiums ceded for the year ended December 31, 2002 were $54.7 million compared to $116.4 million for the year
ended December 31, 2001. The premiums ceded were principally related to the Companys quota-share retrocessional agreement with Grand Central Re. The decline in premiums ceded by 53.0% in the year is a result of the decline in the volume of
life and annuity business written by the Company and the change in the mix of property and casualty business written.



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Net premiums written. Net premiums written for the year ended December 31, 2002
were $592.7 million compared to $594.2 million for the year ended December 31, 2001. Net premiums written for property and casualty products for the year ended December 31, 2002 were $580.2 million compared to $412.6 million for the year ended
December 31, 2001. Net premiums written for life and annuity products for the year ended December 31, 2002 were $12.5 million compared to $181.6 million for the year ended December 31, 2001.



Net premiums earned. Net premiums earned for the year
ended December 31, 2002 were $388.0 million compared to $500.9 million for the year ended December 31, 2001, a decline of 22.5%. Property and casualty net premiums earned were $375.5 million, after the deduction of $44.4 million of earned premiums
ceded, for the year ended December 31, 2002 compared to $319.3 million, after the deduction of $66.6 million of earned premiums ceded, for the year ended December 31, 2001. Life and annuity net premiums earned were $12.5 million, after the deduction
of $2.2 million of earned premiums ceded, for the year ended December 31, 2002 compared to $181.6 million, after the deduction of $32.4 million of earned premiums ceded, for the year ended December 31, 2001. The difference between net premiums
written and net premiums earned for the years ended December 31, 2002 and 2001 reflects the fact that most of the Companys property and casualty reinsurance contracts are written on a prospective basis, with the premium earned over the period
reinsurance protection is provided, whereas each of the Companys life and annuity contracts assumes the existing risk of the reinsured, and, accordingly, the related premium is earned at the time the Company enters into the contract.



Net investment income. Net investment
income, excluding realized and unrealized gains and losses, for the year ended December 31, 2002 increased $20.5 million to $64.4 million compared to $43.9 million for the year ended December 31, 2001. The increase was primarily attributable to the
growth in the fixed maturities portfolio from $884.1 million to $1,279.6 million resulting from cash received from the collection of premiums written since December 31, 2001 and $6.4 million of additional investment income earned from premiums and
deposits withheld by clients during the year ended December 31, 2002 compared to calendar year 2001. The average investment yield on the fixed maturities portfolio for the year ended December 31, 2002 was 5.19% compared to an average yield of 6.15%
for the year ended December 31, 2001.



Net
gains on alternative investments. Net gains on the alternative investment portfolio were $32.1 million, including $8.4 million from the Companys private equity reinsurance investments, for the year ended December 31, 2002 compared to $29.8
million, net of $0.3 million loss from the Companys private equity reinsurance investments for the year ended December 31, 2001. The alternative investment portfolio returned a 5.24% gain during the year ended December 31, 2002 compared to a
6.69% gain during the year ended December 31, 2001. The increase of $2.3 million results from the return from the Companys private equity reinsurance investments, the larger size of the alternative investment portfolio, offset by the lower
return earned on these investments in 2002 compared to 2001.



Losses, benefits and experience refunds. Losses, benefits and experience refunds were $379.3 million for the year ended December 31, 2002 compared to $524.4 million for the year ended December 31, 2001. Property and casualty
losses and experience refunds were $328.0 million for the year ended December 31, 2002 compared to $322.0 million for the year ended December 31, 2001. The increase in property and casualty losses and experience refunds was smaller than the increase
in property and casualty net premiums written and net premiums earned as the Companys business mix changed during the year 2002. During the year ended December 31, 2002, incurred losses related to prior years contracts amounted to $49.9
million, and includes amortization of deferred charges on retrospective property and casualty reinsurance contracts of $6.3 million. The Company recognized additional premiums and interest on those premiums, net of acquisition costs, of $37.8
million, substantially mitigating the losses incurred on prior years contracts. One contract written during calendar year 2000 accounted for $41.2



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million of the prior year incurred losses amount. The contract was a whole account stop loss cover, with workers compensation as the
principal underlying risk, providing reinsurance for calendar year 1999, where losses incurred and settled through December 31, 2002 by the underlying reinsured exceeded the Companys estimates and consequently resulted in additional losses
being recorded by the Company. Life and annuity benefits and experience refunds were $51.2 million for the year ended December 31, 2002 compared to $202.4 million for the year ended December 31, 2001. The decrease was principally attributable to the
lower volume of life and annuity premiums written and earned in 2002 compared to 2001. The Company recorded net adverse mortality and morbidity expense of $7.0 million during the year ended December 31, 2002 resulting principally from worse than
expected claims experience on a coinsurance transaction involving group long term disability written during calendar year 2000.



Acquisition costs. Acquisition costs were $97.7 million for the year ended December 31, 2002 compared to $30.9 million for the year
ended December 31, 2001. The increase in acquisition costs was a result of the Companys increase in property and casualty reinsurance volume and a change in the mix and ceding commission rates of contracts written in 2002 compared to 2001.
Acquisition costs during each of the years ended December 31, 2002 and 2001 consisted primarily of amortization of deferred policy acquisition costs incurred in connection with writing property and casualty business. Acquisition costs are
customarily associated with the type of premium written by the Company. Generally, acquisition costs fluctuate with business volume and changes in product mix. The largest component of deferred policy acquisition costs are ceding commissions paid to
the buyer of the Companys reinsurance products.



General and administrative expenses. General and administrative expenses were $21.3 million for the year ended December 31, 2002 compared to $21.0 million for the year ended December 31, 2001. The increase reflects the costs
associated with growing the Companys operations and principally relates to staff additions, offset by decreased bonuses paid to management and employees in 2002 compared to 2001. The general and administrative expense ratio was 5.5% for the
year ended December 31, 2002 compared to 4.2% for the year ended December 31, 2001.



Net income (loss). Net loss for the year ended December 31, 2002 was $5.8 million compared to net income of $2.5 million for the year ended December 31, 2001. The change to a net loss in 2002
compared to net income in 2001 resulted from the unfavorable development on the Companys reinsurance reserves and lower investment returns than necessary to support the Companys increased reinsurance liabilities.



Year ended December 31, 2001 compared to year ended December 31, 2000



Gross premiums written. Gross
premiums written for the year ended December 31, 2001 were $710.6 million compared to $409.7 million for the year ended December 31, 2000, an increase of 73.4%. Gross premiums written for property and casualty were $496.5 million for the year ended
December 31, 2001 compared to $126.4 million for the year ended December 31, 2000. Gross premiums written for property and casualty increased principally due to the flexibility of the Companys alternative risk transfer products, which, in a
firm price environment for traditional property and casualty reinsurance products, made them more appealing than traditional risk transfer reinsurance products. Gross premiums written for life and annuity were $214.1 million for the year ended
December 31, 2001 compared to $283.3 million for the year ended December 31, 2000. The low interest rate environment adversely impacted the Companys life and annuity production.



Premiums ceded. Premiums ceded for the year ended December 31, 2001 were $116.4 million compared to
$7.9 million for the year ended December 31, 2000. The premiums ceded were principally



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related to the Companys quota-share retrocessional agreement with Grand Central Re, which incepted January 1, 2001.



Net premiums written. Net premiums written for the year
ended December 31, 2001 were $594.2 million compared to $401.8 million for the year ended December 31, 2000. Net premiums written for property and casualty products for the year ended December 31, 2001 were $412.6 million compared to $118.5 million
for the year ended December 31, 2000. Net premiums written for life and annuity products for the year ended December 31, 2001 were $181.6 million compared to $283.3 million for the year ended December 31, 2000.



Net premiums earned. Net premiums earned for the year
ended December 31, 2001 were $500.9 million compared to $401.4 million for the year ended December 31, 2000. Property and casualty net premiums earned were $319.3 million, after the deduction of $66.6 million of earned premiums ceded, for the year
ended December 31, 2001 compared to $118.1 million, after the deduction of $7.9 million of earned premiums ceded, for the year ended December 31, 2000. Life and annuity net premiums earned were $181.6 million, after the deduction of $32.4 million of
earned premiums ceded, for the year ended December 31, 2001 compared to $283.3 million, after the deduction of $nil of earned premiums ceded, for the year ended December 31, 2000.



Net investment income. Net investment income was $43.9 million for the year ended December 31, 2001
compared to $38.9 million for the year ended December 31, 2000. The increase was primarily attributable to the increase in the fixed maturities investment portfolio resulting from cash received from the collection of premiums written since December
31, 2000, as well as proceeds contributed from the Companys initial public offering. Declining interest rates contributed to a total return of 8.55% for the fixed maturities investment portfolio for the year ended December 31, 2001 compared to
a total return of 9.61% for the year ended December 31, 2000.



Net gains on alternative investments. Net gains on the alternative investment portfolio were $29.8 million for the year ended December 31, 2001 compared to $9.6 million for the year ended December 31, 2000. The increase was
attributable to both an increase in the size of the alternative investment portfolio resulting from cash provided from operating activities in 2001, proceeds contributed from the Companys initial public offering and an increase in return on
the alternative investment portfolio. The alternative investment portfolio returned 6.69% during the year ended December 31, 2001 compared to a 4.22% gain during the year ended December 31, 2000.



Losses, benefits and experience refunds. Losses,
benefits and experience refunds were $524.4 million for the year ended December 31, 2001 compared to $408.2 million for the year ended December 31, 2000. Property and casualty losses and experience refunds were $322.0 million for the year ended
December 31, 2001 compared to $109.3 million for the year ended December 31, 2000. The increase in property and casualty losses and experience refunds was directly related to the increase in property and casualty premiums written and earned and loss
reserve adjustments on premiums written in prior years. In the aggregate, the Company took a gross charge of $5.0 million for estimated claims related the September 11, 2001 terrorist attacks on the World Trade Center. After consideration of
reinsurance recoveries and additional premiums on contracts incurring losses from these attacks, the Companys net provision was $3.0 million. Life and annuity benefits and experience refunds were $202.4 million for the year ended December 31,
2001 compared to $298.9 million for the year ended December 31, 2000. The decrease was attributable to the lower volume of life and annuity premiums written and earned in 2001 compared to 2000.



Acquisition costs. Acquisition costs were $30.9 million
for the year ended December 31, 2001 compared to $15.4 million for the year ended December 31, 2000. The increase in acquisition costs was a



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result of the Companys increase in property and casualty insurance volume. Acquisition costs during each of the years ended December
31, 2001 and 2000 consisted primarily of amortization of deferred policy acquisition costs incurred in connection with writing property and casualty business. Acquisition costs are customarily associated with the type of premium written by the
Company. Generally, acquisition costs fluctuate with business volume and changes in product mix.



General and administrative expenses. General and administrative expenses were $21.0 million for the year ended December 31, 2001 compared to $16.4 million for the year ended December 31, 2000.
The increase reflects the costs associated with growing the Companys operations and principally relates to staff additions.



Net income. Net income for the year ended December 31, 2001 was $2.5 million compared to net income of $8.7 million for the year
ended December 31, 2000.



Financial Condition



Cash and invested assets. Aggregate
invested assets, comprising cash, fixed maturities and alternative investments were $2,024.8 million at December 31, 2002 compared to $1,610.2 million at December 31, 2001. The increase in cash and invested assets from 2001 to 2002 resulted
principally from $225.4 million in cash flows from operations generated in 2002, a $100 million bank loan, $36.1 million in net amounts received under deposit liability contracts and $35.6 million in net unrealized appreciation of the Companys
fixed maturities portfolio.



Life and annuity
benefits and experience refunds. Gross life and annuity benefits and experience refunds totaled $405.0 million at December 31, 2002 compared to $423.8 million at December 31, 2001. The decrease in 2002 was primarily attributable to claims and
benefit payments on existing contracts in force, partially offset by the benefit reserves required on business written during the current and prior years.



Property and casualty losses and experience refunds. Gross property and casualty losses and experience refunds totaled $778.1
million at December 31, 2002 compared to $596.4 million at December 31, 2001. The increase in 2002 was primarily attributable to increased premiums earned and normal variability in claim settlements. An analysis of the changes in property and
casualty losses and experience refunds can be found in Note 4 to the audited consolidated financial statements of the Company included herein.



Losses recoverable from reinsurers. Losses recoverable from reinsurers totaled $212.2 million at December 31, 2002 compared to
$173.7 million at December 31, 2001, principally reflecting the increase in losses ceded under the Companys retrocessional agreements. At December 31, 2002, two retrocessionaires account for 60.9% and 36.5% of the Companys losses
recoverable from reinsurers. Both retrocessionaires have a financial strength rating of A by A.M. Best Company.



Bank Loans. In March 2002, Max Re completed a $100.0 million sale of shares of Max Re Diversified to a third party financial
institution. Simultaneous with the sale, Max Re entered into a total return swap with the purchaser of these shares whereby Max Re receives the return earned on the Max Re Diversified shares in exchange for a variable rate of interest based on LIBOR
plus a spread. Additional Max Re Diversified shares owned by Max Re with a fair value of $67.9 million at December 31, 2002 were pledged as collateral. Under GAAP, these transactions are viewed on a combined basis and accounted for as a financing
transaction, which results in the recording of a $100.0 million bank loan. On February 18, 2003, the Company and the third party financial institution mutually terminated the swap transaction described above and, immediately following the
termination, the Company completed a



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$150.0 million sale of shares of Max Re Diversified to the same third party financial institution and entered into a total return swap with
the purchaser on substantially similar terms as the terminated transaction. Max Re Diversified shares owned by Max Re with a fair value of $75.0 million at January 31, 2003 were pledged as collateral. Under GAAP, the new swap transaction will be
accounted for as a financing transaction, which will result in the recording of a $150.0 million bank loan. The new swap termination date is February 2005, with 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 Re Diversified net asset value. At termination, the purchaser has the option to sell the Max Re Diversified shares to the
Company at a price equal to the fair value of the Max Re Diversified shares on the date of repurchase. The swap transaction will enable the Company to transform a portion of its Max Re Diversified assets into fixed maturities investments that can be
held in a trust for the benefit of certain ceding reinsurance companies that require fixed maturity trust assets to meet regulatory requirements.



Shareholders equity and minority interest. The Companys shareholders equity and minority interest increased to
$710.7 million at December 31, 2002 from $699.7 million at December 31, 2001 principally reflecting an increase of $35.6 million in net unrealized appreciation of fixed maturities and $4.0 million in common shares issued during the year in
connection with conversions of minority shareholders and restricted stock awards to employees, partially offset by $20.9 million in shares acquired and retired during the year, a net loss of $5.8 million for the year and dividends paid and
distributions of capital of $3.1 million.



Liquidity and capital resources. As a holding company, Max Re Capitals principal assets are its investments in the voting common shares of its principal subsidiary, Max Re, and the common shares of its other
subsidiaries. The Companys principal source of funds is from interest income on cash balances and cash dividends from its subsidiaries, including Max Re. The payment of dividends is limited under Bermuda insurance laws. In particular, Max Re
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 laws. At December 31, 2002, Max Re, which is required to have $290.4 million in statutory capital and surplus in order to pay dividends, had $618.3 million in actual statutory capital and surplus.



Capital resources. The Companys capital structure
currently consists of equity and minority interest. At December 31, 2002, total capitalization after deducting loans to management and including retained earnings and accumulated other comprehensive income amounted to $710.7 million as compared with
$699.7 million at December 31, 2001. The Company has flexibility with respect to capitalization as the result of its access to the debt and equity markets. The Company regularly reviews its capital adequacy and believes this level of capital is
sufficient to support the Companys reinsurance and insurance operations in 2003. The Company will consider issuing debt, raising additional equity or entering into retrocessional reinsurance contracts if it were to conclude that additional
capital resources are necessary to continue growing its business.



In the ordinary course of business, the Company is required to provide letters of credit or other regulatorily approved security to certain of its ceding reinsurance companies to meet contractual and regulatory requirements.



The Company has two letter of credit facilities
as of December 31, 2002. The Companys primary letter of credit facility is a $375 million facility with a syndicate of commercial banks. At December 31, 2002 and December 31, 2001 letters of credit totaling $284.6 million and $282.9 million,
respectively, were issued and outstanding under this facility. In January 2002, the Company entered into a $100 million letter of credit facility with HVB, a joint venture partner with the Company in Grand



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Central Re. The Company believes that the terms of this letter of credit facility are comparable to the terms that the Company would expect
to negotiate at arms length with an unrelated party. At December 31, 2002, letters of credit totaling $58.5 million were issued by HVB under this facility. All letters of credit issued under these facilities are collateralized by a portion of
the Companys invested assets. The Company was in compliance with all the covenants of its letter of credit facilities at December 31, 2002.



On each of February 8, 2002, May 3, 2002, July 26, 2002 and November 1, 2002, Max Re Capitals Board of Directors declared quarterly
shareholder dividends of $0.02 per share payable to shareholders of record on February 22, 2002, May 17, 2002, August 12, 2002 and November 15, 2002, respectively. The dividends declared on July 26, 2002 and November 1, 2002 were deemed
distributions to shareholders since the Company had a retained deficit on the payment date. Continuation of cash dividends in the future will be at the discretion of the Board of Directors and will be dependent upon the Companys results of
operations and cash flows, and its 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 January 31, 2003, the Board of Directors declared a dividend of $0.02 per share to be paid on March 3, 2003 to shareholders of record on February 17, 2003.



In connection with the lease of an office building currently under construction in Hamilton, Bermuda, the Company has contractual
commitments of approximately $4.4 million for leasehold improvements as of December 31, 2002. The Company anticipates taking occupancy of the building, which will become its corporate headquarters, by May 2003.



The Company has been assigned an insurer financial strength
rating of A- (Excellent) by A.M. Best Company, Inc. and an insurer financial strength rating of A (Strong) by Fitch, Inc. The ratings assigned by rating agencies to reinsurance companies are an important means of assessing
the financial strength and quality of reinsurers. If an independent rating agency downgrades or withdraws any of the Companys ratings, the Company could be severely limited or prevented from writing any new reinsurance contracts, which would
significantly and negatively affect its business. To date, the Companys ratings have been affirmed by A.M. Best and Fitch on each rating review. Ratings are based upon factors relevant to policyholders and are not directed toward the
protection of investors.



New Accounting Pronouncements



Financial Accounting Standard No.
148Accounting for Stock-Based CompensationTransition and Disclosure



In December 2002, Financial Accounting Standard (FAS) No. 148Accounting for Stock-Based CompensationTransition and Disclosure (FAS No. 148) was issued, amending FAS
No. 123Accounting for Stock-Based Compensation. FAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. FAS No. 148 also amends the
disclosure requirements of FAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The
Company has complied with the required disclosure in Note 11 of the accompanying financial statements. The Company will adopt the expense recognition provisions of FAS No. 123 for all stock options granted on or after January 1, 2003. Under these
provisions, compensation expense will be recognized over the related vesting period based on the fair value of the stock options on the date of grant. The amount of stock based compensation to be recognized under the provisions of FAS No. 123 is not
currently determinable because the number and value of stock options to be granted to employees in the future is not known.



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FAS
Interpretation No. 45Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others



In November 2002, FAS Interpretation No. 45Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others was issued. This interpretation elaborates on the disclosures required by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also requires a
guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligations it has undertaken in issuing the guarantee. The initial recognition and measurement provisions of the interpretation are applicable for all
guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective for fiscal years ending after December 15, 2002. The adoption of this interpretation is not expected to have a significant impact on the
Companys financial reporting.



FAS
Interpretation No. 46Consolidation of Variable Interest Entities



In January 2003, the FAS Interpretation No. 46Consolidation of Variable Interest Entities was issued. This interpretation of Accounting Research Bulletin No. 51Consolidated Financial
Statements addresses consolidation by business enterprises of variable interest entities that have certain characteristics. This interpretation applies to variable interest entities created after January 31, 2003, and to variable interest entities
in which an enterprise obtains an interest after that date. It applies from June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of this interpretation is
not expected to have a significant impact on the Companys financial reporting.



Proposed Statement of PositionAccounting for Certain Nontraditional Long-Duration Contracts and for Separate Accounts



The Accounting Standards Executive Committee, a committee of the American Institute of Certified Public
Accountants, has issued a proposed Statement of Position that could set a new standard for accounting for Certain Nontraditional Long-Duration Contracts and for Separate Accounts. This proposed statement applies to certain variable annuity contracts
containing minimum interest and/or minimum death benefit guarantees. As at December 31, 2002, the Company had no contracts that would be affected if this proposed statement were adopted.



Risk Factors



See Factors Affecting Future Financial Results, filed as Exhibit 99.1 to this report, incorporated by reference herein.



|ITEM |  | 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|---- |  | --------------------------------------------------------------



The Company engages in an investment strategy that combines a fixed maturities investment portfolio and an
alternative investment portfolio that employ strategies to manage investment risk. The Company attempts to maintain adequate liquidity in its fixed maturities investment portfolio to fund operations, pay reinsurance liabilities and claims and
provide funding for unexpected events, and the Company has diversified its portfolio to limit volatility. The Company seeks to manage its credit risk through industry and issuer diversification, and interest rate risk by monitoring the duration and
structure of the Companys investment portfolio relative to the duration and structure of its liability portfolio. The Company is exposed to potential loss from various market risks, primarily changes in interest rates and equity prices.
Accordingly, earnings would be affected by these changes. The Company manages its market risk based on Board-approved investment policies. With respect to its fixed maturities investment



30



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portfolio, the Companys risk management strategy and investment policy is to invest in debt instruments of high credit quality issuers
and to limit the amount of credit exposure with respect to particular ratings categories and any one issuer. The Company selects investments with characteristics such as duration, yield, currency and liquidity intended to match the cash outflow
characteristics of the Companys life and annuity and property and casualty liabilities.



As of December 31, 2002, the Company did not hold any high-yield investments in its fixed maturities investment portfolio. Currently, the Companys policy is to not hold securities rated lower
than BBB-/BAA- in its fixed maturities investment portfolio. In addition, the Company did not hold any derivative positions. Pursuant to the Companys policy, derivative positions are allowed only for the purpose of risk management and security
replication. At December 31, 2002, 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 3.7%, or approximately
$49.1 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 4.2%, or approximately $55.3 million.



With respect to the Companys alternative
investment portfolio, the Company does not directly control the allocation of its assets to strategies or underlying funds, nor does the Company control the manner in which they are invested by the Companys fund managers. However, the Company
consistently and systematically monitors the strategies and funds in which it is invested, and the Company believes its overall risk is limited as a result of its selected strategies low volatility and low correlation to the bond market, the
stock market and each other. At December 31, 2002, 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 decrease in market value of
1.49%, or approximately $8.6 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 increase in market value of 1.49%, or approximately
$8.6 million.



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



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



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

DISCLOSURE



None.



PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



The information required in response to this Item is contained under the captions PROPOSAL ONE ELECTION OF DIRECTORS OF THE COMPANY and SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE, in the
Proxy Statement, dated on or about March 26, 2003, filed with the SEC pursuant to Regulation 14A. These portions of the Proxy Statement are hereby incorporated by reference herein.



The Company has adopted a written code of ethics, the Max Re Capital Ltd. Code of Business Conduct and
Ethics, which is applicable to all directors, officers and employees of the Company, including the Companys principal executive officer, principal financial officer, principal accounting



31



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officer or controller and other executive officers identified pursuant to this Item 10 who perform similar functions (collectively, the
Selected Officers). In accordance with the rules and regulations of the Securities and Exchange Commission, a copy of the code has been filed as an exhibit to this Form 10-K, which will be posted on the Companys website as soon as
practicable after the filing of this report. The Company intends to disclose any changes in or waivers from its code of ethics applicable to any Selected Officer on its website at http://www.maxre.bm 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 OF DIRECTORS, PERFORMANCE GRAPH, EXECUTIVE COMPENSATION, COMPENSATION PLANS, DEFERRED COMPENSATION PLANS, EMPLOYMENT CONTRACTS AND
TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS, COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION and COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION in the Proxy Statement, dated on or about March 26, 2003, filed
with the SEC pursuant to Regulation 14A. 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 in the Proxy Statement, dated on or about March
26, 2003, filed with the SEC pursuant to Regulation 14A. This portion of the Proxy Statement is hereby incorporated by reference herein.



ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information required in response to this Item is contained under the caption CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS in the Proxy Statement, dated on or about March 26, 2003, filed with the
SEC pursuant to Regulation 14A. This portion of the Proxy Statement is hereby incorporated by reference herein.



ITEM 14.
DISCLOSURE CONTROLS AND PROCEDURES



Disclosure Controls and Internal Controls. The Companys disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, the Exchange Act) (Disclosure
Controls) are procedures that are designed with the objective of ensuring that information required to be disclosed in the Companys reports filed under the Exchange Act, such as this annual report, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to the
Companys management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls and procedures for financial reporting (Internal
Controls) are procedures that are designed with the objective of providing reasonable assurance that (1) the Companys transactions are properly authorized; (2) assets are safeguarded against unauthorized or improper use; and (3)
transactions are properly recorded and reported, all to permit the preparation of the Companys financial statements in conformity with GAAP.



Limitations on the effectiveness of controls. The Companys management, including the Chief Executive Officer and the Chief
Financial Officer, does not expect that the Companys Disclosure



32



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Controls or Internal Controls
will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.



Quarterly evaluation of the Companys Disclosure
Controls. Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Companys management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Companys Disclosure Controls. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded, subject to the limitations noted above, that the
design and operation of these Disclosure Controls were effective to ensure that material information relating to the Company is made known to management, including the Chief Executive Officer and Chief Financial Officer, particularly during the
period when the Companys periodic reports are being prepared, and that the Companys Internal Controls are effective to provide reasonable assurance that the Companys financial statements are fairly presented in conformity with
GAAP. No significant changes were made in the Companys Internal Controls that could significantly affect these controls subsequent to the date of their evaluation.



PART IV



ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



|      
|------
|(a)(1)
|      
|      
|      
|      
|      
|      
|      
|      
|      
|      
|      
|      



33



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##### Table of Contents



(a)(2) Financial Statement
Schedules:



All other schedules have been
omitted as not required or not applicable under the instructions, or the required information is shown in the consolidated financial statements or notes thereto.



(a)(3) Exhibits



|       
|-------
|Exhibit
|       
|3(i)   
|       
|3(ii)  
|       
|4.1    
|       
|4.2    
|       
|10.1   
|       
|10.2   
|       
|10.3   
|       
|10.4   
|       
|10.5   
|       
|10.6   
|       
|10.7   
|       
|10.8   



34



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|     
|-----
|10.9 
|     
|10.10
|     
|10.11
|     
|10.12
|     
|10.13
|     
|10.14
|     
|10.15
|     
|10.16
|     
|10.17
|     
|10.18
|     
|10.19
|     
|21.1 
|     
|23.1 



35



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##### Table of Contents

|    
|----
|24.1
|    
|99.1
|    
|99.2
|    
|99.3
|    
|99.4



(b) Reports On Form
8-K



The Company did not file any reports on
Form 8-K during the fourth quarter of the fiscal year ended December 31, 2002.



36



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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 RE CAPITAL LTD.                                   
|                                                      
|/S/    ROBERT J.
COONEY                               
|Robert J. Cooney President and Chief Executive Officer



Date:   March 19, 2003



POWER OF ATTORNEY



Each
person whose signature appears below hereby constitutes and appoints Robert J. Cooney and Keith S. Hynes, or either of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, 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 Securities and Exchange Commission,
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/    ROBERT J. COONEY                                                                          
|Robert J. Cooney President and Chief Executive Officer and Director (Principal executive officer)
|                                                                                                 
|Date:  March 19, 2003                                                                            



|                                                 
|-------------------------------------------------
|/S/    N. JAMES TEES                             
|N. James Tees Senior Vice President and Treasurer
|                                                 
|Date:  March 19, 2003                            



37



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|                       
|-----------------------
|/S/    JOHN R. BARBER  
|John R. Barber Director
|                       
|Date: March 19, 2003   



|                          
|--------------------------
|/S/    LAURENCE W. CHENG  
|Laurence W. Cheng Director
|                          
|Date: March 19, 2003      



|                            
|----------------------------
|/S/    WILLIS T. KING, JR.  
|Willis T. King, Jr. Director
|                            
|Date: March 19, 2003        



|                        
|------------------------
|/S/    STEVEN M. SKALA  
|Steven M. Skala Director
|                        
|Date: March 19, 2003    



|                      
|----------------------
|/S/    JAMES L. ZECH  
|James L. Zech Director
|                      
|Date: March 19, 2003  



38



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##### Table of Contents



CERTIFICATIONS



I, Robert J.
Cooney, the Chief Executive Officer of Max Re Capital Ltd., certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Max Re Capital Ltd.;
|-- |  | -----------------------------------------------------------------------



|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date:  March 19, 2003

/S/    ROBERT J. COONEYName:  Robert J.
Cooney




39



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##### Table of Contents



I, Keith S. Hynes, the Chief
Financial Officer of Max Re Capital Ltd., certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Max Re Capital Ltd.;
|-- |  | -----------------------------------------------------------------------



|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date:  March 19, 2003

/S/    KEITH S. HYNESName:  Keith S.
Hynes




40



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##### Table of Contents



INDEPENDENT AUDITORS
REPORT



The Board of Directors and Shareholders

Max Re Capital Ltd.



We have audited the accompanying consolidated balance sheets of Max Re Capital Ltd. and subsidiaries as of December 31, 2002 and 2001 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, 2002. These consolidated financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of Max Re Capital Ltd. and subsidiaries as of December 31, 2002, and 2001, and the results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.



Chartered Accountants

Hamilton, Bermuda

January 29, 2003



F-1



---

##### Table of Contents

MAX RE CAPITAL LTD.



Consolidated Balance Sheets



December 31, 2002 and 2001

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

---



|                                                                                                                  |  | 2002 |           |   | 2001 |  
|----------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | -
|Assets                                                                                                            |  |      |           |   |      |  
|Cash and cash equivalents                                                                                         |  | $    | 92,103    |   |      | $
|Fixed maturities, available for sale at fair value                                                                |  |      | 1,279,564 |   |      |  
|Alternative investments, at fair value                                                                            |  |      | 653,165   |   |      |  
|Accrued interest income                                                                                           |  |      | 12,304    |   |      |  
|Premiums receivable                                                                                               |  |      | 190,214   |   |      |  
|Losses recoverable from reinsurers                                                                                |  |      | 212,241   |   |      |  
|Funds withheld                                                                                                    |  |      | 55,276    |   |      |  
|Deferred acquisition costs                                                                                        |  |      | 79,447    |   |      |  
|Deferred charges                                                                                                  |  |      | 32,086    |   |      |  
|Prepaid reinsurance premiums                                                                                      |  |      | 25,408    |   |      |  
|Other assets                                                                                                      |  |      | 11,633    |   |      |  
|                                                                                                                  |  |      |           |   |      |  
|Total assets                                                                                                      |  | $    | 2,643,441 |   |      | $
|                                                                                                                  |  |      |           |   |      |  
|Liabilities                                                                                                       |  |      |           |   |      |  
|Life and annuity benefits and experience refunds                                                                  |  | $    | 405,008   |   |      | $
|Property and casualty losses and experience refunds                                                               |  |      | 778,069   |   |      |  
|Reinsurance balances payable                                                                                      |  |      | 194,436   |   |      |  
|Deposit liabilities                                                                                               |  |      | 115,513   |   |      |  
|Unearned property and casualty premiums                                                                           |  |      | 323,672   |   |      |  
|Accounts payable and accrued expenses                                                                             |  |      | 16,019    |   |      |  
|Bank loan                                                                                                         |  |      | 100,000   |   |      |  
|                                                                                                                  |  |      |           |   |      |  
|Total liabilities                                                                                                 |  |      | 1,932,717 |   |      |  
|                                                                                                                  |  |      |           |   |      |  
|Minority interest                                                                                                 |  |      | 116,565   |   |      |  
|                                                                                                                  |  |      |           |   |      |  
|Shareholders equity                                                                                              |  |      |           |   |      |  
|Preferred shares (par value $1.00) 20,000,000 shares authorized; no shares
outstanding                            |  |      |          |   |      |  
|Common shares (par value $1.00) 200,000,000 shares authorized 37,998,779
(200139,582,379) issued and outstanding |  |      | 37,999    |   |      |  
|Additional paid-in capital                                                                                        |  |      | 526,582   |   |      |  
|Loans receivable from common share sales                                                                          |  |      | (12,575   | ) |      |  
|Unearned stock grant compensation                                                                                 |  |      | (2,656    | ) |      |  
|Accumulated other comprehensive income                                                                            |  |      | 49,108    |   |      |  
|Retained earnings (deficit)                                                                                       |  |      | (4,299    | ) |      |  
|                                                                                                                  |  |      |           |   |      |  
|Total shareholders equity                                                                                        |  |      | 594,159   |   |      |  
|                                                                                                                  |  |      |           |   |      |  
|Total liabilities, minority interest and shareholders equity                                                     |  | $    | 2,643,441 |   |      | $
|                                                                                                                  |  |      |           |   |      |  



See accompanying
notes to consolidated financial statements



---



F-2



---

##### Table of Contents

MAX RE CAPITAL LTD.



Consolidated Statements of Income and Comprehensive Income



Years Ended December 31, 2002, 2001 and 2000

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

---



|                                                          |  | 2002 |         |   | 2001 |   |          | 2000 | 
|--------------------------------------------------------- |  | ---- | ------- | - | ---- | - | -------- | ---- | 
|Revenues                                                  |  |      |         |   |      |   |          |      | 
|Gross premiums written                                    |  | $    | 647,390 |   |      | $ | 710,551  |      | 
|Reinsurance premiums ceded                                |  |      | (54,679 | ) |      |   | (116,417 | )    | 
|                                                          |  |      |         |   |      |   |          |      | 
|Net premiums written                                      |  | $    | 592,711 |   |      | $ | 594,134  |      | 
|                                                          |  |      |         |   |      |   |          |      | 
|Earned premiums                                           |  | $    | 434,681 |   |      | $ | 599,991  |      | 
|Earned premiums ceded                                     |  |      | (46,644 | ) |      |   | (99,044  | )    | 
|                                                          |  |      |         |   |      |   |          |      | 
|Net premiums earned                                       |  |      | 388,037 |   |      |   | 500,947  |      | 
|Net investment income                                     |  |      | 64,353  |   |      |   | 43,870   |      | 
|Net gains on alternative investments                      |  |      | 32,127  |   |      |   | 29,784   |      | 
|Net realized gains on sale of fixed maturities            |  |      | 5,390   |   |      |   | 2,512    |      | 
|Other income                                              |  |      | 6,181   |   |      |   | 3,857    |      | 
|                                                          |  |      |         |   |      |   |          |      | 
|Total revenues                                            |  |      | 496,088 |   |      |   | 580,970  |      | 
|                                                          |  |      |         |   |      |   |          |      | 
|Losses and expenses                                       |  |      |         |   |      |   |          |      | 
|Losses, benefits and experience refunds                   |  |      | 379,280 |   |      |   | 524,365  |      | 
|Acquisition costs                                         |  |      | 97,738  |   |      |   | 30,860   |      | 
|Interest expense                                          |  |      | 4,833   |   |      |   | 2,079    |      | 
|General and administrative expenses                       |  |      | 21,337  |   |      |   | 21,042   |      | 
|                                                          |  |      |         |   |      |   |          |      | 
|Total losses and expenses                                 |  |      | 503,188 |   |      |   | 578,346  |      | 
|                                                          |  |      |         |   |      |   |          |      | 
|Income (loss) before minority interest                    |  |      | (7,100  | ) |      |   | 2,624    |      | 
|Minority interest                                         |  |      | 1,346   |   |      |   | (93      | )    | 
|                                                          |  |      |         |   |      |   |          |      | 
|Net income (loss)                                         |  |      | (5,754  | ) |      |   | 2,531    |      | 
|Change in net unrealized appreciation of fixed maturities |  |      | 35,633  |   |      |   | 6,674    |      | 
|                                                          |  |      |         |   |      |   |          |      | 
|Comprehensive income                                      |  | $    | 29,879  |   |      | $ | 9,205    |      | 
|                                                          |  |      |         |   |      |   |          |      | 
|Basic earnings (loss) per share                           |  | $    | (0.15   | ) |      | $ | 0.08     |      | 
|                                                          |  |      |         |   |      |   |          |      | 
|Diluted earnings (loss) per share                         |  | $    | (0.15   | ) |      | $ | 0.06     |      | 
|                                                          |  |      |         |   |      |   |          |      | 



See accompanying
notes to consolidated financial statements



---



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##### Table of Contents

MAX RE CAPITAL LTD.



Consolidated Statements of Changes in Shareholders Equity



Years Ended December 31, 2002, 2001 and 2000

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

---



|                                                  |  | 2002 |         |   | 2001 |   |         | 2000 | 
|------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- | 
|Common shares                                     |  |      |         |   |      |   |         |      | 
|Balancebeginning of year                         |  | $    | 39,582  |   |      | $ | 27,683  |      | 
|Issue of shares                                   |  |      | 262     |   |      |   | 13,102  |      | 
|Repurchase of shares                              |  |      | (1,845  | ) |      |   | (1,203  | )    | 
|                                                  |  |      |         |   |      |   |         |      | 
|Balanceend of year                               |  |      | 37,999  |   |      |   | 39,582  |      | 
|                                                  |  |      |         |   |      |   |         |      | 
|Additional paid-in capital                        |  |      |         |   |      |   |         |      | 
|Balancebeginning of year                         |  |      | 543,438 |   |      |   | 376,905 |      | 
|Issue of common shares                            |  |      | 3,736   |   |      |   | 198,210 |      | 
|Repurchase of shares                              |  |      | (19,058 | ) |      |   | (15,856 | )    | 
|Direct equity offering expenses                   |  |      |        |   |      |   | (15,821 | )    | 
|Distribution to shareholders                      |  |      | (1,534  | ) |      |   |        |      | 
|                                                  |  |      |         |   |      |   |         |      | 
|Balanceend of year                               |  |      | 526,582 |   |      |   | 543,438 |      | 
|                                                  |  |      |         |   |      |   |         |      | 
|Loans receivable from common share sales          |  |      |         |   |      |   |         |      | 
|Balancebeginning of year                         |  |      | (12,575 | ) |      |   | (11,650 | )    | 
|Loans granted                                     |  |      |        |   |      |   | (1,025  | )    | 
|Loans repaid                                      |  |      |        |   |      |   | 100     |      | 
|                                                  |  |      |         |   |      |   |         |      | 
|Balanceend of year                               |  |      | (12,575 | ) |      |   | (12,575 | )    | 
|                                                  |  |      |         |   |      |   |         |      | 
|Unearned stock grant compensation                 |  |      |         |   |      |   |         |      | 
|Balancebeginning of year                         |  |      | (2,894  | ) |      |   | (630    | )    | 
|Stock grants awarded                              |  |      | (971    | ) |      |   | (3,288  | )    | 
|Amortization                                      |  |      | 1,209   |   |      |   | 1,024   |      | 
|                                                  |  |      |         |   |      |   |         |      | 
|Balanceend of year                               |  |      | (2,656  | ) |      |   | (2,894  | )    | 
|                                                  |  |      |         |   |      |   |         |      | 
|Accumulated other comprehensive income            |  |      |         |   |      |   |         |      | 
|Balancebeginning of year                         |  |      | 13,475  |   |      |   | 6,801   |      | 
|Holding gains on fixed maturities arising in year |  |      | 46,942  |   |      |   | 10,652  |      | 
|Net realized gains included in net income         |  |      | (5,390  | ) |      |   | (2,512  | )    | 
|Allocation to minority interest                   |  |      | (5,919  | ) |      |   | (1,466  | )    | 
|                                                  |  |      |         |   |      |   |         |      | 
|Balanceend of year                               |  |      | 49,108  |   |      |   | 13,475  |      | 
|                                                  |  |      |         |   |      |   |         |      | 
|Retained earnings (deficit)                       |  |      |         |   |      |   |         |      | 
|Balancebeginning of year                         |  |      | 3,044   |   |      |   | 1,306   |      | 
|Net income (loss)                                 |  |      | (5,754  | ) |      |   | 2,531   |      | 
|Dividends paid                                    |  |      | (1,589  | ) |      |   | (793    | )    | 
|                                                  |  |      |         |   |      |   |         |      | 
|Balanceend of year                               |  |      | (4,299  | ) |      |   | 3,044   |      | 
|                                                  |  |      |         |   |      |   |         |      | 
|Total shareholders equity                        |  | $    | 594,159 |   |      | $ | 584,070 |      | 
|                                                  |  |      |         |   |      |   |         |      | 



See accompanying
notes to consolidated financial statements



---



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##### Table of Contents

MAX RE CAPITAL LTD.



Consolidated Statements of Cash Flows



Years Ended December 31, 2002, 2001 and 2000

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

---



|                                                                                         |  | 2002 |          |   | 2001 |   |          | 2000 | 
|---------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- | 
|Operating activities                                                                     |  |      |          |   |      |   |          |      | 
|Net income (loss)                                                                        |  | $    | (5,754   | ) |      | $ | 2,531    |      | 
|Adjustments to reconcile net income (loss) to net cash provided by operating
activities: |  |      |          |   |      |   |          |      | 
|Minority interest share of net income (loss)                                             |  |      | (1,346   | ) |      |   | 93       |      | 
|Amortization of unearned stock grant compensation                                        |  |      | 1,209    |   |      |   | 1,024    |      | 
|Amortization of discount on fixed maturities                                             |  |      | 1,378    |   |      |   | (1,015   | )    | 
|Net gains on alternative investments                                                     |  |      | (32,127  | ) |      |   | (29,784  | )    | 
|Net realized gains on sale of fixed maturities                                           |  |      | (5,390   | ) |      |   | (2,512   | )    | 
|Accrued interest income                                                                  |  |      | (1,408   | ) |      |   | (4,477   | )    | 
|Premiums receivable                                                                      |  |      | (100,607 | ) |      |   | (86,899  | )    | 
|Losses recoverable from reinsurers                                                       |  |      | (38,578  | ) |      |   | (168,293 | )    | 
|Funds withheld                                                                           |  |      | 204      |   |      |   | (13,489  | )    | 
|Deferred acquisition costs                                                               |  |      | (39,612  | ) |      |   | (39,835  | )    | 
|Deferred charges                                                                         |  |      | 12,351   |   |      |   | (22,756  | )    | 
|Prepaid reinsurance premiums                                                             |  |      | (8,035   | ) |      |   | (17,373  | )    | 
|Other assets                                                                             |  |      | (4,558   | ) |      |   | (4,108   | )    | 
|Life and annuity benefits and experience refunds                                         |  |      | (18,759  | ) |      |   | 169,848  |      | 
|Property and casualty losses and experience refunds                                      |  |      | 181,692  |   |      |   | 460,039  |      | 
|Reinsurance balances payable                                                             |  |      | 64,781   |   |      |   | 106,988  |      | 
|Unearned property and casualty premiums                                                  |  |      | 212,709  |   |      |   | 110,560  |      | 
|Accounts payable and accrued expenses                                                    |  |      | 7,283    |   |      |   | 1,158    |      | 
|                                                                                         |  |      |          |   |      |   |          |      | 
|Cash provided by operating activities                                                    |  |      | 225,433  |   |      |   | 461,700  |      | 
|                                                                                         |  |      |          |   |      |   |          |      | 
|                                                                                        
|Investing activities                                                                     |  |      |          |   |      |   |          |      | 
|Purchases of fixed maturities                                                            |  |      | (746,259 | ) |      |   | (588,120 | )    | 
|Sales (purchases) of alternative investments                                             |  |      | 7,936    |   |      |   | (250,910 | )    | 
|Sales of fixed maturities                                                                |  |      | 306,241  |   |      |   | 178,571  |      | 
|Redemptions of fixed maturities                                                          |  |      | 88,905   |   |      |   | 16,780   |      | 
|                                                                                         |  |      |          |   |      |   |          |      | 
|Cash used in investing activities                                                        |  |      | (343,177 | ) |      |   | (643,679 | )    | 
|                                                                                         |  |      |          |   |      |   |          |      | 
|Financing activities                                                                     |  |      |          |   |      |   |          |      | 
|Net proceeds from subscriptions to share capital                                         |  |      | 3,027    |   |      |   | 191,179  |      | 
|Repurchase of common shares                                                              |  |      | (20,903  | ) |      |   | (17,059  | )    | 
|Proceeds from bank loan                                                                  |  |      | 100,000  |   |      |   |         |      | 
|Dividends and distributions                                                              |  |      | (3,123   | ) |      |   | (793     | )    | 
|Distributions to / conversions of minority shareholders                                  |  |      | (3,600   | ) |      |   | (146     | )    | 
|Deposit liabilities, net                                                                 |  |      | 36,124   |   |      |   | 79,389   |      | 
|Notes and loans repaid                                                                   |  |      |         |   |      |   | 100      |      | 
|                                                                                         |  |      |          |   |      |   |          |      | 
|Cash provided by financing activities                                                    |  |      | 111,525  |   |      |   | 252,670  |      | 
|                                                                                         |  |      |          |   |      |   |          |      | 
|Net increase (decrease) in cash and cash equivalents                                     |  |      | (6,219   | ) |      |   | 70,691   |      | 
|Cash and cash equivalents, beginning of year                                             |  |      | 98,322   |   |      |   | 27,631   |      | 
|                                                                                         |  |      |          |   |      |   |          |      | 
|Cash and cash equivalents, end of year                                                   |  | $    | 92,103   |   |      | $ | 98,322   |      | 
|                                                                                         |  |      |          |   |      |   |          |      | 
|Supplemental Disclosure of Cash Flow Information                                         |  |      |          |   |      |   |          |      | 
|Interest paid                                                                            |  | $    | 2,176    |   |      | $ |         |      | 
|                                                                                         |  |      |          |   |      |   |          |      | 



See accompanying
notes to consolidated financial statements



---



F-5



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##### Table of Contents

MAX RE CAPITAL LTD.



Notes to Consolidated Financial Statements



December 31, 2002, 2001 and 2000

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

---





|1. |  | General
|-- |  | -------



Max Re Capital Ltd. (the Company) was incorporated on July 8, 1999 under the laws of Bermuda to provide customized multi-line
reinsurance and insurance products. On June 29, 2000, the Company changed its name from Maximus Capital Holdings, Ltd. to Max Re Capital Ltd. The Companys principal operating subsidiary is Max Re Ltd. (Max Re). Max Re is registered
as a Class 4 insurer and long-term insurer under the insurance laws of Bermuda.



|2. |  | Significant accounting policies
|-- |  | -------------------------------



(a) Basis of presentation



The consolidated financial statements include the financial statements of Max Re Capital Ltd., Max Re and Max
Re Managers Ltd., together with Max Res subsidiaries, Max Re Europe Limited and Max Re Diversified Strategies Ltd. (MDS). All significant inter-company balances and transactions have been eliminated.



The accompanying financial statements are prepared in
accordance with accounting principles generally accepted in the United States of America 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) Minority
interest



Minority interest represents
non-voting shares in Max Re held by certain founding shareholders of the Company. Max Re non-voting common shares may be exchanged for common shares of the Company on a one-for-one basis following a sale, transfer or other disposition to an
unaffiliated third party, provided that following such exchange the shareholder would not hold in excess of 9.9% of the total common shares issued and outstanding. The current holders of Max Re non-voting common shares cannot exchange any Max Re
non-voting shares for common shares of the Company without the consent of the Board of Directors of the Company, other than to deliver common shares of the Company upon a sale in the public market. The non-voting shares will at all times rank as to
assets, dividends and in all other respects on a parity with the common shares of Max Re, except the right to vote on any matters required by Bermuda law.



The minoritys share of net income is calculated quarterly using the minoritys weighted average ownership percentage. Minority
interest represents the minoritys current proportionate share of Max Res net assets.



(c) Premium revenue recognition



Property and Casualty



Premiums written are earned on a pro-rata basis over the period the coverage is provided. 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. Premium estimates for retrospectively rated contracts are recognized within the periods in which the related losses are incurred.



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.



---



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##### Table of Contents

MAX RE CAPITAL LTD.



Notes to Consolidated Financial Statements



December 31, 2002, 2001 and 2000

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

---





|2. |  | Summary of significant accounting policies (continued)
|-- |  | ------------------------------------------------------



(c) Premium revenue recognition(continued)



Deposits



Short duration reinsurance contracts entered into by the
Company which 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.



(d) 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. 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.



Fair value of investments in fixed maturities is generally
based on quoted market prices. If quoted market prices are not available, fair values are estimated based on dealer quotes, pricing models or quoted prices for instruments with similar characteristics. Changes in fair value are recorded in the
period they are determined.



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) other
strategic equity investments. Investments in limited partnerships and trading entities are carried at the net asset value provided by the respective entity. These entities generally carry their trading positions and investments at fair value as
determined by their respective investment managers. The change in net asset value is included in net gains on alternative investments.



Investments in unquoted equities where the Company has significant influence 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 from the investments. The Company believes this approximates fair value for these equity
investments for which quoted market prices are not available. The Companys share of income or loss from these investments is included in net gains on alternative investments.



(e) Fee revenue recognition



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



(f) Losses and loss adjustment expenses



Property and Casualty

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. Inherent in the estimates of losses are expected trends of frequency, severity and other factors which could vary significantly as claims are settled.
Accordingly, ultimate losses could vary from the liability recorded in these consolidated financial statements. These estimates are regularly reviewed and any adjustments to the estimates are recorded in the period they are determined.



Life and Annuity



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-7



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##### Table of Contents

MAX RE CAPITAL LTD.



Notes to Consolidated Financial Statements



December 31, 2002, 2001 and 2000

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

---





|2. |  | Summary of significant accounting policies (continued)
|-- |  | ------------------------------------------------------



(g) Acquisition costs



Acquisition costs consist of commissions and fees paid to brokers and consultants and ceding commissions paid
to the Companys clients. Deferred acquisition costs are amortized over the period in which the related premiums are earned or, for 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 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. If such costs are estimated to be unrecoverable as a result of a premium deficiency loss, they are expensed.



(h) Experience refunds



The liability for experience refunds represents estimates of
the ultimate liability incurred under profit sharing provisions of various contracts. These estimates are regularly reviewed and any adjustments to the estimates are recorded in the period they are determined. Since this liability is based on
estimates, the ultimate settlement of experience refunds may vary from the amount provided.



(i) Deferred chargesreinsurance assumed



The excess of estimated liabilities for claims and claim costs over the consideration received with respect
to retroactive property and casualty reinsurance contracts that provide for indemnification of insurance risk is established as a deferred charge at inception of such contracts. The deferred charges are subsequently amortized using the interest
method over the expected liability settlement periods of the contracts. The periodic amortization charges are recorded in losses, benefits and experience refunds.



(j) Translation of foreign currencies



The Companys functional currency is the United States
dollar. Premiums written and receivable in foreign currencies are recorded at exchange rates prevailing on the date the contract attaches and liabilities for losses payable in foreign currencies at the time such liabilities are reported. Exchange
gains or losses resulting from the periodic revaluation and settlement of such assets and liabilities are recorded in the consolidated statements of income and 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. Exchange gains and losses are included in the determination of net income.



(k) Offering costs



Direct offering costs incurred in connection with the
Companys initial public offering and private placement offerings (the Offerings), including certain amounts payable for investment banking, legal services and printing were deducted from the gross proceeds of the Offerings.



(l) 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.



(m) 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.



---



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---

##### Table of Contents

MAX RE CAPITAL LTD.



Notes to Consolidated Financial Statements



December 31, 2002, 2001 and 2000

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

---





|3. |  | Investments
|-- |  | -----------



(a)The fair values and amortized costs of fixed maturities at December 31, 2002 and 2001 were as follows:



|2002                                 |  | Amortized Cost |           | Unrealized Gain |   | Unrealized Loss |  |   | FairValue
|------------------------------------ |  | -------------- | --------- | --------------- | - | --------------- |  | - | ---------
|US Government and Agencies           |  | $              | 497,897   |                 | $ | 35,391          |  | $ |         
|US Corporate Securities              |  |                | 351,011   |                 |   | 14,274          |  |   | (344     
|Other Corporate Securities           |  |                | 17,641    |                 |   | 229             |  |   | (2       
|Asset and Mortgage Backed Securities |  |                | 275,577   |                 |   | 5,142           |  |   | (281     
|Collateralized Mortgage Obligations  |  |                | 80,311    |                 |   | 2,741           |  |   | (23      
|                                     |  |                |           |                 |   |                 |  |   |          
|                                     |  | $              | 1,222,437 |                 | $ | 57,777          |  | $ | (650     
|                                     |  |                |           |                 |   |                 |  |   |          
|                                    
|2001                                 |  | Amortized Cost |           | Unrealized Gain |   | Unrealized Loss |  |   | FairValue
|US Government and Agencies           |  | $              | 498,407   |                 | $ | 7,647           |  | $ | (1,668   
|US Corporate Securities              |  |                | 213,026   |                 |   | 6,983           |  |   | (229     
|Asset and Mortgage Backed Securities |  |                | 155,299   |                 |   | 4,032           |  |   | (13      
|Non-US Government                    |  |                | 580       |                 |   | 5               |  |   |         
|                                     |  |                |           |                 |   |                 |  |   |          
|                                     |  | $              | 867,312   |                 | $ | 18,667          |  | $ | (1,910   
|                                     |  |                |           |                 |   |                 |  |   |          



The following table sets
forth certain information regarding the investment ratings (provided by major rating agencies) of fixed maturities at December 31, 2002 and 2001.



|                           |  | 2002       |           | 2001
|-------------------------- |  | ---------- | --------- | ----
|                           |  | Fair Value |           | %   
|US Government and Agencies |  | $          | 533,288   |     
|AAA                        |  |            | 373,462   |     
|AA                         |  |            | 136,672   |     
|A                          |  |            | 231,022   |     
|BBB                        |  |            | 5,120     |     
|                           |  |            |           |     
|                           |  | $          | 1,279,564 |     
|                           |  |            |           |     



(b) The maturity distribution for fixed maturities held at December 31, 2002 was as follows:



|                       |  | Amortized Cost |           | FairValue
|---------------------- |  | -------------- | --------- | ---------
|Within one year        |  | $              | 122,599   |          
|From one to five years |  |                | 470,374   |          
|From five to ten years |  |                | 262,833   |          
|More than ten years    |  |                | 366,631   |          
|                       |  |                |           |          
|                       |  | $              | 1,222,437 |          
|                       |  |                |           |          



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



---



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##### Table of Contents

MAX RE CAPITAL LTD.



Notes to Consolidated Financial Statements



December 31, 2002, 2001 and 2000

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

---





|3. |  | Investments (continued)
|-- |  | -----------------------



(c)    Investment income earned for the years ended December 31, 2002, 2001 and 2000 was as
follows:



|                                                                     |  | 2002 |        |   | 2001 |   |        | 2000 | 
|-------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- | 
|Interest earned on fixed maturities, cash and short term investments |  | $    | 53,398 |   |      | $ | 36,658 |      | 
|Interest earned on funds withheld                                    |  |      | 13,155 |   |      |   | 6,740  |      | 
|Amortization of discount on fixed maturities                         |  |      | (1,378 | ) |      |   | 1,015  |      | 
|Investment expenses                                                  |  |      | (822   | ) |      |   | (543   | )    | 
|                                                                     |  |      |        |   |      |   |        |      | 
|                                                                     |  | $    | 64,353 |   |      | $ | 43,870 |      | 
|                                                                     |  |      |        |   |      |   |        |      | 



(d)     The net realized gains and the change in net unrealized appreciation on fixed maturities for the years ended December 31,   2002, 2001 and 2000 was as follows:



|                                                                                   |  | 2002 |        |   | 2001 |   |        | 2000 | 
|---------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- | 
|Net realized gains:                                                                |  |      |        |   |      |   |        |      | 
|Gross realized gains                                                               |  | $    | 5,879  |   |      | $ | 2,777  |      | 
|Gross realized losses                                                              |  |      | (489   | ) |      |   | (265   | )    | 
|                                                                                   |  |      |        |   |      |   |        |      | 
|Net realized gains                                                                 |  |      | 5,390  |   |      |   | 2,512  |      | 
|                                                                                   |  |      |        |   |      |   |        |      | 
|Change in unrealized appreciation                                                  |  |      | 41,552 |   |      |   | 8,140  |      | 
|Less: allocation to minority interest                                              |  |      | (5,919 | ) |      |   | (1,466 | )    | 
|                                                                                   |  |      |        |   |      |   |        |      | 
|Net change in unrealized appreciation                                              |  |      | 35,633 |   |      |   | 6,674  |      | 
|                                                                                   |  |      |        |   |      |   |        |      | 
|Total net realized gains and change in unrealized appreciation on fixed
maturities |  | $    | 41,023 |   |      | $ | 9,186  |      | 
|                                                                                   |  |      |        |   |      |   |        |      | 



(e)    The majority of the Companys alternative investments at December 31, 2002 comprise a fund of funds portfolio owned by MDS and managed by Moore Capital Management, LLC (the Manager),
a company owned by certain of the Companys shareholders. The funds are primarily engaged in global macro, long/short equity, fixed income arbitrage, convertible arbitrage, diversified arbitrage, distressed investing, event driven
arbitrage, commodity trading, emerging market and opportunistic investment strategies. Certain funds in the portfolio are managed by the Manager. For the year ended December 31, 2002 the Company paid the Manager $3,101 (2001$7,639;
2000$4,400) for investment management services.



In addition, one of the funds is managed by another shareholder, a founding partner of which was a director of the Company for the period November 1999 through November 2002. The Company paid $950 in management and incentive fees
during the year ended December 31, 2002 (2001$1,851; 2000$1,500) for funds managed.



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



(f)In May 2001, the Company made an 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.



Max Re 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, 2002 were approximately $2,800 (2001$2,600) and are included in other income in the accompanying consolidated statements of income and comprehensive income.



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##### Table of Contents

MAX RE CAPITAL LTD.



Notes to Consolidated Financial Statements



December 31, 2002, 2001 and 2000

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

---





|3. |  | Investments (continued)
|-- |  | -----------------------



Max Re has also entered into a quota share retrocession arrangement with Grand Central Re that commenced January 1, 2001. 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 agreement with Grand Central Re:



2002

2001Prepaid reinsurance premiums

$
24,045

$
16,644Losses recoverable from reinsurers


129,308


97,700Reinsurance balances payable


122,747


92,687Deposit liabilities


22,543


14,016Reinsurance premiums ceded


52,089


106,535Earned premiums ceded


44,688


89,890Losses, benefits and experience refunds, net


35,161


97,098




Included within reinsurance balances payable of $122,747, are funds withheld totaling $108,704. During 2002, Max Re credited Grand Central Re with interest of $7,703 (2001$1,573) on the funds withheld by Max Re at a negotiated
rate of 8.59% (20018.55%). Interest paid on funds withheld is included within losses, benefits and experience refunds in the consolidated statements of income and comprehensive income.



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



(g)    In December 2001, the Company made an equity investment of
$50,000 in Class D shares of DaVinci Re Holdings Ltd., and its operating subsidiary DaVinci Reinsurance Ltd. (DaVinci), representing 12.5% of its share capital. DaVinci is a Bermuda-based property catastrophe reinsurer, managed by
Renaissance Underwriting Managers, Ltd. The investment in DaVinci is recorded using the equity method of accounting and is classified as an alternative investment in the accompanying consolidated balance sheets.



|4. |  | Property and casualty losses and loss adjustment expenses
|-- |  | ---------------------------------------------------------



The summary of changes in outstanding property and casualty losses at December 31, 2002, 2001 and 2000 was as
follows:



|                                                                        |  | 2002 |          |   | 2001 |   |         | 2000
|----------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | ----
|Gross balance at January 1                                              |  | $    | 596,377  |   |      | $ | 136,338 |     
|Less: Reinsurance recoverables, deferred charges and experience refunds |  |      | (210,824 | ) |      |   | (47,625 | )   
|                                                                        |  |      |          |   |      |   |         |     
|Net balance at January 1                                                |  |      | 385,553  |   |      |   | 88,713  |     
|                                                                        |  |      |          |   |      |   |         |     
|Incurred losses related to:                                             |  |      |          |   |      |   |         |     
|Current year                                                            |  |      | 261,836  |   |      |   | 292,743 |     
|Prior year                                                              |  |      | 49,912   |   |      |   | 18,181  |     
|                                                                        |  |      |          |   |      |   |         |     
|Total incurred                                                          |  |      | 311,748  |   |      |   | 310,924 |     
|                                                                        |  |      |          |   |      |   |         |     
|Paid losses related to:                                                 |  |      |          |   |      |   |         |     
|Current year                                                            |  |      | (20,784  | ) |      |   | (7,930  | )   
|Prior year                                                              |  |      | (113,778 | ) |      |   | (6,154  | )   
|                                                                        |  |      |          |   |      |   |         |     
|Total paid                                                              |  |      | (134,562 | ) |      |   | (14,084 | )   
|                                                                        |  |      |          |   |      |   |         |     
|Net balance at December 31                                              |  |      | 562,739  |   |      |   | 385,553 |     
|Plus: Reinsurance recoverables, deferred charges and experience refunds |  |      | 215,330  |   |      |   | 210,824 |     
|                                                                        |  |      |          |   |      |   |         |     
|Gross balance at December 31                                            |  | $    | 778,069  |   |      | $ | 596,377 |     
|                                                                        |  |      |          |   |      |   |         |     



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##### Table of Contents

MAX RE CAPITAL LTD.



Notes to Consolidated Financial Statements



December 31, 2002, 2001 and 2000

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

---





|4. |  | Property and casualty losses and loss adjustment expenses (continued)
|-- |  | ---------------------------------------------------------------------



Prior year incurred losses of $49,912 for the year ended December 31, 2002 relates to a current year change
in estimate of expected losses of $53,825 on certain reinsurance contracts written in prior years and the current year amortization of deferred charges of $6,280 with respect to retroactive reinsurance contracts written in prior years, and is net of
$10,193 in realized profits from contracts terminated during the current year that were written in prior years. The change in estimates results from the receipt of information or notification from the ceding companies during the current year. One
contract accounted for $41,156 of the prior year incurred losses amount. For certain contracts, these losses triggered additional premium of $40,892, interest on premium of $9,797 and acquisition costs of $12,915, which were earned and/or incurred
in the current year.



Prior year incurred losses
of $18,181 for the year ended December 31, 2001 relates principally to a change in estimate of expected losses of $11,820 on two reinsurance contracts written during the year ended December 31, 2000, the Companys first year of operations, and
amortization of deferred charges of $6,361 with respect to retroactive reinsurance contracts written during the year ended December 31, 2000.



For the years ended December 31, 2002 and 2001, the change in estimate of expected loss and realized profit results from contracts
covering primarily workers compensation claims.



While the Company believes that it has made a reasonable estimate of ultimate property and casualty losses, subsequent claims experience may exceed loss reserves and have a significant effect on the Companys results of
operations.



Included in deposit liabilities is
$48,490 (2001$8,733; 2000$nil) related to reinsurance contracts that do not transfer sufficient risk to be accounted for as reinsurance.



|5. |  | Life and annuity benefits
|-- |  | -------------------------



Life and annuity benefits at December 31, 2002 and 2001 was as follows:



|                    |  | 2002 |         | 2001
|------------------- |  | ---- | ------- | ----
|Life                |  | $    | 47,371  |     
|Annuities           |  |      | 97,882  |     
|Accident and health |  |      | 259,755 |     
|                    |  |      |         |     
|                    |  | $    | 405,008 |     
|                    |  |      |         |     



Losses
recoverable relating to life and annuity contracts of $30,172 in 2002 (2001$30,232; 2000$nil) are included in losses 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, 2002 are annuities of $8,645 (2001$10,185; 2000$nil) which are subject to discretionary withdrawal.
Deposit liabilities also include $58,378 (2001$60,471; 2000$nil) representing a universal life reinsurance contract that did not transfer sufficient risk to be accounted for as reinsurance.



|6. |  | Reinsurance
|-- |  | -----------



The Company utilizes reinsurance and retrocession agreements principally to increase aggregate capacity and to reduce the risk of loss on
business assumed. The Companys reinsurance and retrocession agreements provide for recovery of a portion of losses and loss adjustment expenses from reinsurers. Losses recoverable from reinsurers are recorded as assets. Losses, benefits and
experience refunds are net of losses recoverable of $49,835 in 2002 (2001$167,692; 2000$5,370) 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. Two retrocessionaires account for 60.9% and 36.5% of the Companys losses recoverable from reinsurers as of
December 31, 2002. Both retrocessionaires have a financial strength rating of A by A.M. Best as at December 31, 2002.



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##### Table of Contents

MAX RE CAPITAL LTD.



Notes to Consolidated Financial Statements



December 31, 2002, 2001 and 2000

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

---





|6. |  | Reinsurance (continued)
|-- |  | -----------------------



The effect of reinsurance and retrocessional activity on premiums written and earned for the years ended December 31, 2002, 2001 and 2000
was as follows:



|Property and casualty                  |  | Premiums written |         |   | Premiums earned |  
|-------------------------------------- |  | ---------------- | ------- | - | --------------- | -
|                                       |  | 2002             |         |   | 2001            |  
|Direct                                 |  | $                |        |   |                 | $
|Assumed                                |  |                  | 632,734 |   |                 |  
|Ceded                                  |  |                  | (52,481 | ) |                 |  
|                                       |  |                  |         |   |                 |  
|Net                                    |  | $                | 580,253 |   |                 | $
|                                       |  |                  |         |   |                 |  
|                                      
|Life and annuity                       |  | Premiums written |         |   | Premiums earned |  
|                                       |  | 2002             |         |   | 2001            |  
|Amounts assessed against policyholders |  | $                |        |   |                 | $
|Assumed                                |  |                  | 14,656  |   |                 |  
|Ceded                                  |  |                  | (2,198  | ) |                 |  
|                                       |  |                  |         |   |                 |  
|Net                                    |  | $                | 12,458  |   |                 | $
|                                       |  |                  |         |   |                 |  
|Total                                  |  | $                | 592,711 |   |                 | $
|                                       |  |                  |         |   |                 |  



|7. |  | Bank loan
|-- |  | ---------



In March 2002, the Company completed a $100,000 sale of shares of MDS to a third party financial institution. Simultaneous with the sale,
the Company entered into a total return swap with the purchaser of these shares whereby the Company receives the return earned on the MDS shares in exchange for the payment of a variable rate of interest based on LIBOR plus a spread. Additional MDS
shares owned by Max Re with a fair value of $67,949 at December 31, 2002 were pledged as collateral. These transactions are viewed on a combined basis and accounted for as a financing transaction, which results in the recording of a $100,000 bank
loan.



The swap termination date is February
2004, with provisions for earlier termination at the Companys option or in the event the Company fails to comply with certain covenants, including maintaining a minimum financial strength rating and a minimum MDS net asset value. At
termination, the purchaser has the option to sell the MDS shares to the Company at a price equal to the fair value of the MDS shares on the date of repurchase.



|8. |  | Pension and deferred compensation plans
|-- |  | ---------------------------------------



The Company provides pension benefits to certain employees as required by the Bermuda National Pension Scheme Act, 1998 through a defined
contribution plan. Company contributions are subject to vesting provisions. Pension expenses totaled $39 for the year ended December 31, 2002 (2001$28; 2000$25).



The Company sponsors a deferred compensation plan in which employee salary deferrals are supplemented by
matching contributions. The Companys contribution is subject to a defined amount and is subject to vesting provisions. Deferred compensation expense totaled $543 for the year ended December 31, 2002 (2001$468; 2000$329).



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F-13



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##### Table of Contents

MAX RE CAPITAL LTD.



Notes to Consolidated Financial Statements



December 31, 2002, 2001 and 2000

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

---





|9. |  | Loans receivable from common share sales
|-- |  | ----------------------------------------



As of December 31, 2002, the Company has full recourse loans outstanding provided to members of management of $12,575 (2001$12,575;
2000$11,650) in connection with their investment in the Company pursuant to the terms of their employment agreements. The loans are repayable within five years and are secured by the shares issued. Interest is charged at applicable federal
rates which are published by the U.S. Internal Revenue Service and is payable annually in arrears. Interest earned on the loans amounted to $343 for the year ended December 31, 2002 (2001$461; 2000$692) and is included in other assets in
the accompanying consolidated balance sheets, and net investment income in the accompanying consolidated statements of income and comprehensive income.



|10. |  | Shareholders equity
|--- |  | --------------------



Common Shares



The holders of common shares are entitled to one vote per paid up share subject to a maximum of 9.9% of total voting rights unless waived
by the Board of Directors. The Board of Directors has waived these provisions with respect to one shareholder, Western General Insurance Ltd. The shareholders agreement provides for distribution of dividends, as and when declared by the
Companys directors, and distribution of the Companys net assets upon dissolution in the same proportion as the voting rights, excluding the 9.9% limitation.



Direct equity offering expenses of $4,271 in 2001 and $2,661 in 2000 were paid to Salomon Smith Barney for
services as joint book runner of the Companys initial public offering and as placement agent for the private equity offerings.



During the year ended December 31, 2000, the Company paid $200 in cash and issued 26,666 common shares at $15 per share to a director for
services rendered in connection with its private equity offerings.



Warrants



In
connection with the issuance of shares, the Company has issued warrants to purchase the Companys common shares exchangeable on a one-for-one basis. 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. Included in the warrants issued are 6,617,177 warrants on non-voting shares of Max Re which are exchangeable into Company shares in
limited circumstances. Max Re non-voting common shares may be exchanged for common shares of the Company on a one-for-one basis following a sale, transfer or other disposition to an unaffiliated third party, provided that, following such exchange,
the shareholder would not hold in excess of 9.9% of the total common shares issued and outstanding. The current holders of Max Re non-voting common shares cannot exchange any Max Re non-voting common shares for common shares of the Company without
the consent of the Board of Directors of the Company, other than to deliver common shares of the Company upon a sale in the public market.



Warrant related activity is as follows:



|                           |  | Warrants Outstanding |   |  | Warrants Exercisable |  | Weighted Average Exercise Price |       | Weighted Average Fair Value |   | Range ofExercisePrices
|-------------------------- |  | -------------------- | - |  | -------------------- |  | ------------------------------- | ----- | --------------------------- | - | ----------------------
|                          
|Balance, December 31, 1999 |  | 4,176,587            |   |  | 3,518,805            |  | $                               | 15.00 |                             |   |                       
|                          
|Warrants granted           |  | 2,607,240            |   |  |                      |  | $                               | 15.00 |                             | $ | 5.42                  
|                           |  |                      |   |  |                      |  |                                 |       |                             |   |                       
|                          
|Balance, December 31, 2000 |  | 6,783,827            |   |  | 5,751,533            |  | $                               | 15.00 |                             |   |                       
|                          
|Warrants granted           |  | 2,590,036            |   |  |                      |  | $                               | 16.13 |                             | $ | 5.72                  
|                           |  |                      |   |  |                      |  |                                 |       |                             |   |                       
|                          
|Balance, December 31, 2001 |  | 9,373,863            |   |  | 8,173,239            |  | $                               | 15.31 |                             |   |                       
|                          
|Warrants granted           |  |                     |   |  |                      |  | $                               |      |                             |   |                       
|                          
|Warrants forfeited         |  | (4,500               | ) |  |                      |  | $                               | 15.00 |                             |   |                       
|                           |  |                      |   |  |                      |  |                                 |       |                             |   |                       
|                          
|Balance, December 31, 2002 |  | 9,369,363            |   |  | 8,584,049            |  | $                               | 15.31 |                             |   |                       
|                           |  |                      |   |  |                      |  |                                 |       |                             |   |                       



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##### Table of Contents

MAX RE CAPITAL LTD.



Notes to Consolidated Financial Statements



December 31, 2002, 2001 and 2000

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

---





|11. |  | 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 stock, share awards or other awards. In May 2002, the shareholders of the Company approved the adoption
of an amendment to the Plan to increase the maximum aggregate number of common shares available for awards under the Plan to 5,000,000. 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).



Stock options issued under the Plan have terms set by the Committee. The maximum option period is ten years. The minimum exercise price of
ISOs is equal to the fair value of the Companys common shares at the date of grant. Options vest over a four year period from the date of grant and contain restrictions relating to, among other things, forfeiture in the event of termination of
employment and transferability.



Restricted stock
issued under the Plan have terms set by the Committee. These shares vest over a four year period from the date of grant and contain certain restrictions relating to, among other things, forfeiture in the event of termination of employment and
transferability. At the time of grant the fair value of the shares awarded is recorded as unearned stock grant compensation and is presented as a separate component of shareholders equity. The unearned compensation is charged to income over
the vesting period. Total compensation cost recognized in income for stock-based compensation awards totaled $1,209 for the year ended December 31, 2002 (2001$1,024; 2000$90).



Eligible non-employee Directors were granted NQSOs to purchase 10,000 common shares on the date of their
directorship and 2,000 common shares each year thereafter. The NQSOs have an exercise price equal to the fair value of the Companys common shares at the date of grant and become exercisable and vest over three years.



The Company has adopted the disclosureonly provisions of
FAS No. 123 Accounting for Stock-Based Compensation (FAS 123), and applies APB Opinion No. 25 (APB 25) and related interpretations in accounting for the Stock Incentive Plan. Under APB 25, compensation
expense is recognized based on the intrinsic value of the options at the measurement date.



In accordance with FAS 123, 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:



|                              |  | 2002    |  | 2001    |  | 2000   
|----------------------------- |  | ------- |  | ------- |  | -------
|Option valuation assumptions: |  |         |  |         |  |        
|Expected option life          |  | 7 years |  | 7 years |  | 7 years
|Expected dividend yield       |  | 0.52%   |  | 0.13%   |  | 0.00%  
|Expected volatility           |  | 22.00%  |  | 20.00%  |  | 20.00% 
|Risk-free interest rate       |  | 4.62%   |  | 5.11%   |  | 5.11%  



Had the
Company elected to recognize compensation expense based on the fair value of options at the date of grant in accordance with FAS 123, net income (loss) and earnings (loss) per share would have been as follows:



|                                              |  | 2002 |        |   | 2001 |   | 2000 
|--------------------------------------------- |  | ---- | ------ | - | ---- | - | -----
|Net income (loss)as reported                 |  | $    | (5,754 | ) |      | $ | 2,531
|Net income (loss)pro-forma                   |  | $    | (7,744 | ) |      | $ | 1,618
|Basic earnings (loss) per shareas reported   |  | $    | (0.15  | ) |      | $ | 0.08 
|Basic earnings (loss) per sharepro-forma     |  | $    | (0.20  | ) |      | $ | 0.05 
|Diluted earnings (loss) per shareas reported |  | $    | (0.15  | ) |      | $ | 0.06 
|Diluted earnings (loss) per sharepro-forma   |  | $    | (0.20  | ) |      | $ | 0.04 



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##### Table of Contents

MAX RE CAPITAL LTD.



Notes to Consolidated Financial Statements



December 31, 2002, 2001 and 2000

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

---





|11. |  | Stock incentive plan (continued)
|--- |  | --------------------------------



A summary of Plan related activity follows:



|                             |  | AwardsAvailable forGrant |   |  | OptionsOutstanding |   |  | OptionsExercisable |  | WeightedAverageExercisePrice |       | WeightedAverageFair Value ofOptions |   | Range of ExercisePrices
|---------------------------- |  | ------------------------ | - |  | ------------------ | - |  | ------------------ |  | ---------------------------- | ----- | ----------------------------------- | - | -----------------------
|Balance, December 31, 1999   |  |                         |   |  |                   |   |  |                   |  |                              |       |                                     |   |                        
|                            
|Plan adoption, June 2000     |  | 1,200,000                |   |  |                    |   |  |                    |  |                              |       |                                     |   |                        
|Options granted              |  | (176,479                 | ) |  | (176,479           | ) |  |                    |  | $                            | 15.06 |                                     | $ | 5.44                   
|Restricted stock issued      |  | (48,000                  | ) |  |                    |   |  |                    |  |                              |       |                                     |   |                        
|                             |  |                          |   |  |                    |   |  |                    |  |                              |       |                                     |   |                        
|                            
|Balance, December 31, 2000   |  | 975,521                  |   |  | (176,479           | ) |  | 25,295             |  | $                            | 15.06 |                                     |   |                        
|Increase in shares available |  | 800,000                  |   |  |                    |   |  |                    |  |                              |       |                                     |   |                        
|Options granted              |  | (841,000                 | ) |  | (841,000           | ) |  |                    |  | $                            | 16.01 |                                     | $ | 5.75                   
|Restricted stock issued      |  | (205,500                 | ) |  |                    |   |  |                    |  |                              |       |                                     |   |                        
|                             |  |                          |   |  |                    |   |  |                    |  |                              |       |                                     |   |                        
|                            
|Balance, December 31, 2001   |  | 729,021                  |   |  | (1,017,479         | ) |  | 233,461            |  | $                            | 15.84 |                                     |   |                        
|Increase in shares available |  | 3,000,000                |   |  |                    |   |  |                    |  |                              |       |                                     |   |                        
|Options granted              |  | (718,500                 | ) |  | (718,500           | ) |  |                    |  | $                            | 15.51 |                                     | $ | 5.19                   
|Restricted stock issued      |  | (62,000                  | ) |  |                    |   |  |                    |  |                              |       |                                     |   |                        
|                             |  |                          |   |  |                    |   |  |                    |  |                              |       |                                     |   |                        
|                            
|Balance, December 31, 2002   |  | 2,948,521                |   |  | (1,735,979         | ) |  | 591,323            |  | $                            | 15.71 |                                     |   |                        
|                             |  |                          |   |  |                    |   |  |                    |  |                              |       |                                     |   |                        



|12. |  | Taxation
|--- |  | --------



Under current Bermuda law the Company is not required to pay any taxes in Bermuda on either income or capital gains. The Company and Max
Re 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 and its Bermuda subsidiaries plan to operate in a manner so that they will not generally be subject to tax in other
jurisdictions except for withholding taxes on certain kinds of investment income, excise taxes and other taxes attributable to marketing activities in certain jurisdictions.



|13. |  | Statutory requirements and dividend restrictions
|--- |  | ------------------------------------------------



Under the Bermuda Insurance Act, 1978 and related regulations Max Re is required to maintain certain levels of solvency and liquidity. The
minimum statutory capital and surplus required at December 31, 2002 was $290,377 and actual statutory capital and surplus was $618,285. The principle differences between statutory capital and surplus and shareholders equity presented in
accordance with generally accepted accounting principles are deferred acquisition costs, deferred charges and prepaid reinsurance premiums.



Max Re is also required by its Class 4 licence to maintain a minimum liquidity ratio whereby the value of its relevant assets are not less
than 75% of the amount of its relevant liabilities for general business. Relevant assets include cash and cash equivalents, fixed maturities, accrued interest income, premiums receivable, losses recoverable from reinsurers and funds withheld. Max Re
has received approval from the Minister of Finance to include all of its alternative investments as relevant assets. The relevant liabilities are total general business insurance reserves and total other liabilities, less sundry liabilities. As of
December 31, 2002, the Company met the minimum liquidity ratio requirement.



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##### Table of Contents

MAX RE CAPITAL LTD.



Notes to Consolidated Financial Statements



December 31, 2002, 2001 and 2000

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

---





|13. |  | Statutory requirements and dividend restrictions(continued)
|--- |  | -----------------------------------------------------------



The Companys ability to pay dividends depends on the ability of its subsidiaries to pay dividends.
While the Company is not subject to any significant legal prohibitions on the payment of dividends, Max Re is subject to Bermuda regulatory constraints that affect its ability to pay dividends to the Company. Max Re is prohibited from declaring or
paying a dividend if such payment would reduce its statutory surplus below the required minimum. Max Re is also subject to certain restrictions under its letter of credit facilities that affect its ability to pay dividends to the Company. The
Company paid dividends and capital distributions of $0.08 per share during 2002, compared to $0.02 per share in 2001.



|14. |  | Earnings per share
|--- |  | ------------------



The following table sets forth the computation of basic and diluted earnings per share for the years ended
December 31, 2002, 2001 and 2000.



|                                                     |  | 2002 |            |   | 2001 |   | 2000      
|---------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ----------
|Basic earnings (loss) per share:                     |  |      |            |   |      |   |           
|Net income (loss)                                    |  | $    | (5,754     | ) |      | $ | 2,531     
|Weighted average common shares outstanding           |  |      | 39,097,059 |   |      |   | 32,710,380
|                                                     |  |      |            |   |      |   |           
|                                                    
|Basic earnings (loss) per share                      |  | $    | (0.15      | ) |      | $ | 0.08      
|                                                     |  |      |            |   |      |   |           
|                                                    
|Diluted earnings (loss) per share:                   |  |      |            |   |      |   |           
|Net income (loss)                                    |  | $    | (5,754     | ) |      | $ | 2,531     
|Add back minority interest share of income (loss)    |  |      | (1,346     | ) |      |   | 93        
|                                                     |  |      |            |   |      |   |           
|                                                    
|Adjusted net income (loss)                           |  | $    | (7,100     | ) |      | $ | 2,624     
|                                                     |  |      |            |   |      |   |           
|Weighted average ordinary shares outstandingbasic   |  |      | 39,097,059 |   |      |   | 32,710,380
|Weighted average non-voting shares outstanding       |  |      | 7,163,716  |   |      |   | 7,319,332 
|Conversion of warrants                               |  |      |           |   |      |   | 164,027   
|Conversion of non-voting warrants                    |  |      |           |   |      |   | 372,993   
|Conversion of options                                |  |      |           |   |      |   | 31,032    
|                                                     |  |      |            |   |      |   |           
|                                                    
|Weighted average ordinary shares outstandingdiluted |  |      | 46,260,775 |   |      |   | 40,597,764
|                                                     |  |      |            |   |      |   |           
|                                                    
|Diluted earnings (loss) per share                    |  | $    | (0.15      | ) |      | $ | 0.06      
|                                                     |  |      |            |   |      |   |           



|15. |  | Commitments and contingencies
|--- |  | -----------------------------



(a) Concentrations of credit risk



The Companys portfolio of 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 MDS Manager 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.



(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 2003. Total rent expense for the year ended
December 31, 2002 was $475.



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##### Table of Contents

MAX RE CAPITAL LTD.



Notes to Consolidated Financial Statements



December 31, 2002, 2001 and 2000

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

---





|15. |  | Commitments and contingencies(continued)
|--- |  | ----------------------------------------



In 2001, the Company entered into a ten year lease agreement to lease a building in Bermuda that is currently under construction. The
Company anticipates taking occupancy of the building during 2003. In connection with the lease of the building, the Company has contractual commitments of approximately $4,357 for leasehold improvements at December 31, 2002. The rent and maintenance
expense for the first five years will be approximately $1,113 annually and the expense for the remaining five years will not be more than approximately $1,252 annually.



(c) Letter of credit facilities



A syndicate of banks has provided Max Re with a letter of credit facility for $375,000. In accordance with
the facility agreement and at the request of the Company, the syndicate will issue letters of credit, that may total up to $300,000, and are to be secured by fixed maturity collateral. In addition, the syndicate will issue letters of credit, that
may total up to $75,000, and are to be secured by alternative investments. This letter of credit facility requires that the Company and/or certain of its subsidiaries continue to maintain certain covenants, including a minimum consolidated tangible
net worth covenant and certain restrictions on the payment of dividends.



At December 31, 2002, letters of credit totaling $284,557 were issued under this $375,000 letter of credit facility with the syndicate of banks. Fixed maturities and cash equivalents with a fair value of $299,502 and common
shares of MDS with a fair value of $63,732 at December 31, 2002 were pledged as collateral for these letters of credit.



In January 2002, the Company entered into a $100,000 letter of credit facility with the New York branch of Bayerische Hypo-und Vereinsbank
AG (HVB), a shareholder of the Company. HVB is the majority shareholder of Grand Central Re, which is managed by Max Re Managers Ltd. and in which the Company has a 7.5% equity interest. This letter of credit facility requires that the
Company comply with certain covenants, including minimum consolidated tangible net worth. The Company believes that the terms of this letter of credit facility are comparable to the terms that the Company would expect to negotiate with an unrelated
party.



At December 31, 2002, letters of credit
totaling $58,472 were issued by HVB under this $100,000 letter of credit facility. Fixed maturities and cash equivalents with a fair value of $31,512 and common shares of MDS with a fair value of $69,526 at December 31, 2002 were pledged as
collateral for these letters of credit. Fees paid to HVB during the year were $352.



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##### Table of Contents

MAX RE CAPITAL LTD.



Notes to Consolidated Financial Statements



December 31, 2002, 2001 and 2000

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

---





|16. |  | Segment information
|--- |  | -------------------



The Company operates in the reinsurance business serving two segments: the property and casualty segment and the life and annuity segment,
which includes disability products. Within the property and casualty segment, the Company offers three products: structured risk transfer, alternative risk transfer and traditional risk transfer. The Company differentiates these products in several
ways, including by the amount of aggregate loss cap and/or occurrence limits incorporated into the underlying contract, with its structured risk transfer products having the lowest aggregate loss cap and occurrence limits and its traditional risk
transfer products having the highest. Within the life and annuity segment, the Company currently offers products focusing on existing blocks of business, which take the form of co-insurance transactions whereby the risks are reinsured on the same
basis as that of the original policies. The Company does not allocate assets by segment.



A summary of operations by segment for the years ended December 31, 2002, 2001 and 2000 were as follows:



|                                               |  | Property & Casualty |         |   | Life & Annuity   |   |         | Other       |  | Consolidated |        
|---------------------------------------------- |  | ------------------- | ------- | - | ---------------- | - | ------- | ----------- |  | ------------ | -------
|2002                                           |  | Structured          |         |   | Alternative Risk |   |         | Traditional |  | Total        |        
|Revenues                                       |  |                     |         |   |                  |   |         |             |  |              |        
|Gross premiums written                         |  | $                   | 308,615 |   |                  | $ | 186,200 |             |  | $            | 137,919
|Reinsurance premiums ceded                     |  |                     | (43,593 | ) |                  |   | (8,888  | )           |  |              |       
|                                               |  |                     |         |   |                  |   |         |             |  |              |        
|                                              
|Net premiums written                           |  | $                   | 265,022 |   |                  | $ | 177,312 |             |  | $            | 137,919
|                                               |  |                     |         |   |                  |   |         |             |  |              |        
|                                              
|Earned premiums                                |  | $                   | 283,963 |   |                  | $ | 97,152  |             |  | $            | 38,910 
|Earned premiums ceded                          |  |                     | (39,261 | ) |                  |   | (5,185  | )           |  |              |       
|                                               |  |                     |         |   |                  |   |         |             |  |              |        
|                                              
|Net premiums earned                            |  |                     | 244,702 |   |                  |   | 91,967  |             |  |              | 38,910 
|Net investment income                          |  |                     |        |   |                  |   |        |             |  |              |       
|Net gains on alternative investments           |  |                     |        |   |                  |   |        |             |  |              |       
|Net realized gains on sale of fixed maturities |  |                     |        |   |                  |   |        |             |  |              |       
|Other income                                   |  |                     | 2,763   |   |                  |   | 638     |             |  |              |       
|                                               |  |                     |         |   |                  |   |         |             |  |              |        
|                                              
|Total revenues                                 |  |                     | 247,465 |   |                  |   | 92,605  |             |  |              | 38,910 
|Losses and expenses                            |  |                     |         |   |                  |   |         |             |  |              |        
|Losses, benefits and experience refunds        |  |                     | 235,849 |   |                  |   | 64,038  |             |  |              | 28,152 
|Acquisition costs                              |  |                     | 67,515  |   |                  |   | 21,210  |             |  |              | 9,218  
|Interest expense                               |  |                     | 910     |   |                  |   |        |             |  |              |       
|General and administrative expenses            |  |                     | 3,313   |   |                  |   | 1,945   |             |  |              | 1,441  
|                                               |  |                     |         |   |                  |   |         |             |  |              |        
|                                              
|Total losses and expenses                      |  |                     | 307,587 |   |                  |   | 87,193  |             |  |              | 38,811 
|                                               |  |                     |         |   |                  |   |         |             |  |              |        
|                                              
|Net income (loss) before minority interest     |  | $                   | (60,122 | ) |                  | $ | 5,412   |             |  | $            | 99     
|                                               |  |                     |         |   |                  |   |         |             |  |              |        



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F-19



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##### Table of Contents

MAX RE CAPITAL LTD.



Notes to Consolidated Financial Statements



December 31, 2002, 2001 and 2000

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

---





|16. |  | Segment information (continued)
|--- |  | -------------------------------



|                                               |  | Property & Casualty |         |   | Life & Annuity   |   |             | Other |       | Consolidated | 
|---------------------------------------------- |  | ------------------- | ------- | - | ---------------- | - | ----------- | ----- | ----- | ------------ | 
|2001                                           |  | Structured          |         |   | Alternative Risk |   | Traditional |       | Total |              | 
|Revenues                                       |  |                     |         |   |                  |   |             |       |       |              | 
|Gross premiums written                         |  | $                   | 496,452 |   |                  | $ |            |       | $     |             | 
|Reinsurance premiums ceded                     |  |                     | (83,974 | ) |                  |   |            |       |       |             | 
|                                               |  |                     |         |   |                  |   |             |       |       |              | 
|                                              
|Net premiums written                           |  | $                   | 412,478 |   |                  | $ |            |       | $     |             | 
|                                               |  |                     |         |   |                  |   |             |       |       |              | 
|                                              
|Earned premiums                                |  | $                   | 385,892 |   |                  | $ |            |       | $     |             | 
|Earned premiums ceded                          |  |                     | (66,601 | ) |                  |   |            |       |       |             | 
|                                               |  |                     |         |   |                  |   |             |       |       |              | 
|                                              
|Net premiums earned                            |  |                     | 319,291 |   |                  |   |            |       |       |             | 
|Net investment income                          |  |                     |        |   |                  |   |            |       |       |             | 
|Net gains on alternative investments           |  |                     |        |   |                  |   |            |       |       |             | 
|Net realized gains on sale of fixed maturities |  |                     |        |   |                  |   |            |       |       |             | 
|Other income                                   |  |                     | 1,289   |   |                  |   |            |       |       |             | 
|                                               |  |                     |         |   |                  |   |             |       |       |              | 
|                                              
|Total revenues                                 |  |                     | 320,580 |   |                  |   |            |       |       |             | 
|Losses and expenses                            |  |                     |         |   |                  |   |             |       |       |              | 
|Losses, benefits and experience refunds        |  |                     | 321,972 |   |                  |   |            |       |       |             | 
|Acquisition costs                              |  |                     | 29,254  |   |                  |   |            |       |       |             | 
|Interest expense                               |  |                     |        |   |                  |   |            |       |       |             | 
|General and administrative expenses            |  |                     | 6,296   |   |                  |   |            |       |       |             | 
|                                               |  |                     |         |   |                  |   |             |       |       |              | 
|                                              
|Total losses and expenses                      |  |                     | 357,522 |   |                  |   |            |       |       |             | 
|                                               |  |                     |         |   |                  |   |             |       |       |              | 
|                                              
|Net income (loss) before minority interest     |  | $                   | (36,942 | ) |                  | $ |            |       | $     |             | 
|                                               |  |                     |         |   |                  |   |             |       |       |              | 



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##### Table of Contents

MAX RE CAPITAL LTD.



Notes to Consolidated Financial Statements



December 31, 2002, 2001 and 2000

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

---





|16. |  | Segment information (continued)
|--- |  | -------------------------------



|                                               |  | Property & Casualty |         |   | Life & Annuity   |   |             | Other |       | Consolidated | 
|---------------------------------------------- |  | ------------------- | ------- | - | ---------------- | - | ----------- | ----- | ----- | ------------ | 
|2000                                           |  | Structured          |         |   | Alternative Risk |   | Traditional |       | Total |              | 
|Revenues                                       |  |                     |         |   |                  |   |             |       |       |              | 
|Gross premiums written                         |  | $                   | 126,320 |   |                  | $ |            |       | $     |             | 
|Reinsurance premiums ceded                     |  |                     | (7,854  | ) |                  |   |            |       |       |             | 
|                                               |  |                     |         |   |                  |   |             |       |       |              | 
|                                              
|Net premiums written                           |  | $                   | 118,466 |   |                  | $ |            |       | $     |             | 
|                                               |  |                     |         |   |                  |   |             |       |       |              | 
|                                              
|Earned premiums                                |  | $                   | 125,917 |   |                  | $ |            |       | $     |             | 
|Earned premiums ceded                          |  |                     | (7,854  | ) |                  |   |            |       |       |             | 
|                                               |  |                     |         |   |                  |   |             |       |       |              | 
|                                              
|Net premiums earned                            |  |                     | 118,063 |   |                  |   |            |       |       |             | 
|                                              
|Net investment income                          |  |                     |        |   |                  |   |            |       |       |             | 
|Net gains on alternative investments           |  |                     |        |   |                  |   |            |       |       |             | 
|Net realized gains on sale of fixed maturities |  |                     |        |   |                  |   |            |       |       |             | 
|Other income                                   |  |                     |        |   |                  |   |            |       |       |             | 
|                                               |  |                     |         |   |                  |   |             |       |       |              | 
|                                              
|Total revenues                                 |  |                     | 118,063 |   |                  |   |            |       |       |             | 
|                                              
|Losses and expenses                            |  |                     |         |   |                  |   |             |       |       |              | 
|Losses, benefits and experience refunds        |  |                     | 109,287 |   |                  |   |            |       |       |             | 
|Acquisition costs                              |  |                     | 15,111  |   |                  |   |            |       |       |             | 
|Interest expense                               |  |                     |        |   |                  |   |            |       |       |             | 
|General and administrative expenses            |  |                     | 4,405   |   |                  |   |            |       |       |             | 
|                                               |  |                     |         |   |                  |   |             |       |       |              | 
|                                              
|Total losses and expenses                      |  |                     | 128,803 |   |                  |   |            |       |       |             | 
|                                               |  |                     |         |   |                  |   |             |       |       |              | 
|                                              
|Net income (loss) before minority interest     |  | $                   | (10,740 | ) |                  | $ |            |       | $     |             | 
|                                               |  |                     |         |   |                  |   |             |       |       |              | 





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F-21



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##### Table of Contents

MAX RE CAPITAL LTD.



Notes to Consolidated Financial Statements



December 31, 2002, 2001 and 2000

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

---





|16. |  | Segment information (continued)
|--- |  | -------------------------------



The Company currently operates in two geographic segments: North America, which represents North American based risks written by North
American based reinsureds, and Europe, which principally represents the United Kingdom and Continental Europe.



Financial information relating to gross premiums written and reinsurance premiums ceded by geographic region for the years ended December
31, 2002, 2001 and 2000 was as follows:



|                                |  | 2002 |         |   | 2001 |   |          | 2000 | 
|------------------------------- |  | ---- | ------- | - | ---- | - | -------- | ---- | 
|North America                   |  | $    | 412,373 |   |      | $ | 514,551  |      | 
|Europe                          |  |      | 235,017 |   |      |   | 196,000  |      | 
|Reinsurance cededNorth America |  |      | (27,914 | ) |      |   | (106,535 | )    | 
|Reinsurance cededEurope        |  |      | (26,765 | ) |      |   | (9,882   | )    | 
|                                |  |      |         |   |      |   |          |      | 
|                               
|                                |  | $    | 592,711 |   |      | $ | 594,134  |      | 
|                                |  |      |         |   |      |   |          |      | 



Three
customers accounted for 20.7%, 17.2% and 14.2%, respectively, of the Companys gross premiums written during the year ended December 31, 2002. Five customers accounted for 22.1%, 16.2%, 14.5%, 14.1% and 11.4%, respectively, of the
Companys gross premiums written during the year ended December 31, 2001. Three customers accounted for 42.8%, 12.4% and 11.9%, respectively, of the Companys gross premiums written during the year ended December 31, 2000.



|17. |  | Quarterly financial results (unaudited)
|--- |  | ---------------------------------------



|                                               |  | Quarter Ended
|---------------------------------------------- |  | -------------
|2002                                           |  | March 31     
|Revenues                                       |  |              
|Gross premiums written                         |  | $            
|                                               |  |              
|                                              
|Net premiums earned                            |  | $            
|Net interest income                            |  |              
|Net gain on alternative investments            |  |              
|Net realized gains on sale of fixed maturities |  |              
|Other income                                   |  |              
|                                               |  |              
|                                              
|Total revenues                                 |  |              
|                                               |  |              
|                                              
|Losses and expenses                            |  |              
|Losses, benefits and experience refunds        |  |              
|Acquisition costs                              |  |              
|Interest expense                               |  |              
|General and administrative expenses            |  |              
|                                               |  |              
|                                              
|Total losses and expenses                      |  |              
|                                               |  |              
|                                              
|Income (loss) before minority interest         |  | $            
|                                               |  |              
|                                              
|Net income (loss)                              |  | $            
|                                               |  |              
|                                              
|Basic earnings (loss) per share                |  | $            
|                                               |  |              
|                                              
|Diluted earnings (loss) per share              |  | $            
|                                               |  |              



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##### Table of Contents

MAX RE CAPITAL LTD.



Notes to Consolidated Financial Statements



December 31, 2002, 2001 and 2000

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

---







|17. |  | Quarterly financial results (unaudited) (continued)
|--- |  | ---------------------------------------------------



|                                               |  | Quarter Ended |        
|---------------------------------------------- |  | ------------- | -------
|                                               |  | March 31      |        
|2001                                           |  |               |        
|Revenues                                       |  |               |        
|Gross premiums written                         |  | $             | 276,200
|                                               |  |               |        
|Net premiums earned                            |  | $             | 55,230 
|Net interest income                            |  |               | 8,773  
|Net gain on alternative investments            |  |               | 14,791 
|Net realized gains on sale of fixed maturities |  |               | 767    
|Other income                                   |  |               | 45     
|                                               |  |               |        
|Total revenues                                 |  |               | 79,606 
|                                               |  |               |        
|Losses and expenses                            |  |               |        
|Losses, benefits and experience refunds        |  |               | 60,668 
|Acquisition costs                              |  |               | 7,192  
|Interest expense                               |  |               |       
|General and administrative expenses            |  |               | 5,074  
|                                               |  |               |        
|Total losses and expenses                      |  |               | 72,934 
|                                               |  |               |        
|Income (loss) before minority interest         |  | $             | 6,672  
|                                               |  |               |        
|Net income (loss)                              |  | $             | 5,192  
|                                               |  |               |        
|Basic earnings (loss) per share                |  | $             | 0.19   
|                                               |  |               |        
|Diluted earnings (loss) per share              |  | $             | 0.19   
|                                               |  |               |        
|2000                                           |  |               |        
|Revenues                                       |  |               |        
|Gross premiums written                         |  | $             | 78,784 
|                                               |  |               |        
|Net premiums earned                            |  | $             | 40,534 
|Net interest income                            |  |               | 3,490  
|Net gain on alternative investments            |  |               | 1,605  
|Net realized gains on sale of fixed maturities |  |               |       
|                                               |  |               |        
|Total revenues                                 |  |               | 45,629 
|                                               |  |               |        
|Losses and expenses                            |  |               |        
|Losses, benefits and experience refunds        |  |               | 39,443 
|Acquisition costs                              |  |               |       
|General and administrative expenses            |  |               | 2,865  
|                                               |  |               |        
|Total losses and expenses                      |  |               | 42,308 
|                                               |  |               |        
|Income (loss) before minority interest         |  | $             | 3,321  
|                                               |  |               |        
|Net income (loss)                              |  | $             | 2,205  
|                                               |  |               |        
|Basic earnings (loss) per share                |  | $             | 0.15   
|                                               |  |               |        
|Diluted earnings (loss) per share              |  | $             | 0.15   
|                                               |  |               |        



---



F-23