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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

Securities Exchange Act of 1934

For the fiscal year ended December 31, 2004

Commission File Number 000-33047

MAX RE CAPITAL LTD.

(Exact name of registrant as specified in its charter)

Max Re House

2 Front Street

Hamilton, HM 11

Bermuda

(Address of principal executive offices)

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

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

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

Common Shares, Par Value $1.00 per share

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

Indicate by check mark whether the registrant is 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, 2004 was $326,067,032, based on the closing price of the registrant’s common shares on June 30, 2004, the last business day of the registrant’s most recently completed second fiscal quarter. Solely for the purpose of this calculation and for no other purpose, the non-affiliates of the registrant are assumed to be all shareholders of the registrant other than (i) directors of the registrant, (ii) executive officers of the registrant who are identified as “named executive officers” pursuant to Item 11 of this Form 10-K, (iii) any shareholder that beneficially owns 10% or more of the registrant’s common shares and (iv) any shareholder that has one or more of its affiliates on the registrant’s board of directors. Such exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant.

The number of shares of the registrant’s common shares outstanding as of January 31, 2005 was 45,860,480.

Documents incorporated by reference:

Portions of the proxy statement for the registrant’s annual meeting of shareholders to be held on April 28, 2005, 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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PART I

Unless otherwise indicated or unless the context otherwise requires, all references in this Annual Report on Form 10-K to “we,” “us,” “our” and similar expressions are references to Max Re Capital Ltd. and its consolidated subsidiaries. Unless otherwise indicated or unless the context otherwise requires, all references in this annual report to “Max Re Capital” are solely to Max Re Capital Ltd., references to “Max Re” are solely to our subsidiary Max Re Ltd., references to “Max Europe” are solely to our Irish subsidiaries Max Europe Holdings Limited, Max Re Europe Limited and Max Insurance Europe Limited collectively, references to “Max Europe Holdings” are solely to our subsidiary Max Europe Holdings Limited, references to “Max Re Europe” are solely to our subsidiary Max Re Europe Limited, references to “Max Insurance Europe” are solely to our subsidiary Max Insurance Europe Limited, references to “Max Re Diversified” are solely to our subsidiary Max Re Diversified Strategies Ltd. and references to “Max Re Managers” are solely to our subsidiary Max Re Managers Ltd.

Safe Harbor Disclosure

This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend that the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 apply to these forward-looking statements. Forward-looking statements are not statements of historical fact but rather reflect our current expectations, estimates and predictions about future results and events. These statements may use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “project” and similar expressions as they relate to us or our management. When we make forward-looking statements, we are basing them on management’s beliefs and assumptions, using information currently available to us. These forward-looking statements are subject to risks, uncertainties and assumptions. Factors that could cause such forward-looking statements not to be realized (which are described in more detail included or incorporated by reference herein and in documents filed by us with the Securities and Exchange Commission) include, without limitation, acceptance in the market of our products, general economic conditions and conditions specific to the reinsurance and insurance markets in which we operate, pricing competition, the amount of underwriting capacity from time to time in the market, material fluctuations in interest rates, 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 our investments or impede our access to, or increase the cost of, financing our operations. We caution that the foregoing list of important factors is not intended to be, and is not, exhaustive. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise. If one or more risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statements in this Form 10-K reflect our current view with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph.

General Description

Max Re Capital is a holding company formed in July 1999 under the laws of Bermuda. We commenced operations in January 2000. Through Max Re Capital’s subsidiaries, Max Re, Max Re Europe and Max Insurance Europe, we provide multi-line reinsurance and insurance products. Max Re Managers provides reinsurance underwriting and administrative services on a fee basis. Max Re Diversified holds all of our alternative investments, other than reinsurance private equity investments that are held by Max Re. Max Europe Holdings is the holding company for our European operating subsidiaries and was formed in June 2003 under the laws of Ireland.

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In December 1999, we raised gross proceeds of $331 million from an initial private placement of Max Re Capital common shares and Max Re non-voting common shares. In March 2000, Max Re Capital completed a second private placement of common shares, which raised an additional $180 million of gross proceeds. We used substantially all of the net proceeds of these offerings to capitalize and commence our reinsurance operations.

On August 14, 2001, Max Re Capital raised gross proceeds of $192 million in an 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. Max Re Capital’s common shares are listed on the Nasdaq National Market under the symbol MXRE and the Bermuda Stock Exchange under the symbol MXRE BH.

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

Business Segments

We operate in the reinsurance and insurance business serving two segments: the property and casualty segment and the life and annuity segment, which includes disability products. The table below sets forth gross premiums written by type of risk for the years ended December 31, 2004, 2003 and 2002.

Additional information about our business segments is set forth in Note 16 to our audited consolidated financial statements included herein.

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The majority of our clients are insurers, reinsurers and companies located in the United States. During the years ended December 31, 2004, 2003 and 2002, we derived approximately 59.4%, 62.9% and 63.7%, respectively, of gross premiums written from clients located in the United States. We also source business throughout Europe, which represented approximately 40.6%, 37.1% and 36.3% of gross premiums written for the years ended December 31, 2004, 2003 and 2002, respectively.

During the last three years, gross premiums written in each of our business segments has fluctuated. Due to continual changes in our industry, specifically with regard to the relative market pricing conditions in property and casualty and life and annuity products, and other changes in global economic conditions, we anticipate that the percentages of premiums that we write will fluctuate regularly between our property and casualty products and our life and annuity products.

Description of Business

We are a Bermuda-based provider of both reinsurance and insurance for the property and casualty market and a provider of reinsurance for the life and annuity, including disability, market. We offer traditional reinsurance and insurance products in the property and casualty market. We also underwrite alternative risk transfer products in both markets, but with a lesser focus than when we commenced operations in 2000. We target superior risk-adjusted returns from our diversified investment portfolio. In addition, we model our assets and liabilities on an integrated basis in an effort to better manage our reinsurance and insurance liability exposure, structure our investment portfolio and assess our overall risk.

Our customized alternative risk transfer products typically have certain features that differ from our traditional products. These features may include contractual provisions that require the client to share in a portion of losses resulting from its ceded risks, may require the payment of additional premium amounts if we incur greater losses than those projected at the time of the execution of the contract and may provide for premium refunds if the losses we incur are less than those projected at the time of the execution of the contract.

We believe that our diversified products and exposure base, together with our integrated risk management, provide us with flexibility in making decisions regarding our investments because they permit us to undertake investment strategies that have greater liquidity constraints than publicly traded stocks and bonds. This flexibility, as well as a greater flexibility provided under Bermuda law to make various types of investments including alternative investments than afforded to U.S. based insurers and reinsurers, allows us to invest our assets in both a portfolio of high grade fixed maturities and an alternative investment portfolio.

Property and Casualty

Reinsurance products

We offer traditional reinsurance and alternative risk transfer products in the property and casualty reinsurance market. We often customize our reinsurance products in an effort to satisfy particular client needs. Alternative risk transfer products are distinguished from traditional products based on the amount of risk transferred to our company, with alternative risk transfer products transferring less risk to our company. Our traditional products do not typically include certain features of our alternative risk transfer products and, accordingly, they expose us to greater potential underwriting loss than our alternative risk transfer products. Generally, our traditional reinsurance products are written on market terms with participation by other reinsurers, while we lead the underwriting and design terms of our alternative risk products.

Our primary focus is on the casualty risk classes, such as workers’ compensation, general liability, professional liability, and medical malpractice, with a lesser focus on aviation, marine, accident and health and property. Whole account coverage provides integrated coverage across a client’s multi-line portfolio of risk and may include some or all of the classes described above. We generally underwrite whole account coverages focused on casualty risk exposures.

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

Our property and casualty reinsurance 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, we share the premiums as well as the losses and expenses in an agreed proportion with the ceding client. With respect to excess of loss reinsurance, we indemnify the ceding client against all or a specified portion of losses and expenses in excess of a specified dollar or percentage amount. In both types of contracts, we may provide a ceding commission to the client.

During the years ended December 31, 2004, 2003 and 2002, we wrote $182.2 million, $302.3 million and $275.5 million, respectively, or 31.2%, 40.9% and 43.5%, respectively, of property and casualty reinsurance gross premiums written on a quota share basis and $401.0 million, $436.0 million and $357.2 million, or 68.8%, 59.1% and 56.5%, respectively, on an excess of loss basis.

Insurance products

In 2003, we began offering excess liability and professional lines insurance products, primarily to Fortune 1000 clients. Our excess liability products are excess umbrella liability insurance, excess product liability insurance, excess medical malpractice insurance and excess product recall insurance. Our professional lines products include directors and officers insurance, errors and omissions insurance and employment practices liability insurance. Our insurance products are underwritten in Bermuda and Ireland. In September 2004, we began offering property insurance to the same client base to which we offer our casualty insurance products.

We underwrite our insurance products on an individual risk basis, which, in many cases, includes holding an in-person meeting with the client in Bermuda or Ireland. Excess liability, professional liability and property premiums accounted for 54.8%, 44.3% and 0.9%, respectively, of the gross premiums written for traditional insurance products during the year ended December 31, 2004 and is approximately consistent with the premium exposure written in the year ended December 31, 2003.

Life and Annuity

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

The life and annuity risks that we underwrite include mortality and investment risks and, to a lesser extent, early surrender and lapse risks. The disability products that we underwrite include morbidity risk and, to a lesser extent, early surrender and lapse risks. Mortality risk measures the sensitivity of the insurance company’s liability to higher mortality rates than were assumed in setting the premium. 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

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to early or changing policy surrender distributions. Life reinsurance is often written on a yearly renewable term basis, where the predominant risk is the mortality of the insured population. Our co-insurance structures typically involve a higher level of investment risk, with our company investing the premium received.

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

Underwriting and Risk Management

We attempt to manage our underwriting exposures in both the property and casualty and life and annuity markets by diversifying across many underlying insureds with small policy limits per insured. Our largest underlying exposure in 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 whole account), which has attractive features of payments over many years and low statutorily defined cash payout amounts. With respect to our life and annuity reinsurance products, our focus is on reinsuring blocks of business having small underlying policy limits spread across a large population of insureds and avoiding high policy limit exposures.

We seek to reduce the volatility arising out of the underlying risks assumed through our 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 greater than expected.

We manage the duration and volatility of our asset mix in relation to our liabilities in an attempt to manage our overall risk. We believe that our portfolio of underwriting risks benefits from diversification and complements our investment strategy. We access the retrocession market to transfer risk to other parties when competitive advantages permit them to assume a risk for a lower price or as part of our risk management process. We also manage the amount of leverage that we employ on the liability side of our business based upon continual assessment of the risks and opportunities in the underwriting and capital markets.

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

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

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Due Diligence

We perform a significant amount of due diligence on every material transaction that we consider underwriting, and perform regular monitoring and periodic due diligence on the transactions that we complete. Generally, we complement our internal skills with reputable third party service providers, including actuaries, attorneys, claim adjusters and other professionals. These third-parties perform on-site client due diligence on our behalf and assist us in modeling transactions and contract documentation.

Retrocessional and Balance Sheet Protections

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

When we reinsure portions of risk, we utilize reinsurance arrangements, such as quota share reinsurance, excess of loss reinsurance and stop-loss contracts that are available in the reinsurance and retrocessional market as a means to manage risk on the products that we write. In quota share reinsurance arrangements, the reinsurer or retrocessionaire shares a proportional part of our premiums and losses associated with the risks being reinsured. Under the terms of excess of loss reinsurance and stop-loss contracts, the reinsurer or retrocessionaire agrees to cover all losses in excess of the amount of risk that we have retained, subject to negotiated limits. Our reinsurance strategy includes purchasing reinsurance to limit losses on a single risk or transaction or on a whole portfolio basis as the need arises.

The amount of risk that we retain differs across our portfolio of liabilities. We generally retain higher amounts of net risk on transactions where we believe that we can monitor outcomes with a higher degree of predictability or where larger blocks of business offer us the possibility of higher returns without retaining excessive risk. Our underwriting policy is to retain a maximum net exposure of not more than 5% of our shareholders’ equity for any individual contract we write.

Credit Risk

These reinsurance and retrocessional arrangements do not legally discharge our liability with respect to obligations that we have insured or reinsured. We remain liable with respect to the liabilities that we cede even if a counterparty is unable to meet its obligations assumed under a reinsurance or retrocessional agreement. Accordingly, we evaluate and monitor the financial strength of each of our counterparties.

In connection with our retrocessional arrangements, we prefer to cede risk on a funds withheld basis, which allows us to cede risk while retaining collateral to secure our reinsurer’s or retrocessionaire’s obligation. Grand Central Re Limited, a Bermuda domiciled reinsurance company in which Max Re has a 7.5% equity investment (“Grand Central Re”) is our largest retrocessionaire and accounted for 51.1% of our losses recoverable at December 31, 2004. In September 2004, Grand Central Re requested that A.M. Best Company withdraw its financial strength rating. Consequently, A.M. Best Company has assigned a financial strength rating of “NR-4” to Grand Central Re. We retain funds from Grand Central Re amounting to approximately 101% of its loss recoverable obligations. In addition, at December 31, 2004, one other counter-party accounted for 21.6% of our

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losses recoverable from reinsurers. This retrocessionaire has a financial strength rating of “A” by A.M. Best Company. We retain funds amounting to approximately 62% of its loss recoverable obligations from this counterparty.

Our reinsurance programs for our traditional insurance risks are generally written on a funds transferred basis and therefore we have greater credit risk exposure. Since we are liable with respect to the reinsurance that we cede even if a reinsurer is unable to meet its obligations assumed under a reinsurance agreement, we evaluate and monitor the financial strength of each of our reinsurers. All of our reinsurers are presently rated “A-”or above by A.M. Best Company.

Reserves

We regularly review and update our methods of determining estimates for reported and unreported losses and benefits and related reinsurance recoverables. Adjustments resulting from this review are reflected in our net income during the period in which we determine these adjustments. In connection with the process of estimating our loss reserves, we rely 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 and benefit reserves is a difficult process, particularly in light of changes in the legal environment that affect the payment of losses and benefits. As a result, we frequently supplement quantitative techniques with subjective considerations and managerial judgment.

In accordance with accounting principles generally accepted in the United States of America, which we refer to as GAAP, we establish and carry as liabilities actuarially determined reserves calculated to meet our estimated future obligations. The adequacy of our reserves is reviewed annually by outside actuaries in order to support management’s estimates. We maintain our reserves on a GAAP basis. Future losses, benefits and experience refunds comprise the majority of our financial obligations.

Reserves do not represent an exact calculation of liability. Rather, reserves represent our estimate of the expected cost of the ultimate settlement and administration of the claim. Although actuarial methods for establishing reserves have been developed over time, some of the major assumptions about anticipated loss emergence patterns are subject to unanticipated fluctuation. These estimates, which generally involve actuarial projections, are based upon our assessment of facts and circumstances then known, as well as estimates of future trends in claims severity and frequency, mortality, judicial theories of liability and other factors, including the actions of third parties, that are beyond our control.

Loss and loss adjustment expenses and life and annuity benefits, net of related reinsurance recoverables, are charged to income as incurred. Unpaid losses and loss adjustment expenses represent the accumulation of:

The table below breaks our reserves into these components by product line.

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The table above makes certain assumptions regarding the split of case reserves and IBNR on property and casualty traditional reinsurance and alternative risk transfer loss reserves. Reinsureds provide loss data in various formats, with some reinsureds providing an analysis of case reserves and IBNR, while other reinsureds provide one reserve number encompassing all reserves and without a specific analysis of the component parts. Where reinsureds provide one reserve number, we treat that reserve as a case reserve, even though it may contain IBNR reserves.

Property and Casualty Insurance Reserve Process

Our property and casualty insurance reserves, which include case reserves, amounts for IBNR reserves and loss adjustment expenses, are compiled on a book of business basis and are computed on an undiscounted basis. The majority of the insurance business we have written is casualty business. Historically, losses associated with casualty business have had a long claim-tail, the time period between the occurrence of a loss and the time it is settled by the insurer. Casualty losses are also generally more susceptible to litigation and can be significantly affected by changing contract interpretations and a changing legal environment. Due to the long claim-tail nature of casualty business, a high degree of judgment is involved in establishing loss reserves. Since the Company has only been writing casualty insurance business for two years, it will be several years before we can accurately determine the validity of our reserve estimates.

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

We establish and review our property and casualty insurance reserves on a regular basis. The process for adjusting our property and casualty insurance reserves is based upon loss reports received from clients, which are analysed by our actuarial models. We use a variety of actuarial techniques and methods in estimating our ultimate liability for property and casualty insurance losses and loss expenses. These methods include paid loss development, incurred loss development, paid and incurred Bornhuetter-Ferguson methods and frequency and severity methods. This actuarial data is analyzed by product, type of risk, coverage and accident or policy year. Industry loss experience is also used to supplement our own data in selecting “tail factors” and in areas where our own data is limited.

Property and Casualty Reinsurance Reserve Process

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

We establish and review our property and casualty reinsurance reserves on a regular basis. The process for establishing our property and casualty reinsurance reserves is based upon internally generated actuarial analysis of loss data provided by clients. We use a variety of actuarial techniques and methods in estimating our ultimate liability for property and casualty reinsurance losses and loss expenses. These methods include paid loss

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development, incurred loss development, paid and incurred Bornhuetter-Ferguson methods and frequency and severity methods. This actuarial data is analyzed by product, type of risk, coverage and accident or policy year, as appropriate. Industry loss experience is also used to supplement our own data in selecting “tail factors” and in areas where our own data is limited.

As a reinsurer, we rely on reserve estimates reported by our clients. Our clients use a wide variety of actuarial techniques to establish their reserves. The quality of the reserve estimation process varies from client to client. In addition, there is often a time lag between our clients establishing case reserves and re-estimating their reserves, and notifying us of the revised case reserves and re-estimated reserve balances. We analyze information from our clients as it is received and there is no backlog of processing client information received. It is likely, however, that our property and casualty reinsurance reserves will have larger re-estimation adjustments, which will be made over a longer period of time, compared to our property and casualty insurance reserves, where we receive loss information directly.

In connection with an ongoing analysis of our property and casualty reinsurance reserves, we review loss reports received from our clients to confirm that submitted claims are covered under the contract terms. As disputes with clients arise in the ordinary course of business, we resolve them through negotiation and, in our history, have not had any client dispute develop into arbitration or litigation. We also consider additional historical data, industry loss trends, legal developments, changes in social attitudes and economic conditions, including the effects of inflation. As additional data becomes available and is reviewed, we revise our property and casualty reserve estimates to reflect this additional data, which may result in increases or decreases to reserves for insured events of prior years. These adjustments are recorded in the period they are determined.

Life and Annuity Reinsurance Reserve Process

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

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

Property and Casualty Reserve Development

The following table represents the development of balance sheet property and casualty reserves calculated in accordance with GAAP, as of December 31, 2000, 2001, 2002, 2003 and 2004. This table does not present accident or policy year development data. The top line of the table shows the gross reserves at the balance sheet date for each of the indicated years and is reconciled to the net reserve by adjusting for reinsurance recoverables and experience refunds. This represents the estimated amount of net claims and claim expenses arising in the current year and all prior years that are unpaid at the balance sheet date, including IBNR reserves. The table also shows the re-estimated amount of the previously recorded reserves as adjusted for new information received as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The “net cumulative redundancy (deficiency)” represents the aggregate change to date from the original estimate on the third line of the table “reserve for property and casualty losses, originally stated, net of reinsurance and experience refunds.” The “gross cumulative redundancy

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(deficiency)” represents the aggregate change to date from the original gross estimate on the top line of the table. The table also shows the cumulative net paid amounts as of successive years with respect to the net reserve liability.

The deterioration of our reserve balances as of December 31, 2000 and December 31, 2001 was primarily the result of adverse development on two whole account stop loss covers written in 2000, which have workers’ compensation as the principal underlying risk. Specifically, losses incurred and settled by the underlying reinsured exceeded our estimates and caused us to record additional losses. For one of these two contracts, reserves were increased by $11.2 million during the year ended December 31, 2001 but were subsequently reduced by $10.2 million upon final commutation of the contract in 2002.

The reserve for the second of these contracts was increased by $36.8 million during the year ended December 31, 2002 based on loss information received and recorded in 2002. As a result, the reserve increase with respect to this contract affected both the 2000 and 2001 balance sheet reserve re-estimation in the table above. In addition, the adverse loss development triggered additional premiums, net of acquisition costs and inclusive of interest on such additional premiums, of $29.2 million. This contract was commuted in 2003 with no further loss development.

The cumulative deficiency of our reserve balance as of December 31, 2002 was primarily the result of $21.8 million of additional incurred losses arising from increases in premium estimates. These additional loss reserves were established at the expected loss ratio for the contracts generating the increased premium volumes. Changes in premium estimates on prior year contracts occur each year based on updated information received from ceding clients and will have the effect of increasing or decreasing the previously stated reserve balance.

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For additional information on our reserves, including a reconciliation of losses and loss adjustment expense reserves for the years ended December 31, 2004, 2003 and 2002, please refer to Note 4 of our audited consolidated financial statements included herein.

Marketing

We believe that diversity in our sources of business reduces the potential adverse effects arising from the termination of any one of our business relationships. Our marketing plan calls for the development of relationships with potential clients that we believe have a need for reinsurance or insurance, based on regulatory filings, industry knowledge and market trends. Given the nature of our business, we target clients through management relationships and non-traditional marketing channels.

During the years ended December 31, 2004, 2003 and 2002, brokered transactions accounted for 99%, 84% and 80%, respectively, of gross premiums written. During the years ended December 31, 2004, 2003, and 2002, the top three independent producing intermediaries and brokerage firms accounted for 27%, 25% and 8%; 36%, 15% and 11%; and 25%, 24% and 18%, respectively, of gross premiums written.

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

Overview of Investments

We seek to earn a superior risk-adjusted total return on our assets by engaging in an investment strategy that combines fixed maturities investments and alternative investments that employ strategies intended to manage investment risk. We diversify our portfolio to limit volatility and attempt to maintain adequate liquidity in our fixed maturities and alternative investments to fund operations and protect against losses from unexpected events. We seek to manage our credit risk through industry and issuer diversification and interest rate risk by monitoring the duration and structure of the investment portfolio relative to the duration and structure of the liability portfolio. The finance and investment committee of our board of directors approves and monitors performance of the managers of our fixed maturities investments and alternative investments. The finance and investment committee also periodically reviews our investment guidelines in light of prevailing market conditions and amends them from time to time as it deems appropriate. Based on fair values at December 31, 2004, approximately 68.2% of our investment portfolio was invested in cash and fixed maturities and approximately 31.8% was invested in alternative investments. We seek to allocate between 50% and 75% of our investment portfolio in cash and fixed maturities and between 25% and 50% of our investment portfolio in alternative investments. However, this allocation can vary from the targeted amounts because of cash inflows and market value variations at specific points in time.

Aggregate Portfolio Results

The table below shows the annual total rate of return of our cash and fixed maturities investments, alternative investments and aggregate investment portfolio for the years ended December 31, 2004, 2003 and 2002. It also includes, for comparative purposes, performance information for the bond and stock markets represented by the Merrill Lynch Master Bond Index and the S&P 500 Index^®, respectively, as well as information for a hypothetical portfolio consisting of 80% Merrill Lynch Master Index and 20% S&P 500 Index^®.

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

Fixed Maturities Investments

Based on fair values at December 31, 2004, approximately 68.2% of our total investment portfolio was invested in cash and fixed maturities and was managed by General Re-New England Asset Management, Inc., Conning Asset Management and Asset Allocation and Management. Our fixed maturities investments are comprised of liquid, high quality securities. As of December 31, 2004, our fixed maturities investments had a dollar-weighted average rating of “AA,” an average duration of approximately 4.4 years and an average book yield to maturity of 4.02%.

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

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

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

Alternative Investments

Overview. Based on fair values at December 31, 2004, approximately 31.8% of our investment portfolio was invested in alternative investments. Max Re Diversified holds all of our alternative investments other than reinsurance private equity investments that are held by Max Re. Moore Capital Management, LLC, which we refer to as Moore Capital, served as fund of funds advisor for Max Re Diversified until April 1, 2004, when Moore Capital assigned its management obligations, with our consent, to its affiliate Alstra Capital Management, LLC, which we refer to as Alstra. As of December 31, 2004, Max Re Diversified was invested in approximately 50 underlying alternative investment funds representing the following investment strategies: Commodities Trading, Convertible Arbitrage, Distressed Securities Investing, Diversified Arbitrage, Emerging Markets, Event Driven Arbitrage, Fixed Income Arbitrage, Global Macro, Long/Short Credit, Long/Short Equities and Opportunistic Investing. These strategies were selected because of their low correlation with the stock market, the bond market and each other. Our alternative investment guidelines also provide that Max Re Diversified may be invested in Merger Arbitrage.

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

Under the terms of our customer agreement and trading authorization contract with Alstra, Alstra may make discretionary investment determinations so long as those determinations comply with our alternative investment guidelines and are in underlying funds approved by the finance and investment committee of the board of directors. Moore Capital did not receive fees as the fund of funds advisor for Max Re Diversified from our inception through December 31, 2002. However, effective January 1, 2003, Max Re Diversified began paying to Moore Capital a management fee of 70 basis points plus an incentive fee of 7.5% of the return in excess of a 10% threshold on the net asset value of the funds in which Max Re Diversified had invested and that were not managed directly by Moore Capital or any of its affiliates. As a result of the assignment from Moore Capital to Alstra discussed above, we now pay these fees directly to Alstra. As of December 31, 2004, approximately $44.5 million, or 4.2%, of Max Re Diversified’s investments were in alternative investment funds not managed directly by Moore Capital or its affiliates.

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

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

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

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

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

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

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

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

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

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

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

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

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

In addition to Max Re Diversified’s investments in alternative investment funds, Max Re has made private equity investments in two reinsurance companies: Grand Central Re and DaVinci Re Holdings Ltd., and its operating subsidiary DaVinci Reinsurance Ltd., a Bermuda property catastrophe reinsurer.

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Alternative Investment Portfolio. As of December 31, 2004 and 2003, our alternative investment portfolio was allocated as follows:

Alternative Investment Portfolio Liquidity. We are able to liquidate our alternative investments held through Max Re Diversified on the same terms that the underlying funds can be liquidated. In general, the funds in which our alternative investments are invested require 30 days notice of liquidation, and may be liquidated on a monthly, quarterly or longer basis. In accordance with our investment guidelines, a minimum of 85% of our alternative investment portfolio must be maintained in funds with monthly or quarterly liquidity. As of December 31, 2004, the liquidity profile of our alternative investments held through Max Re Diversified was as follows:

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

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

Competition

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

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We compete directly with numerous independent reinsurance companies, captive insurance companies, insurance companies, subsidiaries or affiliates of established insurance companies or newly formed companies, reinsurance departments of primary insurance companies and underwriting syndicates from countries throughout the world in our chosen product lines. Many of these competitors are well established, have significant operating histories and have developed longstanding customer relationships. Our worldwide insurance and reinsurance competitors include ACE Limited, American International Group, Inc., Berkshire Hathaway, Inc., Swiss Reinsurance Company and XL Capital Ltd, all larger companies, with higher credit ratings and greater credit capacity. Additionally, competitors such as AXIS Capital Holdings Limited, Arch Capital Group Ltd., Endurance Specialty Insurance Ltd. and Platinum Underwriters Reinsurance, Inc. entered many of our markets following the improvement in pricing and contract terms for property and casualty business primarily as a result of the September 11, 2001 terrorist attacks.

Ratings

Ratings are an important factor in establishing the competitive position of reinsurance and insurance companies and are important to our ability to market our products. 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

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

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

Regulation

Bermuda

The Insurance Act 1978 of Bermuda and its related regulations, which we refer to collectively as the Bermuda Insurance Act, regulates the reinsurance and insurance business of Max Re and the reinsurance management business of Max Re Managers. The Bermuda Insurance Act imposes solvency and liquidity

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standards and auditing and reporting requirements on Max Re and grants to the Bermuda Monetary Authority powers to supervise, investigate and intervene in the affairs of Bermuda reinsurance and insurance companies. Max Re is required to prepare annual statutory financial statements, file an annual statutory financial return and have the statutory reserves actuarially certified. In addition, Max Re Capital, Max Re, Max Re Managers and Max Re Diversified are each required to comply with the provisions of the Companies Act 1981 of Bermuda, which we refer to as the Bermuda Companies Act, regulating the payment of dividends and making distributions from contributed surplus.

Ireland

Our Irish operating subsidiaries, Max Insurance Europe and Max Re Europe, are subject to regulation by the Irish Financial Services Regulatory Authority, or IFSRA, under the Irish Insurance Acts 1909 to 2000, regulations promulgated thereunder, regulations relating to insurance business promulgated under the European Communities Act 1972 and directions issued under regulations and guidelines issued by IFSRA.

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

United States and Other Jurisdictions

We are not currently licensed or admitted as an insurer in any jurisdiction except Bermuda and Ireland. The insurance laws of each state in the United States and of many other jurisdictions regulate the sale of reinsurance and insurance within their jurisdiction by insurers, such as Max Re, which are not licensed or admitted to do business within such jurisdictions. We conduct our business through our Bermuda and Dublin, Ireland offices and do not intend to conduct any activities that may constitute the transaction of the business of insurance in any jurisdiction in which we are not licensed or otherwise authorized to engage in such activities.

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

Employees

As of December 31, 2004, we had 66 employees.

Available Information

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

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We lease office space in Hamilton, Bermuda and Dublin, Ireland, the locations in which we operate. We lease office space on a long-term basis, which we believe will be adequate for anticipated future operations. The property and casualty and life and annuity segments use both locations, although the life and annuity segment primarily works from our Bermuda office.

We are, from time to time, a party to litigation and/or arbitration that arises in the normal course of our business operations. We are also subject to other potential litigation, disputes, and regulatory or governmental inquiry. While any proceeding contains an element of uncertainty, we believe that we are not presently a party to any litigation or arbitration that is likely to have a material adverse effect on our business or operations, and we are unaware of any governmental inquiries being contemplated against us.

No matters were submitted to a vote of shareholders during the fourth quarter of the fiscal year ended December 31, 2004.

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PART II

(A) Market Information

Our 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 Max Re Capital common shares. The following table sets forth for the periods indicated the high and low closing sale price of our common shares on the Nasdaq National Market.

Our common shares began trading on the Bermuda Stock Exchange (“BSX”) under the symbol MXRE BH on December 17, 2001. The last day a closing price was reported by the BSX was $15.50 on December 18, 2001.

(B) Holders

As of January 31, 2005, the number of holders of record of our common shares was approximately 126.

(C) Dividends

We have paid a quarterly cash dividend of $0.03 ($0.12 annually) per common share since the fourth quarter of 2003. From the fourth quarter of 2001 through the third quarter of 2003 we paid a quarterly cash dividend of $0.02 per common share ($0.08 annually). Prior to that time, we had not declared or paid any dividends on our common shares. Any determination to pay cash dividends is at the discretion of our board of directors and is dependent upon the results of operations and cash flows, the financial position and capital requirements, general business conditions, legal, tax, regulatory and any contractual restrictions on the payment of dividends and other factors the board of directors deems relevant.

Max Re Capital’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 Max Re Capital. Under the Bermuda Insurance Act, 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 Bermuda Insurance Act. 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 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 Max Re Capital, 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. Under the Irish Insurance Acts and regulations, each of Max Europe Holdings, Max Re Europe and Max Insurance Europe may only declare a dividend if, among other matters, such payment would not reduce its statutory surplus

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below the required minimum. Accordingly, we cannot assure shareholders that we will declare or pay dividends in the future. In addition, each of Max Re’s three letter of credit facilities prohibits Max Re from paying dividends at any time that it is in default under the respective facility, which will occur if Max Re Capital’s shareholders’ equity or Max Re’s shareholders’ equity is less than a specified amount as well as in certain other circumstances.

(D) Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of December 31, 2004 about Max Re Capital’s common shares that may be issued upon the exercise of options, warrants and rights granted to employees, consultants or members of the board of directors under all of our existing equity compensation plans, including the Incentive Plan, each as amended.

(E) Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The table below sets forth the information with respect to purchases made by or on behalf of Max Re Capital or any “affiliated purchase” (as defined in Rule 10b-18(a)(3) under the Exchange Act), of our common shares during the three months ended December 31, 2004.

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

The following is a discussion and analysis of our results of operations for the year ended December 31, 2004 compared to the year ended December 31, 2003 and for the year ended December 31, 2003 compared to the year ended December 31, 2002, and also a discussion of our financial condition as of December 31, 2004. 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.

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Overview

We are a Bermuda-based provider of reinsurance and insurance products for both the property and casualty and the life and annuity markets. In the past three years, the property and casualty market has presented more opportunities to us than the life and annuity market due to a shortage of reinsurance capacity in the property and casualty market, resulting in improvement in premium rates, terms and conditions. However, in 2004, we observed premium rates, terms and conditions stabilizing as competition increased in most property and casualty lines of business. With respect to the types of life and annuity contracts we offer, we are beginning to see more opportunities in the market, but remain cautious about whether these opportunities will result in additional business for us in the near term. However, we did execute two life and annuity reinsurance transactions during the year ended December 31, 2004. Despite the increased property and casualty competition and increased life and annuity opportunities, we anticipate continuing greater demand for our property and casualty products than for our life and annuity products during the year 2005.

To manage reinsurance and insurance liability exposure, make investment decisions and assess overall enterprise risk, we model our underwriting and investing activities on an integrated basis. Our integrated risk management, as well as terms and conditions of our products, provides flexibility in making decisions regarding investments. Our investments are currently comprised of a high grade fixed maturities portfolio and an alternative investment portfolio that currently employs 12 strategies invested in approximately 50 underlying trading entities and two strategic reinsurance private equity investments. Our investment portfolio is designed to provide diversification and to generate positive returns while attempting to reduce the frequency and severity of loss outcomes. Based on fair value at December 31, 2004, the allocation of invested assets was approximately 68.2% in cash and fixed maturities and 31.8% in alternative investments.

Our principal operating subsidiary is Max Re. At December 31, 2004, Max Re had $915.3 million of shareholders’ equity. We conduct our European activities through Max Europe Holdings and its operating subsidiaries, Max Re Europe and Max Insurance Europe. We also provide underwriting and administrative services on a fee basis through Max Re Managers. We hold all of our alternative investments in Max Re Diversified, other than reinsurance private equity investments that are held by Max Re.

Executive Summary

The Company continued to perform well in the year ended December 31, 2004. Our overall property and casualty underwriting results improved to produce a 93.2% combined ratio (total losses and expenses as a percentage of net premiums earned) compared to 99.8% in the year ended December 31, 2003. This reflects the realization of the benefits associated with our shift in property and casualty product mix toward traditional reinsurance and insurance business over the past two years and achievement of expected loss results. In addition, our alternative investments produced strong results in the three months ended December 31, 2004 enabling the annual return for these investments to reach 8.23%, slightly ahead of our annual target return of 8%. We faced some challenges in 2004, including losses associated with catastrophes in the three months ended September 30, 2004 and a difficult investment environment for alternative assets in the six months ended September 30, 2004. A combination of good returns from our increasingly diversified underwriting portfolio and alternative investment portfolio allowed the Company to produce record net income of $133.7 million and a solid return on average equity of 15.35%.

We continued to actively pursue property and casualty traditional reinsurance and insurance opportunities during the year ended December 31, 2004. Overall we produced a 3.3% increase in gross premiums written during the year ended December 31, 2004 compared to the year ended December 31, 2003. Gross premiums written for the traditional reinsurance and traditional insurance product lines increased by 20.9% to $582.6 million for the year ended December 31, 2004 compared to $481.8 million for the year ended December 31, 2003. Although overall production of gross premiums written increased, gross premiums written in our alternative risk transfer product line decreased 40.7%, principally due to the non-renewal of one large alternative risk transfer contract that accounted for $110.0 million of gross premiums written in the year ended December 31, 2003 and the termination of an accident and health alternative risk transfer contract during its

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term, which resulted in us writing $50.0 million less premium in the current year compared to the same period in 2003. In addition, we placed greater emphasis on selling traditional products during the year ended December 31, 2004, which resulted in lower alternative risk transfer premium volume. Conditions in the life and annuity market improved and we closed two life and annuity reinsurance transactions during the year ended December 31, 2004, resulting in gross written premium of $212.3 million compared to $108.3 million during the same period in 2003.

Our current emphasis on traditional reinsurance underwriting, coupled with two years of insurance operations, has expanded our professional liability and general liability underwriting volume. We intend to continue to diversify our property and casualty underwriting business by writing business with a greater number of clients and by varying the underlying exposures assumed. As part of this effort, we recently hired an experienced underwriting professional to oversee a newly formed property group within our insurance and reinsurance operations. Consequently, we believe our underwriting portfolio is, and will be for the foreseeable future, more diversified than in previous years.

There is a potential for increased volatility in our underwriting results arising from the increase in our traditional reinsurance and traditional insurance business. However, by carefully selecting line sizes of business assumed, diversifying our underlying exposures, establishing contractual liability caps on our contracts and purchasing reinsurance and retrocessional reinsurance protection, we believe we will be able to manage this risk effectively. In support of our belief, we note that, since we commenced operations in 2000, we have incurred small losses, relative to companies of comparable size, from the World Trade Center disaster, United States corporate scandals and the four third quarter 2004 hurricanes that came ashore in Florida.

The increased premium volume in traditional reinsurance and traditional insurance resulted in improved underwriting performance in 2004 due to the lower loss ratios incurred on these products. Our traditional reinsurance and traditional insurance products generated lower combined ratios than our alternative risk transfer products. Consequently, our property and casualty combined ratio improved to 93.2% for the year ended December 31, 2004, compared to 99.8% for the year ended December 31, 2003.

Losses, benefits and experience refunds represented our largest expense and accounted for 61.8% of total liabilities at December 31, 2004. We established loss expenses and reserves using a combination of loss reserving techniques and actuarial methods. Loss expenses and reserves are reviewed regularly to reflect new information that we receive. We conduct regular quarterly internal reviews of reserves and, in addition, the adequacy of our reserves is reviewed annually, during the fourth quarter of the year, by outside actuaries to support management’s estimates. Overall, we did not have any significant adjustment to reserves relating to prior periods during the year ended December 31, 2004. An analysis of property and casualty loss development may be found in Note 4 to our audited consolidated financial statements attached hereto.

The New York State Attorney General filed suit against an insurance broker alleging illegal conduct including the manipulation of the insurance market. In addition, other regulatory authorities have also launched investigations. We are not a party to any of the litigation and have not received any subpoena or information requests. We have reviewed the allegations contained in the filed complaint and have conducted an internal review of our business arrangements. We have discovered no evidence that we were involved in the type of conduct that is the subject of the complaint. It is not possible to predict the ultimate effect of the current litigation or its impact on the reinsurance industry and our business.

We have entered into a limited number of Placement Service Agreements (PSAs) with insurance brokers. The fees incurred under these PSAs are accounted for as acquisition costs. We terminated our PSAs with effect from September 30, 2004. We do not believe that the termination of our PSAs will have a material adverse effect on our business or financial condition.

Our investments during the year ended December 31, 2004 produced a total return of 5.63% compared to 7.74% for the year ended December 31, 2003. The cash and fixed maturities portfolio produced a total return of 4.22% during the year ended December 31, 2004 compared to 3.26% for the year ended December 31, 2003.

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During the year ended December 31, 2004, our alternative investments generated a 8.23% rate of return compared to a 16.57% rate of return for the same period in 2003. The Max Re Diversified portfolio has performed at a level consistent with our annual targeted return, which is based on our expectations of long term average return. The return of the alternative investment portfolio was negatively impacted by our private equity reinsurance investments that have produced negative returns for the year largely due to our investment in DaVinci Re Holdings Ltd. and its operating subsidiary DaVinci Reinsurance Ltd. (“DaVinci”), which experienced losses from hurricanes Charley, Frances, Ivan and Jeanne.

We continually assess our liquidity needs by monitoring and evaluating new business prospects and opportunities and the development of our existing operations. During the year ended December 31, 2004, we generated $598 million of cash from operations and invested $557 million in fixed maturities. We expect to continue to generate positive operating cash flow during 2005 through premium receipts and investment returns, which will be partially offset by paid losses on reinsurance and insurance obligations, as well as operating expenses.

Drivers of Profitability

Revenues

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

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 our reinsurance contracts contains unique pricing, terms and conditions and expected profit margins. Therefore, the amount of premiums is not necessarily an accurate indicator of our anticipated profitability. Premium estimates are based upon information in underlying contracts, data received from clients and from premium audits. Changes in premium estimates are expected and may result in significant adjustments in any period. These estimates change over time as additional information regarding the underlying business volume of our clients is obtained. There is often a delay in the receipt of updated premium information from clients due to the time lag in preparing and reporting the data to us. After review by our underwriters, we increase or decrease premium estimates as updated information from our clients is received.

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

Expenses

Our principal expenses are losses, benefits and experience refunds, acquisition costs, interest expense and general and administrative expenses. Losses, benefits and experience refunds are based on the amount and type of reinsurance and insurance contracts written by us during the current reporting period and information received during the current reporting period from clients pertaining to contracts written in prior years. We record losses, benefits and experience refunds based on actuarial estimates of the expected losses, benefits and experience refunds to be incurred on each contract written. The ultimate losses, benefits and experience refunds depend on

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the actual costs to settle these liabilities. We increase or decrease losses, benefits and experience refunds estimates as actual claim reports are received. Our ability to estimate losses, benefits and experience refunds accurately at the time of pricing our contracts is a critical factor in determining profitability.

Acquisition costs consist principally of ceding commissions paid to ceding clients and brokerage expenses, and typically represent a negotiated percentage of the premiums on reinsurance and insurance contracts written. We generally defer and amortize these costs over the period in which the related premiums are earned.

Interest expense principally reflects the net interest charge on funds withheld from reinsurers under reinsurance and retrocessional contracts. Interest is recorded on the funds withheld balances based on various contractual and negotiated rates. The interest expense attributable to the funds withheld under a variable quota share retrocession agreement with Grand Central Re, our largest funds withheld balance, is based on the average of two total return interest rate indices. A charge or credit may be recorded in interest expense on this contract in any given period. As a result, interest expense is expected to vary from period to period with a corresponding entry to funds withheld. Interest expense on the remaining balance of funds withheld from other reinsurers under reinsurance and retrocessional contracts will vary due only to changes in the balance of funds withheld. In addition, interest expense also includes interest on deposit contracts and interest on the bank loan at a rate based on LIBOR plus a spread.

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

Critical Accounting Policies:

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

Revenue recognition

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

Property and casualty insurance revenue recognition

Our property and casualty insurance premiums are recorded at the inception of each contract, based upon contract terms. The amount of minimum and/or deposit premium is usually contractually documented at inception, and variances between deposit premium and final premium are generally small. An adjustment is posted to amend the minimum and/or deposit premium as data regarding the underlying exposure is provided to us by our insureds. Premiums are earned on a pro rata basis over the coverage period.

We also accrue for reinstatement and additional premiums resulting from losses. Such accruals are based upon contractual terms, and the only element of management judgment involved is with respect to the amount of losses. Reinstatement and additional premiums are recognized at the time we receive and book loss notifications. Reinstatement premiums are the premiums for the restoration of the insurance limit of a contract to its full amount after a loss occurrence by the insured. Additional premiums are premiums based on loss experience during the policy term or coverage period.

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Property and casualty reinsurance revenue recognition

Our property and casualty reinsurance premiums are recorded at the inception of each contract, based upon contract terms and information received from ceding clients and their brokers. For excess of loss contracts, the amount of minimum and/or deposit premium is usually contractually documented at inception, and variances between deposit premium and final premium are generally small. An adjustment is posted to amend the minimum and/or deposit premium as data regarding the underlying exposure is provided to us by our ceding clients. For quota share or proportional property and casualty reinsurance contracts, gross premiums written are normally estimated at inception by the ceding client. We generally account for such premiums using the client’s initial estimates, and then adjust them as advised by our ceding clients. We believe that the ceding clients’ estimate of the volume of business they expect to cede to us represents the best estimate of gross premium written at the beginning of the contract. As the contract progresses, we monitor actual premium received in conjunction with correspondence from the ceding client in order to refine our estimate. Variances from original premium estimates can be greater for quota share contracts than excess of loss contracts. Premiums are earned on a pro rata basis over the coverage period.

We also accrue for reinstatement and additional premiums resulting from losses. Such accruals are based upon contractual terms, and the only element of management judgment involved is with respect to the amount of losses. Reinstatement and additional premiums are recognized at the time we re-estimate losses. Reinstatement premiums are the premiums for the restoration of the reinsurance limit of a contract to its full amount after a loss occurrence by the reinsured. Additional premiums are premiums based on loss experience during the policy term or coverage period.

Life and annuity reinsurance premium

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

Premiums receivable

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

Losses, benefits and experience refunds

Under GAAP, we are not permitted to establish loss reserves until the occurrence of an event that may give rise to a loss. Once such an event occurs, we establish reserves based upon loss reports from insureds and estimates of total losses incurred by the ceding client as a result of the event and our estimate of the portion of such loss we cover. As a result, only loss reserves applicable to losses incurred up to the reporting date 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

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reported to us). Our IBNR reserves are largely comprised of casualty exposures and therefore these claims are subject to a higher degree of estimation volatility as a result of changes in the legal environment, jury awards, medical cost trends and general cost inflation. We regularly review and update these estimates using the most current information available and employing various actuarial methods. The ultimate liability for a loss is likely to differ from the original estimate due to the factors discussed above. Whenever we determine that an existing reserve for losses, benefits and experience refunds needs adjustment, we are required to record a change in estimate, increasing or decreasing the reserve with a corresponding reduction or increase, which could be material, in our operating results in the period in which the deficiency or redundancy is identified. Adjustments resulting from changes in our estimates are recorded in the period such adjustments are determined. The establishment of reserves, or the adjustment of reserves for reported losses, could result in significant upward or downward changes to our financial condition or results of our operations in the period such amounts are reported.

Our 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 in the evaluation of losses and benefits and the establishment of liabilities for losses and benefits. We employ a variety of actuarial loss reserving techniques and several models to assist in the setting and reviewing of reserves. The actuarial loss reserves techniques and models employed include paid loss development, incurred loss development, paid and incurred Bornhuetter-Ferguson methods and frequency and severity methods. The actuarial loss reserves techniques and models employed are principally based on paid and incurred loss development methods. Further, we retain an independent actuarial firm to review annually 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

Our investments are carried at fair value or amounts that approximate fair value. Fair value for our investments in fixed maturities is generally based on quoted market prices or pricing models. At December 31, 2004, the valuation of approximately 96% of our fixed maturities investments was based on quoted market prices. Fair value for our alternative investments is generally based on the net asset value reported by the respective investment fund managers or, for our reinsurance equity 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. We rely on the financial reports from these entities for recording the net gains on alternative investments in our statement of income.

Investments in unquoted equities, where we have a meaningful ownership position and significant influence over operating and financial policies of the investee, are carried under the equity method of accounting. Under this method, we initially record the investments at cost and periodically adjust the carrying values to recognize our proportionate share of income or loss and dividends from these investments. Future adverse changes in general market, global and economic conditions, changes to the interest and currency rate environment or poor operating results by our investments carried under the equity method of accounting could result in losses.

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

Results of Operations

We operate in the reinsurance and insurance business serving two segments: the property and casualty segment and the life and annuity segment. Within the property and casualty segment, we offer three products: traditional reinsurance, alternative risk transfer reinsurance and insurance and traditional insurance. We differentiate our property and casualty products in several ways, including the amount of aggregate loss cap and/or occurrence limits incorporated into the underlying contracts, with our alternative risk transfer products having

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lower aggregate loss cap and occurrences limits, relative to the premium received, compared to our traditional products. Within the life and annuity segment, we currently offer reinsurance products focusing on existing blocks of business, which take the form of co-insurance transactions. In co-insurance transactions, risks are reinsured on the same basis as the original policies. We also have a corporate segment that includes our investment and financing functions. We do not allocate assets by segment and accordingly, we evaluate performance of underwriting operations without the allocation of investment income.

Results of Underwriting Operations

Property and Casualty Traditional Reinsurance Products

The loss ratio (“loss ratio”) is calculated by dividing losses, benefits and experience refunds (shown as (b)) by net premium earned (shown as (a)).

The combined ratio (“combined ratio”) is calculated by dividing total losses and expenses (shown as (c)) by net premiums earned (shown as (a)).

Gross premiums written. Gross premiums written for traditional reinsurance products for the year ended December 31, 2004 were $334.6 million compared to $318.6 million for the year ended December 31, 2003, an increase of 5.0%. This increase included $37.3 million of decreases in premium estimates relating to contracts written in prior periods. The premium estimate changes resulted principally from changes in two ceding clients’ operations due to a rating agency downgrade in one instance and the loss of key members of the client’s underwriting team in the second instance, with both items leading to lower premium production for the ceding clients. Gross premiums written for the traditional reinsurance products for the year ended December 31, 2003 were $318.6 million compared to $137.9 million for the year ended December 31, 2002, an increase of 131.0%. This increase includes $6.1 million of increases in premium estimates relating to contracts written in prior periods. Our first full year of offering traditional reinsurance products was 2003 and reflected our shift in product mix away from alternative risk transfer products. The level of business written in future periods will vary, perhaps materially, based upon market conditions and management’s assessment of the adequacy of premium rates relative to the underwriting risk being assumed.

Reinsurance premiums ceded. Reinsurance premiums ceded for traditional reinsurance products for the year ended December 31, 2004 were $20.8 million compared to $17.5 million for the year ended December 31, 2003, an increase of 18.9%. Reinsurance premiums ceded were principally related to our purchase of specific reinsurance to manage the risks associated with traditional reinsurance and to manage the exposure retained by us on certain transactions. Prior to the year ended December 31, 2003, we did not cede any premiums related to traditional reinsurance as the product line was relatively new and we had not written a sufficient volume of premium to warrant a reinsurance program.

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Net premiums earned. Net premiums earned for traditional reinsurance products increased by 39.3% to $273.0 million for the year ended December 31, 2004. The increase is attributed to the expansion of our traditional reinsurance product line over the last two years and reflects the earning pattern of an increasingly mature book of property and casualty contracts. Net premiums earned for traditional reinsurance products for the year ended December 31, 2003 were $196.0 million, an increase of 403.9% over the same period in 2002. We commenced writing traditional reinsurance business in the latter half of 2002.

Losses and experience refunds. Losses and experience refunds relating to the traditional reinsurance product line were $174.2 million for the year ended December 31, 2004 compared to $125.3 million for the year ended December 31, 2003, an increase of 39.0%, which is comparable to the increase in our premiums earned for this product line. The loss ratio for our traditional reinsurance product line for the year ended December 31, 2004 was 63.8% compared to 63.9% for the year ended December 31, 2003. There has been a shift in the type of business written from aviation business, which produced a lower loss ratio in past periods, to casualty products, which typically have higher loss ratios. However the effect of this shift was offset by the final settlement of loss reserves incurred in prior periods for amounts lower than previously reserved. During the year ended December 31, 2004, incurred losses relating to prior year traditional reinsurance contracts decreased by $11.2 million, largely as a result of the final settlement of certain loss reserves incurred in prior periods through commutation agreements with clients.

Losses and experience refunds relating to the traditional reinsurance product line increased 344.3% from $28.2 million for the year ended December 31, 2002 to $125.3 million for the year ended December 31, 2003. The increase is less than the 403.9% increase in earned premiums for the same period and reflects the increase in aviation premium earned and low losses incurred during the year ended December 31, 2003, which resulted in a loss ratio of 63.9% for the year ended December 31, 2003 compared to a loss ratio of 72.4% for 2002. During the year ended December 31, 2003, incurred losses relating to prior year traditional reinsurance contracts increased $1.2 million as a result of increases in estimated premium written on traditional reinsurance contracts written in the prior year.

Acquisition costs. Acquisition costs were $51.3 million for the year ended December 31, 2004 compared to $41.3 million for the year ended December 31, 2003, an increase of 24.2%. The increase in acquisition costs is less than the 39.3% increase in premiums earned for the year ended December 31, 2004 due to lower average acquisition costs on premiums earned. Acquisition costs during each of the years ended December 31, 2004 and 2003 consisted primarily of amortization of deferred policy acquisition costs incurred in connection with writing traditional reinsurance business. Acquisition costs are customarily associated with the type of premium that we write. A significant component of deferred policy acquisition costs are ceding commissions paid to the buyer of our reinsurance products. Acquisition costs for the year ended December 31, 2003 were $41.3 million, an increase of 348.9% over the same period in 2002, principally the result of increased operations in 2003 compared to the prior year.

General and administrative expenses. General and administrative expenses were $5.0 million for the year ended December 31, 2004 compared to $3.2 million for the year ended December 31, 2003, an increase of 56.3%. The increase resulted principally from expenses associated with the continued expansion of our traditional reinsurance staff. The general and administrative expense to net premiums earned ratio was 1.8% for the year ended December 31, 2004 compared to 1.6% for the year ended December 31, 2003. General and administrative expenses were $1.4 million for the year ended December 31, 2002 resulting in a general and administrative expense to net premiums earned ratio of 3.6%, higher than 2003 and 2004 due principally to personnel costs.

Net underwriting income. Net underwriting income attributable to traditional reinsurance products for the year ended December 31, 2004 was $42.5 million compared to $26.2 million for the year ended December 31, 2003. The results for the year ended December 31, 2004 were principally attributable to increased traditional reinsurance premiums earned at an improved combined ratio. Net underwriting income attributable to traditional reinsurance products for the year ended December 31, 2002 was $0.1 million.

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Property and Casualty Alternative Risk Transfer Products