Unless otherwise indicated or unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to "we," "us," "our" and similar expressions are references to Max Capital and its consolidated subsidiaries.

The following is a discussion and analysis of our results of operations for the three and nine month periods ended September 30, 2009 compared to the three and nine month periods ended September 30, 2008 and our financial condition as of September 30, 2009. This discussion and analysis should be read in conjunction with the attached unaudited interim consolidated financial statements and related notes and the audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2008.

This Form 10-Q 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 ("Exchange Act"). 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 ("SEC") include, but are not limited to:

• claims development;

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

• pricing competition;

• rating agency policies and practices;

• catastrophic events;

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

• material fluctuations in interest rates;

• unexpected volatility associated with investments;

• tax and regulatory changes and conditions; and

• loss of key executives.

Other factors such as changes in U.S. and global equity and debt markets resulting from general economic conditions, market disruptions and significant interest rate fluctuations, foreign exchange rate fluctuations and changes in credit spreads may adversely impact our business or impede our access to, or increase the cost of, financing our operations. We caution that the foregoing list of important factors is not intended to be, and is not, exhaustive. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. If one or more risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any

forward-looking statements in this Form 10-Q 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 safe harbor disclosure.

Generally, our policy is to communicate events that we believe may have a material adverse impact on our operations or financial position, including property and casualty catastrophic events and material losses in our investment portfolio, in a timely manner through a public announcement. It is also our policy not to make public announcements regarding events that we believe have no material impact on our operations or financial position based on management's current estimates and available information, other than through regularly scheduled calls, press releases or filings.

Overview

We are a Bermuda headquartered global provider of specialty insurance and reinsurance products for the property and casualty market, with underwriting operations based in Bermuda, Ireland, the United States and the United Kingdom. We underwrite a diversified portfolio of risks and serve clients ranging from Fortune 1000 companies to small owner-operated businesses. We also provide reinsurance for the life and annuity market when opportunities arise.

We have approximately $1,546.7 million in consolidated shareholders' equity as of September 30, 2009. Our principal operating subsidiary is Max Bermuda. We conduct our non-Lloyd's European activities through Max Europe Holdings and its operating subsidiaries, Max Re Europe and Max Insurance Europe. We conduct our U.S. operations through Max USA and its operating subsidiaries, Max Specialty and Max America. Our United Kingdom Lloyd's operations are conducted through Max UK and its operating subsidiary Max at Lloyd's Ltd. ("Max at Lloyd's"). We hold all hedge funds in Max Diversified. We house certain personnel and assets within our global service companies which we believe improves the efficiency of certain corporate services across the group. The global service companies are incorporated in Ireland, Bermuda, the United Kingdom and the United States.

To manage our insurance and reinsurance liability exposure, make our investment decisions and assess our overall enterprise risk, we model our underwriting and investing activities on an integrated basis for all of our non-Lloyd's operations, and this integration is currently being extended to include our Max at Lloyd's platform. Our integrated risk management, as well as terms and conditions of our products, provides flexibility in making decisions regarding investments. Our investments comprise three high grade fixed maturities securities portfolios (one held for trading, one held as available for sale, the other being held to maturity) and a diversified hedge fund portfolio. Our investment portfolio is designed to provide diversification and to generate positive returns while attempting to reduce the frequency and severity of credit losses. Based on carrying values at September 30, 2009, the allocation of invested assets was 92.8% in cash and fixed maturities and 7.2% in other investments.

Executive Summary

Net income for the nine months ended September 30, 2009 was $183.6 million, an increase of $264.8 million from a loss of $81.2 million for the same period in 2008. Diluted book value per share has increased 18.2% to $26.54 at September 30, 2009 compared to December 31, 2008. Our property and casualty underwriting business is producing gross premium volumes ahead of plan for the year to date. Gross premiums written for our property and casualty segments for the nine months ended September 30, 2009 have increased 33.9% over the same period in 2008, with net premiums earned increasing by 40.1%. This growth reflects the continued build out of our U.S specialty segment, with an increase in gross premiums written of $85.1 million over the comparable prior year-to-date period, and the addition of our Max at Lloyd's segment at the end of 2008 which has contributed $110.6 million of gross premiums written for the year-to-date period. We've seen attractive rates in certain casualty and short tail lines during 2009, and our diversified underwriting platforms enables us to take advantage of opportunities where market conditions are favorable.

Our four property and casualty segments produced an aggregate combined ratio for the nine months ended September 30, 2009 of 90.5%, compared to a combined ratio of 89.1% for the nine months ended September 30, 2008. Net losses incurred in the nine months ended September 30, 2009 related to property catastrophe events were $3.4 million, compared to $50.0 million, net of reinstatement premiums of $7.4 million, in the same period in 2008. We recognized net favorable development on prior year loss reserves of $47.5 million for the nine months ended September 30, 2009, compared to $88.6 million for the same period in 2008. The favorable development in the 2009 period relates principally to our property and professional liability lines of business, offset by adverse development in the marine and energy lines. Absent the net favorable loss development our combined ratios for the nine months ended September 30, 2009 and 2008 were 98.6% and 110.3%, respectively. Favorable loss reserve development is primarily due to lower than expected claims emergence on prior year contracts.

The current year to date has have seen some stabilization of the investment markets in comparison to the market disruption and significant interest rate fluctuations experienced in 2008. Net investment income for the nine months ended September 30, 2009 was $125.1 million, a decrease of 9.0% compared to the same period in 2008. The reduction in net investment income is principally

attributable to our maintenance of a significant allocation to cash and cash equivalents during the nine months ended September 30, 2009, averaging approximately 18.6% of invested assets, compared to approximately 10.4% on average during the nine month period ended September 30, 2008. We anticipate this ratio will decrease as we deploy cash in more attractive investment opportunities. The credit quality of our fixed maturities investments remains high, with 62.2% of our fixed maturities at September 30, 2009, by carrying value, being held in U.S. government, agency, or AAA-rated securities.

We implemented a strategy in the three months ended September 30, 2009 to hold certain fixed income securities to maturity. As a result of this classification, the held to maturity portfolio is recorded at amortized cost in the consolidated balance sheet and is no longer recorded at fair value. As the movements in fair value of these securities are no longer reflected within accumulated other comprehensive income this reclassification will eliminate the impact to shareholders' equity of volatility in fair values. The held to maturity portfolio is comprised principally of long duration government and corporate debt securities. We believe this held to maturity strategy is achievable due to the relatively stable and predictable cash flows of our long-term liabilities. The fair value of those securities reclassified as held to maturity was $952.7 million on the date of reclassification, which became the new cost base.

The return on our hedge fund portfolio was 9.38% for the nine month period ended September 30, 2009, compared to a return of 9.80% for the HFRI Fund of Funds Composite Index, which we believe to be the most comparable benchmark. As of September 30, 2009, our allocation of invested assets to the hedge fund portfolio was 7.2%, compared to 18.6% as of September 30, 2008. We believe our reduced allocation to hedge funds and the rebalancing of our portfolio has significantly reduced the potential volatility of our investment returns.

Over the nine months ended September 30, 2009 we have significantly reduced our external borrowings. We have repaid $150.0 million in bank loans and $225.0 million on our swap loan, reducing both balances to zero. These actions have reduced our total debt from $466.4 million at December 31, 2008 to $91.4 million at September 30, 2009.

Our underwriting and investment performance resulted in an annualized return on average shareholders' equity of 17.3% for the nine months ended September 30, 2009, compared to negative 7.6% for the same period in 2008. Diluted book value per common share increased 18.2% from $22.46 at December 31, 2008 to $26.54 at September 30, 2009. Diluted book value per common share is computed using the treasury stock method, which assumes that in-the-money options and warrants are exercised and the proceeds received are used to purchase common shares in the market. Under this method diluted common shares outstanding were 58,272,865 and 57,017,157 at September 30, 2009 and December 31, 2008, respectively.

Following the termination of the amalgamation agreement with IPC on June 12, 2009, and as a result of IPC entering into an Agreement and Plan of Amalgamation with another company on July 9, 2009, the Company received a termination fee of $50.0 million from IPC. This fee was received on July 9, 2009 and is reflected in our results for the three months ended September 30, 2009, net of $8.6 million of expenses.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles, which require management to make estimates and assumptions. We have performed a current assessment of our critical accounting policies in connection with preparing our interim unaudited consolidated financial statements as of and for the nine months ended September 30, 2009. We believe that the critical accounting policies set forth in our Form 10-K for the year ended December 31, 2008 continue to describe the more significant judgments and estimates used in the preparation of our consolidated financial statements. These accounting policies pertain to revenue recognition, loss and benefit expenses and investment valuation. If actual events differ significantly from the underlying judgments or estimates used by management in the application of these accounting policies, there could be a material adverse effect on our results of operations and financial condition.

Other-Than-Temporary Impairment

Our critical accounting policy pertaining to the assessment of other-than-temporary impairments was updated as at April 1, 2009 in accordance with new accounting standards. Our updated policy requires that an other-than-temporary impairment, or OTTI, related to a credit loss is recognized in earnings, and the amount of the OTTI related to other factors (e.g. interest rates, market conditions, etc.) is recorded as a component of other comprehensive income. If no credit loss exists but either: (a) an entity has the intent to sell the debt security or (b) it is more likely than not that the entity will be required to sell the debt security before its anticipated recovery, the entire unrealized loss is recognized in earnings. In periods after the recognition of an OTTI on debt securities, we account for such securities as if they had been purchased on the measurement date of the OTTI at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings.

The Company reviews all securities at the end of the period and identifies those which it either has the intention to sell or it is more likely than not that the Company will be required to sell. All such securities identified which are also in an unrealized loss position will have an OTTI charge (being the difference between the amortized cost and the fair value of the security) recognized in net income. The Company considers its liquidity and working capital needs in the determination whether it is not more likely than not

that it will be required to sell any securities. The Company also performs a review of debt securities which considers various indicators of potential credit losses. These indicators include the length of time and extent of the unrealized loss, any specific adverse conditions, historic and implied volatility of the security, failure of the issuer of the security to make scheduled interest payments, expected cash flow analysis, significant rating changes and recoveries or additional declines in fair value subsequent to the balance sheet date. The consideration of these indicators and the estimation of credit losses involve significant management judgment.

Results of Operations

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

• Bermuda/Dublin insurance - This segment offers property and casualty excess of loss capacity from our Bermuda and Dublin offices on specific risks related to individual insureds.

• Bermuda/Dublin reinsurance - This segment offers property and casualty quota share and excess of loss capacity from our Bermuda and Dublin offices, providing coverage for underlying risks written by our clients.

• U.S. specialty - This segment offers property and casualty coverage from offices in the United States on specific risks related to individual insureds.

• Max at Lloyd's - This segment offers property and casualty quota share and excess of loss capacity from our London and Copenhagen offices. This segment comprises our proportionate share of the underwriting results of the Syndicates, and the results of our managing agent, Max at Lloyd's.

• Life and annuity reinsurance - This segment operates out of Bermuda only and offers reinsurance products focusing on existing blocks of life and annuity business, which take the form of co-insurance transactions whereby the risks are reinsured on the same basis as the original policies.

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

Each of the U.S. specialty and the Max at Lloyd's segments has its own portfolio of fixed maturities investments. The investment income earned by each of these segments is reported in their respective segments.

In contrast, invested assets relating to the Bermuda/Dublin reinsurance, Bermuda/Dublin insurance and life and annuity segments are managed on an aggregated basis. Consequently, investment income on this consolidated portfolio and gains on the hedge fund portfolio are not directly captured in any one of these segments. However, because of the longer duration of liabilities on casualty insurance and reinsurance business (as compared to property), and life and annuity reinsurance business, investment returns are important in evaluating the profitability of these segments. Accordingly, we allocate investment returns from the consolidated portfolio to each of these three segments. This is based on a notional allocation of invested assets from the consolidated portfolio using durations that are determined based on estimated cash flows into and out of each segment. The balance of investment returns from this consolidated portfolio is allocated to our corporate function for the purposes of segment reporting. The overall performance of our fixed maturities portfolio and hedge fund portfolio is discussed within the corporate function results of operations.

Three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2008

Results of Underwriting Operations

Bermuda/Dublin Insurance Segment



                                    Three Months                              Three Months             Nine Months                               Nine Months
                                        Ended                                     Ended                   Ended                                     Ended
                                    September 30,                             September 30,           September 30,                             September 30,
                                        2009               % change               2008                    2009               % change               2008
Gross premiums written             $          81.1              0.2 %        $          80.9         $         302.7              9.6 %        $         276.3
Reinsurance premiums ceded                   (41.9 )            9.4 %                  (38.3 )                (146.1 )            9.8 %                 (133.1 )

Net premiums written               $          39.2             (8.0 )%       $          42.6         $         156.6              9.4 %        $         143.2

Net premiums earned(a)             $          49.1              6.0 %        $          46.3         $         150.0              9.4 %        $         137.1
Net investment income                          5.9             20.4 %                    4.9                    16.9             27.1 %                   13.3
Net gains (losses) on other
investments                                    1.3              N/A                    (14.9 )                   3.5              N/A                    (13.5 )
Other income                                   0.1              N/A                       -                      1.2              9.1 %                    1.1

Total revenues                                56.4             55.4 %                   36.3                   171.6             24.3 %                  138.0

Net losses and loss
expenses(b)(c)                                31.7            (18.7 )%                  39.0                   106.0             (2.6 )%                 108.8
Acquisition costs(c)                           0.4              N/A                     (0.7 )                  (1.5 )          (21.1 )%                  (1.9 )
General and administrative
expenses(c)                                    7.3             40.4 %                    5.2                    17.8             10.6 %                   16.1

Total losses and expenses                     39.4             (9.4 )%                  43.5                   122.3             (0.6 )%                 123.0

Income (loss) before taxes         $          17.0              N/A          $          (7.2 )       $          49.3            228.7 %        $          15.0

Loss ratio(b)/(a)                             64.6 %                                    84.4 %                  70.7 %                                    79.4 %
Combined ratio(c)/(a)                         80.2 %                                    94.0 %                  81.6 %                                    89.7 %

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

                                Three Months                       Three Months                        Nine Months                        Nine Months
                                    Ended           % of               Ended           % of               Ended           % of               Ended           % of
                                September 30,      Premium         September 30,      Premium         September 30,      Premium         September 30,      Premium
                                    2009           Written             2008           Written             2009           Written             2008           Written
Gross Premiums Written by
Type of Risk:
Aviation                                  13.5        16.6 %                  9.1        11.2 %                 30.3        10.0 %                 21.9         7.9 %
Excess liability                          19.1        23.6 %                 20.8        25.7 %                 87.1        28.8 %                 96.5        34.9 %
Professional liability                    39.1        48.2 %                 42.8        53.0 %                134.8        44.5 %                116.6        42.2 %
Property                                   9.4        11.6 %                  8.2        10.1 %                 50.5        16.7 %                 41.3        15.0 %

                               $          81.1       100.0 %      $          80.9       100.0 %      $         302.7       100.0 %      $         276.3       100.0 %

The combined ratio was 80.2% and 81.6%, respectively for the three and nine months ended September 30, 2009 compared to 94.0% and 89.7% respectively for the same periods in 2008. The combined ratio for both the three and nine months ended September 30, 2009 decreased primarily due to decreases in the loss ratio.

The loss ratio decreased over the comparative periods by 19.8 and 8.7 percentage points for the three and nine months ended September 30, 2009, respectively. Significant items impacting the loss ratio were:

• Net favorable loss development of prior year reserves in the three and nine month periods ended September 30, 2009 of $11.0 million and $26.4 million, respectively, compared to $8.3 million and $10.0 million in the comparable prior year periods.

• Excluding the net favorable loss development, the loss ratio is 87.0% and 88.3% for the current year three and nine month periods and 102.3% and 86.6% for the 2008 comparable periods.

• The development in the three and nine months ended September 30, 2009 was evenly spread across our professional liability, aviation and excess liability lines of business.

• The three and nine months ended September 30, 2008 included $11.5 million in catastrophe-related and property per-risk losses compared to no significant catastrophe losses in the corresponding 2009 periods.

Gross premiums written for the three and nine months ended September 30, 2009 increased by 0.2% and 9.6% respectively compared to the same periods in 2008. Our gross premium written volume is ahead of plan for the nine months ended September 30, 2009. The increase in premiums has principally been in our professional liability, aviation and property lines, where we have seen favorable market pricing and reduced market capacity, particularly in professional liability. In the excess liability line of business we are seeing a more competitive pricing environment with additional capacity entering the market place. As a result we have been more selective in our excess liability renewals, focusing on business that meets our rate of return requirements.

The ratio of reinsurance premiums ceded to gross premiums written for the three and nine month periods ended September 30, 2009 was 51.6% and 48.3% respectively as compared to 47.3% and 48.2% respectively in the comparable prior year periods. Reinsurance premiums ceded are principally related to our quota share treaties and tend to fluctuate in line with gross premiums written. The increase in the percentage of reinsurance premiums ceded is principally due to changes in the mix of business, specifically the increase in professional liability business written in comparison to prior periods.

General and administration expenses for the three and nine months ended September 30, 2009 increased $2.1 million and $1.7 million compared to the same periods in 2008. The improvement in the segment's income before taxes for both 2009 periods compared to the corresponding 2008 periods resulted in increased incentive based compensation for the 2009 periods. The nine months ended September 30, 2009 also includes a higher level of infrastructure and maintenance costs related to information technology, compared to the comparable 2008 period.

Net investment income and net gains on other investments are discussed within the corporate function results of operations as we manage investments for this segment on a consolidated basis with the Bermuda/Dublin reinsurance and life and annuity reinsurance segments.

Bermuda/Dublin Reinsurance Segment



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