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UNITEDSTATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM10-Q

|        |                                                                                            |
|--------|--------------------------------------------------------------------------------------------|
|   | **QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

For the quarterly period ended March 31, 2005

|        |                                                                                         |
|--------|-----------------------------------------------------------------------------------------|
|   | TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |

For thetransition period from                      to                    

Commission file number000-50885

QUANTA CAPITAL HOLDINGS LTD.

(Exact name of registrant as specified in itscharter)

|                                                                                                       |  |                                     |  |  |  |  |
|-------------------------------------------------------------------------------------------------------|--|-------------------------------------|--|--|--|--|
| **Bermuda**                                                                                           |  | **N/A**                             |
| (Stateor other jurisdiction of incorporation ororganization)                                          |  | (I.R.S. Employer IdentificationNo.) |
|                                                                                                  |  |                                |
| 1 VictoriaStreet, Fourth FloorHamilton HM11Bermuda(Address ofprincipal executive offices and zipcode) |
| 441-294-6350(Registrant'stelephone number, including area code)                                       |
|                                                                                                       |

Indicate bycheck mark whether the registrant (1) has filed all reports required tobe filed by Section  13 or 15(d)  of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90  days. Yes       No   

Indicateby check mark whether the registrant is an accelerated filer (asdefined in Exchange Act Rule 12b-2).Yes       No   

As of May 5, 2005 therewere 56,798,218 common shares, $0.01 par value per share,outstanding.

    

|  |
|--|
|  |
|  |
|  |
|  |

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QUANTA CAPITALHOLDINGS LTD.

INDEX TO FORM 10-Q

|         |  |                                                                                                                                            |  |         |        |        |  |  |  |  |
|---------|--|--------------------------------------------------------------------------------------------------------------------------------------------|--|---------|--------|--------|--|--|--|--|
|    |  |                                                                                                                                       |  | PageNo. |
| PARTI.  |  | FINANCIALINFORMATION                                                                                                                       |  |    |   |   |
| Item 1  |  | FinancialStatements                                                                                                                        |  |    |   |   |
|    |  | Condensed ConsolidatedBalance Sheets at March 31, 2005 (unaudited) and December 31,2004                                                    |  |    | 3      |   |
|    |  | Unaudited CondensedConsolidated Statements of Operations and Comprehensive (Loss) Incomefor the three months ended March 31, 2005 and 2004 |  |    | 4      |   |
|    |  | Unaudited Condensed Consolidated Statements ofChanges in Shareholders' Equity for the three months ended March31, 2005 and 2004            |  |    | 5      |   |
|    |  | UnauditedCondensed Consolidated Statements of Cash Flows for the three monthsended March 31, 2005 and 2004                                 |  |    | 6      |   |
|    |  | Notes to the Unaudited Condensed ConsolidatedFinancial Statements                                                                          |  |    | 7      |   |
| Item2   |  | Management's Discussion and Analysis of FinancialCondition and Results of Operations                                                       |  |    | 18     |   |
| Item3   |  | Quantitative and Qualitative Disclosures about MarketRisk                                                                                  |  |    | 40     |   |
| Item 4  |  | Controls andProcedures                                                                                                                     |  |    | 42     |   |
| PARTII. |  | OTHERINFORMATION                                                                                                                           |  |    |   |   |
| Item 1  |  | LegalProceedings                                                                                                                           |  |    | 44     |   |
| Item 2  |  | UnregisteredSales of Equity Securities and Use of Proceeds                                                                                 |  |    | 44     |   |
| Item6   |  | Exhibits                                                                                                                                   |  |    | 44     |   |
|         |

2

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|              |                       |
|--------------|-----------------------|
| PART1.  | FINANCIAL INFORMATION |

|              |                      |
|--------------|----------------------|
| ITEM1.  | FINANCIAL STATEMENTS |

QUANTA CAPITALHOLDINGS LTD.CONDENSED CONSOLIDATED BALANCE SHEETS(Expressedin thousands of U.S. dollars except for share and per shareamounts)

|                                                                                                                          |  |              |           |                 |  |        |         |         |  |  |
|--------------------------------------------------------------------------------------------------------------------------|--|--------------|-----------|-----------------|--|--------|---------|---------|--|--|
|                                                                                                                     |  | March31,2005 |           | December31,2004 |
|                                                                                                                     |  | (unaudited)  |           |            |
| **Assets**                                                                                                               |  |
| Investmentsat fair value (amortized cost: March 31, 2005, $657,881; December31, 2004,$600,161)                           |  |         |      |            |  |   |    |    |
| Available for saleinvestments                                                                                            |  | $            | 611,019   |            |  | $      | 559,430 |    |
| Tradinginvestments related to depositliabilities                                                                         |  |         | 39,633    |            |  |   | 40,492  |    |
| Totalinvestments at fairvalue                                                                                            |  |         | 650,652   |            |  |   | 599,922 |    |
| Cash and cashequivalents                                                                                                 |  |         | 52,985    |            |  |   | 32,775  |    |
| Restrictedcash and cashequivalents                                                                                       |  |         | 53,441    |            |  |   | 42,482  |    |
| Accruedinvestmentincome                                                                                                  |  |         | 4,513     |            |  |   | 4,719   |    |
| Premiumsreceivable                                                                                                       |  |         | 187,609   |            |  |   | 146,784 |    |
| Lossesand loss adjustment expensesrecoverable                                                                            |  |         | 24,874    |            |  |   | 13,519  |    |
| Otheraccountsreceivable                                                                                                  |  |         | 9,424     |            |  |   | 11,575  |    |
| Deferredacquisition costs,net                                                                                            |  |         | 46,285    |            |  |   | 41,496  |    |
| Deferredreinsurancepremiums                                                                                              |  |         | 57,445    |            |  |   | 47,416  |    |
| Property andequipment, net of accumulated depreciation of $2,282 (December 31,2004: $1,625)                              |  |         | 5,391     |            |  |   | 4,875   |    |
| Goodwilland other intangibleassets                                                                                       |  |         | 20,432    |            |  |   | 20,617  |    |
| Otherassets                                                                                                              |  |         | 25,402    |            |  |   | 14,553  |    |
| Totalassets                                                                                                              |  | $            | 1,138,453 |            |  | $      | 980,733 |    |
| **Liabilities**                                                                                                          |  |         |      |            |  |   |    |    |
| Reservefor losses and lossexpenses                                                                                       |  | $            | 215,403   |            |  | $      | 159,794 |    |
| Unearnedpremiums                                                                                                         |  |         | 309,356   |            |  |   | 247,936 |    |
| Environmentalliabilitiesassumed                                                                                          |  |         | 6,406     |            |  |   | 6,518   |    |
| Reinsurancebalancespayable                                                                                               |  |         | 26,540    |            |  |   | 24,929  |    |
| Accountspayable and accruedexpenses                                                                                      |  |         | 14,986    |            |  |   | 17,360  |    |
| Net payablefor investmentspurchased                                                                                      |  |         | 32,128    |            |  |   | 3,749   |    |
| Depositliabilities                                                                                                       |  |         | 42,676    |            |  |   | 43,365  |    |
| Deferredincome and otherliabilities                                                                                      |  |         | 4,089     |            |  |   | 4,935   |    |
| Juniorsubordinateddebentures                                                                                             |  |         | 61,857    |            |  |   | 41,238  |    |
| Totalliabilities                                                                                                         |  | $            | 713,441   |            |  | $      | 549,824 |    |
| Commitmentsand contingencies (Note8)                                                                                     |  |         |      |            |  |   |    |    |
| **Shareholders'equity**                                                                                                  |  |         |      |            |  |   |    |    |
| Preferredshares                                                                                                          |  |
| ($0.01 par value; 25,000,000 sharesauthorized; none issued and outstanding at March 31, 2005 and December31,2004)        |  | $            | —   |            |  | $      | — |    |
| Commonshares                                                                                                             |  |
| ($0.01 par value; 200,000,000 sharesauthorized; 56,798,218 issued and outstanding at March 31, 2005 andDecember 31,2004) |  |         | 568       |            |  |   | 568     |    |
| Additional paid-incapital                                                                                                |  |         | 523,771   |            |  |   | 523,771 |    |
| Accumulateddeficit                                                                                                       |  |         | (91,670   | )          |  |   | (93,058 | )  |
| Accumulatedother comprehensiveloss                                                                                       |  |         | (7,657    | )          |  |   | (372    | )  |
| Totalshareholders'equity                                                                                                 |  | $            | 425,012   |            |  | $      | 430,909 |    |
| **Totalliabilities and shareholders'equity**                                                                             |  | $            | 1,138,453 |            |  | $      | 980,733 |    |
|                                                                                                                          |

Theaccompanying notes are an integral part of these unaudited condensedconsolidated financial statements

3

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QUANTA CAPITAL HOLDINGS LTD. UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVELOSS(Expressed in thousands of U.S. dollars except for shareand per shareamounts)

|                                                                                                                |  |                                          |            |                                         |  |        |            |         |  |  |
|----------------------------------------------------------------------------------------------------------------|--|------------------------------------------|------------|-----------------------------------------|--|--------|------------|---------|--|--|
|                                                                                                           |  | Forthe three months ended March 31, 2005 |            | For the threemonths ended March 31,2004 |
| **Revenues**                                                                                                   |  |
| Grosspremiumswritten                                                                                           |  | $                                        | 172,726    |                                    |  | $      | 118,729    |    |
| Netpremiumswritten                                                                                             |  | $                                        | 142,877    |                                    |  | $      | 112,455    |    |
| Change innet unearnedpremiums                                                                                  |  |                                     | (51,391    | )                                  |  |   | (85,220    | )  |
| Netpremiumsearned                                                                                              |  |                                     | 91,486     |                                    |  |   | 27,235     |    |
| Technicalservices revenues                                                                                     |  |                                     | 7,150      |                                    |  |   | 6,507      |    |
| Netinvestment income                                                                                           |  |                                     | 5,225      |                                    |  |   | 3,235      |    |
| Netrealized (losses) gains oninvestments                                                                       |  |                                     | (483       | )                                  |  |   | 1,195      |    |
| Net foreignexchange (losses)gains                                                                              |  |                                     | (112       | )                                  |  |   | 224        |    |
| Otherincome                                                                                                    |  |                                     | 1,686      |                                    |  |   | 191        |    |
| Totalrevenues                                                                                                  |  |                                     | 104,952    |                                    |  |   | 38,587     |    |
| **Expenses**                                                                                                   |  |
| Netlosses and lossexpenses                                                                                     |  |                                     | 57,496     |                                    |  |   | 15,895     |    |
| Acquisitionexpenses                                                                                            |  |                                     | 18,445     |                                    |  |   | 6,617      |    |
| Directtechnical servicescosts                                                                                  |  |                                     | 4,861      |                                    |  |   | 4,384      |    |
| General andadministrativeexpenses                                                                              |  |                                     | 20,871     |                                    |  |   | 15,829     |    |
| Interestexpense                                                                                                |  |                                     | 826        |                                    |  |   | —    |    |
| Depreciation offixed assets and amortization of intangibleassets                                               |  |                                     | 842        |                                    |  |   | 387        |    |
| Totalexpenses                                                                                                  |  |                                     | 103,341    |                                    |  |   | 43,112     |    |
| Income(loss) before incometaxes                                                                                |  |                                     | 1,611      |                                    |  |   | (4,525     | )  |
| Income taxexpense                                                                                              |  |                                     | 223        |                                    |  |   | —    |    |
| **Netincome(loss)**                                                                                            |  |                                     | 1,388      |                                    |  |   | (4,525     | )  |
| **Othercomprehensive (loss) income**                                                                           |  |
| Net unrealizedinvestment (losses) gains arising during the period, net of incometaxes                          |  |                                     | (7,763     | )                                  |  |   | 3,962      |    |
| Foreign currencytranslationadjustments                                                                         |  |                                     | (5         | )                                  |  |   | (13        | )  |
| Reclassificationof net realized losses (gains) on investments included in net income(loss), net of incometaxes |  |                                     | 483        |                                    |  |   | (1,195     | )  |
| Othercomprehensive (loss)income                                                                                |  |                                     | (7,285     | )                                  |  |   | 2,754      |    |
| **Comprehensiveloss**                                                                                          |  | $                                        | (5,897     | )                                  |  | $      | (1,771     | )  |
|                                                                                                           |  |                                     |       |                                    |  |   |       |    |
| Weightedaverage common share and common share equivalents –basic                                         |  |                                     | 56,798,218 |                                    |  |   | 56,798,218 |    |
| diluted                                                                                                        |  |                                     | 56,798,916 |                                    |  |   | 56,798,218 |    |
| Basicincome (loss) pershare                                                                                    |  | $                                        | 0.02       |                                    |  | $      | (0.08      | )  |
| Diluted income(loss) pershare                                                                                  |  | $                                        | 0.02       |                                    |  | $      | (0.08      | )  |
|                                                                                                                |

Theaccompanying notes are an integral part of these unaudited condensedconsolidated financialstatements

4

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QUANTACAPITAL HOLDINGS LTD. UNAUDITED CONDENSED CONSOLIDATED STATEMENTSOF CHANGES IN SHAREHOLDERS' EQUITY(Expressed in thousandsof U.S. dollars except for share and per shareamounts)

|                                                                  |  |                                         |         |                                         |  |        |         |         |  |  |
|------------------------------------------------------------------|--|-----------------------------------------|---------|-----------------------------------------|--|--------|---------|---------|--|--|
|                                                             |  | Forthe three months endedMarch 31, 2005 |         | For the threemonths ended March 31,2004 |
|                                                             |  |                                    |    |                                    |  |   |    |    |
| **Sharecapital – preferred shares of par value $0.01each** |  | $                                       | — |                                    |  | $      | — |    |
| **Sharecapital – common shares of par value $0.01each**    |  |                                    |    |                                    |  |   |    |    |
| Balance at beginning ofperiod                                    |  |                                    | 568     |                                    |  |   | 568     |    |
| Issued duringperiod                                              |  |                                    | — |                                    |  |   | — |    |
| Balanceat end ofperiod                                           |  |                                    | 568     |                                    |  |   | 568     |    |
| **Additionalpaid-in capital**                                    |  |                                    |    |                                    |  |   |    |    |
| Balance atbeginning ofperiod                                     |  |                                    | 523,771 |                                    |  |   | 524,235 |    |
| Net offeringcosts                                                |  |                                    | — |                                    |  |   | (32     | )  |
| Balanceat end ofperiod                                           |  |                                    | 523,771 |                                    |  |   | 524,203 |    |
| **Accumulateddeficit**                                           |  |                                    |    |                                    |  |   |    |    |
| Balance at beginningof period                                    |  |                                    | (93,058 | )                                  |  |   | (38,477 | )  |
| Netincome (loss) forperiod                                       |  |                                    | 1,388   |                                    |  |   | (4,525  | )  |
| Balanceat end ofperiod                                           |  |                                    | (91,670 | )                                  |  |   | (43,002 | )  |
| **Accumulatedother comprehensive (loss)income**                  |  |                                    |    |                                    |  |   |    |    |
| Balance at beginning ofperiod                                    |  |                                    | (372    | )                                  |  |   | 1,157   |    |
| Net change inunrealized losses on investments, net oftax         |  |                                    | (7,280  | )                                  |  |   | 2,767   |    |
| Foreign currencytranslationadjustments                           |  |                                    | (5      | )                                  |  |   | (13     | )  |
| Balanceat end ofperiod                                           |  |                                    | (7,657  | )                                  |  |   | 3,911   |    |
| **Totalshareholders'equity**                                     |  | $                                       | 425,012 |                                    |  | $      | 485,680 |    |
|                                                                  |

Theaccompanying notes are an integral part of these unaudited condensedconsolidated financial statements

5

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QUANTA CAPITAL HOLDINGS LTD. UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Expressed inthousands of U.S.dollars)

|                                                                                                    |  |                                          |          |                                          |  |        |          |         |  |  |
|----------------------------------------------------------------------------------------------------|--|------------------------------------------|----------|------------------------------------------|--|--------|----------|---------|--|--|
|                                                                                               |  | Forthe three months ended March 31, 2005 |          | For the threemonths ended March 31, 2004 |
| **Cashflows from operatingactivities**                                                             |  |                                     |     |                                     |  |   |     |    |
| Net income(loss)                                                                                   |  | $                                        | 1,388    |                                     |  | $      | (4,525   | )  |
| **Adjustmentsto reconcile net income (loss) to net cash provided by (used in)operatingactivities** |  |                                     |     |                                     |  |   |     |    |
| Depreciationof property andequipment                                                               |  |                                     | 657      |                                     |  |   | 202      |    |
| Amortizationof intangibleassets                                                                    |  |                                     | 185      |                                     |  |   | 185      |    |
| Amortization ofdiscounts oninvestments                                                             |  |                                     | 375      |                                     |  |   | 924      |    |
| Netrealized losses (gains) oninvestments                                                           |  |                                     | 483      |                                     |  |   | (1,195   | )  |
| Netchange in fair value of derivativeinstruments                                                   |  |                                     | (470     | )                                   |  |   | 50       |    |
| Changesin assets andliabilities:                                                                   |  |                                     |     |                                     |  |   |     |    |
| Restricted cashand cashequivalents                                                                 |  |                                     | (10,959  | )                                   |  |   | (13,043  | )  |
| Accruedinvestmentincome                                                                            |  |                                     | 206      |                                     |  |   | (1,189   | )  |
| Premiumsreceivable                                                                                 |  |                                     | (40,825  | )                                   |  |   | (72,012  | )  |
| Lossesand loss adjustment expensesrecoverable                                                      |  |                                     | (11,355  | )                                   |  |   | (153     | )  |
| Deferredacquisitioncosts                                                                           |  |                                     | (4,789   | )                                   |  |   | (16,862  | )  |
| Deferredreinsurancepremiums                                                                        |  |                                     | (10,029  | )                                   |  |   | (5,776   | )  |
| Otheraccountsreceivable                                                                            |  |                                     | 2,151    |                                     |  |   | 1,341    |    |
| Otherassets                                                                                        |  |                                     | (9,820   | )                                   |  |   | 569      |    |
| Reserve forlosses and loss adjustmentexpenses                                                      |  |                                     | 55,609   |                                     |  |   | 16,048   |    |
| Unearnedpremiums                                                                                   |  |                                     | 61,420   |                                     |  |   | 90,942   |    |
| Environmentalliabilitiesassumed                                                                    |  |                                     | (112     | )                                   |  |   | (150     | )  |
| Reinsurancebalancespayable                                                                         |  |                                     | 1,611    |                                     |  |   | 4,943    |    |
| Accountspayable and accruedexpenses                                                                |  |                                     | (2,374   | )                                   |  |   | (7,740   | )  |
| Deferredincome and otherliabilities                                                                |  |                                     | (846     | )                                   |  |   | 2,383    |    |
| Depositliabilities                                                                                 |  |                                     | (689     | )                                   |  |   | —  |    |
| Netcash provided by (used in) operatingactivities                                                  |  |                                     | 31,817   |                                     |  |   | (5,058   | )  |
| **Cashflows used in investingactivities**                                                          |  |                                     |     |                                     |  |   |     |    |
| Proceeds from saleof fixed maturities and short-terminvestments                                    |  |                                     | 288,978  |                                     |  |   | 281,584  |    |
| Purchasesof fixed maturities and short-terminvestments                                             |  |                                     | (319,003 | )                                   |  |   | (293,619 | )  |
| Purchasesof property andequipment                                                                  |  |                                     | (1,173   | )                                   |  |   | (829     | )  |
| Netcash used in investingactivities                                                                |  |                                     | (31,198  | )                                   |  |   | (12,864  | )  |
| **Cashflows used in financingactivities**                                                          |  |                                     |     |                                     |  |   |     |    |
| Net offeringcosts                                                                                  |  |                                     | —  |                                     |  |   | (32      | )  |
| Proceeds fromjunior subordinated debentures, net of issuancecosts                                  |  |                                     | 19,591   |                                     |  |   | —  |    |
| Netcash provided by (used in) financingactivities                                                  |  |                                     | 19,591   |                                     |  |   | (32      | )  |
| Increase(decrease) in cash and cashequivalents                                                     |  |                                     | 20,210   |                                     |  |   | (17,954  | )  |
| Cash andcash equivalents at beginning ofperiod                                                     |  |                                     | 32,775   |                                     |  |   | 36,694   |    |
| Cashand cash equivalents at end ofperiod                                                           |  | $                                        | 52,985   |                                     |  | $      | 18,740   |    |
|                                                                                                    |

Theaccompanying notes are an integral part of these unaudited condensedconsolidated financialstatements

6

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed inthousands of US dollars except for share and per shareamounts)

1.    Description of business andbasis of presentation

Quanta Capital Holdings Ltd.("Quanta Holdings"), incorporated on May 23,2003, is a holding company organized under the laws of Bermuda. QuantaHoldings and its subsidiaries, collectively referred to as the"Company," were formed to provide specialtyinsurance, reinsurance, risk assessment and risk technical services andproducts on a global basis. Quanta Holdings conducts its insurance andreinsurance operations principally through subsidiaries operating inBermuda, the United States of America and Europe.

On February22, 2005 the Company announced the opening of a London insurance branchfollowing the receipt, by Quanta Europe, of approval to establish thisbranch office. The branch office underwrites specialty insurance linesincluding environmental liability, professional liability, financialinstitutions and trade and political risk.

Interim financialinformation

These unaudited condensed consolidated financialstatements include the accounts of the Company and have been preparedin conformity with generally accepted accounting principles in theUnited States of America ("GAAP") for interimfinancial information and with the instructions for Form 10-Q andArticle 10 of Regulation S-X. Accordingly, certain information andfootnote disclosures normally included in financial statements preparedin accordance with GAAP have been condensed, or omitted, pursuant tothe rules and regulations of the Securities and Exchange Commission(the "SEC"). In the opinion of management,the condensed consolidated financial statements include all adjustmentsnecessary (consisting of only normal and recurring accruals) for a fairstatement of the financial position and results of operations as at theend of and for the interim periods presented. The results of operationsfor any interim period are not necessarily indicative of the resultsthat may be expected for any other interim period or for a full year.All significant inter-company balances and transactions have beeneliminated on consolidation.

These unaudited condensedconsolidated financial statements should be read in conjunction withthe Company's audited consolidated financial statements for theyear ended December 31, 2004, included in the Form 10-K filed by theCompany with the SEC on March 30, 2005.

The preparation offinancial statements in conformity with GAAP requires management tomake estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets andliabilities reported at the date of the unaudited condensedconsolidated financial statements and the reported amounts of revenuesand expenses during the reporting period. While management believes theamounts included in the unaudited condensed consolidated financialstatements reflect management's best estimates and assumptions,the actual results could ultimately be materially different from theamounts currently provided for in the unaudited condensed consolidatedfinancial statements. The Company's principal estimates andassumptions relate to the development and determination of thefollowing:

|              |                                                  |
|--------------|--------------------------------------------------|
| •  | reserves for losses and lossadjustment expenses; |

|              |                                                                      |
|--------------|----------------------------------------------------------------------|
| •  | certainestimated premiums written, unearned premiums andreceivables; |

|              |                                  |
|--------------|----------------------------------|
| •  | reinsurancebalances recoverable; |

|              |                                                |
|--------------|------------------------------------------------|
| •  | thevaluation of goodwill and intangibleassets; |

|              |                                   |
|--------------|-----------------------------------|
| •  | environmentalliabilities assumed; |

|              |                       |
|--------------|-----------------------|
| •  | investmentvaluations; |

|              |                                      |
|--------------|--------------------------------------|
| •  | annual incentiveplan provisions; and |

|              |                                       |
|--------------|---------------------------------------|
| •  | deferredincome taxes and liabilities. |

7

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed inthousands of US dollars except for share and per shareamounts)

During the three months ended September 30,2004, the Company renamed its consulting segment as the technicalservices segment. Accordingly, the consulting revenues and directconsulting costs captions in the income statement, previously includedin the Company's Form 10-Q for the three months ended March 31,2004, have been renamed technical service revenues and direct technicalservice costs.

2.    Significant accounting policies

A detailed discussion and analysis of the Company'ssignificant accounting policies is provided in the notes to theCompany's audited consolidated financial statements as of and forthe year ended December 31, 2004 included in its Form 10-K.

Non-Traditional Contracts

TheCompany writes non-traditional contracts of insurance and reinsurance.The Company may account for these transactions as deposits held onbehalf of clients instead of as insurance and reinsurance premiums, asappropriate. Under the deposit method of accounting, revenues andexpenses from insurance and reinsurance contracts are not recognized aswritten premium and incurred losses. Instead, amounts from thesecontracts are recognized as other income or investment income over theexpected contract or service period.

During the first quarter of2005, the Company recognized in other income $1.0 million  offees and revenues relating to non-traditional contracts which wereaccounted for using the deposit method. If these contracts transferredrisk as determined by Statement of Financial Accounting Standards("SFAS") No. 113 "Accountingand Reporting for Reinsurance of Short-Duration and Long-DurationContracts", gross premium relating to these contractswould total approximately  $28 million in the firstquarter  of 2005.

Of the $1.0 million, $0.2 million ofthis other income relates to fees earned from a surplus relief lifereinsurance arrangement with a U.S. insurance company which meets theCompany's definition of a non-traditional contract.   Inthe fourth quarter  of 2004, under this contract the Company madean arrangement with a client and assumed, through novation agreements,several life reinsurance contracts it had made. Because the Companyassumed these contracts, the client, which is subject to insuranceregulation in the United States and therefore is required to maintain acertain amount of statutory capital, may reduce its statutory capitalrequirements. In exchange for the Company's assumption of thecontracts it received a fee. The arrangement, among other things, alsoprovides that on certain dates and during specific periods, the clienthas the right but not the obligation to recapture the life reinsurancecontracts the Company has assumed, provided that the underlying cedantsdo not reasonably withhold their consent to this recapture.   TheCompany believes that its client is economically incentivized toexercise the recapture provision in the future, as the amount ofstatutory relief that its client receives from its regulator over theperiod of this contract reduces over time.

The Company believesthe arrangement, including the client's option to recapture, andthe assumption of the life insurance contracts constitute one contractwith minimal mortality, credit or other insurance or economic riskwhich results in deposit accounting. Although the Company believes itsclient will exercise the recapture, it is not assured  that thiswill be the case.   If the Company's client does notrecapture the underlying insurance contracts in the future, the Companymay be viewed as having had the risks described above and, as a result,the Company could become the life reinsurer and may be required toaccount for some or all of the underlying insurance contracts as lifeinsurance, recognizing life premiums written and life benefit reservesin the consolidated statement of operations. With respect to thisparticular arrangement, at this time, the Company believes that thegross life reinsurance premiums written, of approximately $5.6 million,that would have been recognized had 

8

----

QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed inthousands of US dollars except for share and per shareamounts)

deposit accounting not been appropriate, wouldnot have had a material effect on the Company's financialposition and results of operations. However, as the underlying lifeinsurance contracts mature the effect on the Company's financialcondition and results of operations may become material.

Theremaining $0.8 million of the $1.0 million of other income relates torevenues earned from three reinsurance contracts accounted for asdeposits. Although these contracts did possess some underwriting andtiming risks as prescribed by SFAS No. 113, the Company does notbelieve it is exposed to a reasonable possibility of significantloss.

3.    Recent accounting pronouncements

In March2004, the Financial Accounting Standards Board's("FASB") Emerging Issues Task Force("EITF") reached a consensus on EITF issue03-01, "The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments." EITF 03-01addresses the meaning of the term "other-than-temporaryimpairment" and its application to the Company'sinvestments in debt and equity securities. On September 30, 2004, theFASB issued FASB Staff Position EITF 03-1-1 which delayed the effectivedate for the measurement and recognition guidance contained in EITF03-01.

This delay does not suspend the requirement to recognizeother than temporary impairments as required by existing authoritativeliterature. During the three months ended March 31, 2005, the Companydid not identify any securities with declines in value that wereconsidered to be other-than-temporary. The Company anticipates that theadoption of the new evaluation guidance of EITF 03-01 will not have amaterial effect on the Company's consolidated results ofoperations, financial position or cash flows.

In December 2004,the FASB issued Statement of Financial Accounting Standards("SFAS") No.  123 (revised 2004)"Share-based payment"("SFAS 123(R)"). SFAS 123(R) replaces SFASNo. 123, "Accounting for Stock-BasedCompensation" ("SFAS 123")and supersedes Accounting Principles Board Opinion No. 25,"Accounting for Stock Issued toEmployees" and related interpretations("APB 25"). Generally, the approach in SFAS123(R) is similar to SFAS 123, however, SFAS 123(R) requires allshare-based payments to employees, including grants of employee stockoptions, to be recognized in the consolidated financial statementsbased on their fair values and, accordingly, SFAS 123(R) does not allowpro forma disclosure as an alternative to financial statementrecognition. SFAS 123(R) is effective for the beginning of the firstannual period beginning after June 15, 2005. The Company is currentlyevaluating the effects of this statement on its financialreporting.

In March 2005, the Staff of the SEC issued StaffAccounting Bulletin No. 107 ("SAB 107")providing guidance on SFAS 123(R). SAB 107 was issued to assist issuersin their initial implementation of FAS 123(R) and enhance theinformation received by investors and other users of the financialstatements. The Company is evaluating the impact that the guidance inSAB 107 will have on its financial reporting.

9

----

QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed inthousands of US dollars except for share and per shareamounts)

4.    Segment information

Thefollowing tables summarize the Company's results before incometaxes for each reportable segment for the three months ended March 31,2005 and 2004 based on the reportable segments in effect during theyear ended December 31, 2004.

|                                                            |  |                                  |         |                      |  |         |         |                   |  |                             |         |              |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------------------------|--|----------------------------------|---------|----------------------|--|---------|---------|-------------------|--|-----------------------------|---------|--------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                       |  | Threemonths ended March 31, 2005 |
| Statement ofoperations by segment                          |  | Specialtyinsurance               |         | Specialtyreinsurance |  | Lloyd's |         | Technicalservices |  | Adjustments andeliminations |         | Consolidated |
| Directinsurance                                            |  | $                                | 66,178  |                 |  | $       | — |              |  | $                           | 16,293  |         |  | $      | — |    |  | $      | — |    |  | $      | 82,471  |    |
| Reinsuranceassumed                                         |  |                             | 848     |                 |  |    | 89,407  |              |  |                        | — |         |  |   | — |    |  |   | — |    |  |   | 90,255  |    |
| Totalgross premiumswritten                                 |  |                             | 67,026  |                 |  |    | 89,407  |              |  |                        | 16,293  |         |  |   | — |    |  |   | — |    |  |   | 172,726 |    |
| Premiumsceded                                              |  |                             | (24,930 | )               |  |    | (1,297  | )            |  |                        | (3,622  | )       |  |   | — |    |  |   | — |    |  |   | (29,849 | )  |
| Netpremiumswritten                                         |  | $                                | 42,096  |                 |  | $       | 88,110  |              |  | $                           | 12,671  |         |  | $      | — |    |  | $      | — |    |  | $      | 142,877 |    |
| Netpremiumsearned                                          |  | $                                | 34,540  |                 |  | $       | 53,637  |              |  | $                           | 3,309   |         |  | $      | — |    |  | $      | — |    |  | $      | 91,486  |    |
| Technicalservicesrevenues                                  |  |                             | — |                 |  |    | — |              |  |                        | — |         |  |   | 7,999   |    |  |   | (849    | )  |  |   | 7,150   |    |
| Otherincome                                                |  |                             | 254     |                 |  |    | 790     |              |  |                        | — |         |  |   | 123     |    |  |   | — |    |  |   | 1,167   |    |
| Netlosses and lossexpenses                                 |  |                             | (26,005 | )               |  |    | (29,648 | )            |  |                        | (1,843  | )       |  |   | — |    |  |   | — |    |  |   | (57,496 | )  |
| Directtechnical servicescosts                              |  |                             | — |                 |  |    | — |              |  |                        | — |         |  |   | (4,861  | )  |  |   | — |    |  |   | (4,861  | )  |
| Acquisitionexpenses                                        |  |                             | (6,340  | )               |  |    | (11,772 | )            |  |                        | (333    | )       |  |   | — |    |  |   | — |    |  |   | (18,445 | )  |
| Generaland administrativeexpenses                          |  |                             | (9,465  | )               |  |    | (5,156  | )            |  |                        | (4,560  | )       |  |   | (2,539  | )  |  |   | 849     |    |  |   | (20,871 | )  |
| **Segment(loss)income**                                    |  | $                                | (7,016  | )               |  | $       | 7,851   |              |  | $                           | (3,427  | )       |  | $      | 722     |    |  | $      | — |    |  | $      | (1,870  | )  |
| Depreciation of fixedassets and amortization ofintangibles |  |                             |    |                 |  |    |    |              |  |                        |    |         |  |   |    |    |  |   |    |    |  | $      | (842    | )  |
| Interestexpense                                            |  |                             |    |                 |  |    |    |              |  |                        |    |         |  |   |    |    |  |   |    |    |  |   | (826    | )  |
| Netinvestmentincome                                        |  |                             |    |                 |  |    |    |              |  |                        |    |         |  |   |    |    |  |   |    |    |  |   | 5,225   |    |
| Netrealized losses oninvestments                           |  |                             |    |                 |  |    |    |              |  |                        |    |         |  |   |    |    |  |   |    |    |  |   | (483    | )  |
| Otherincome                                                |  |                             |    |                 |  |    |    |              |  |                        |    |         |  |   |    |    |  |   |    |    |  |   | 519     |    |
| Netforeign exchangelosses                                  |  |                             |    |                 |  |    |    |              |  |                        |    |         |  |   |    |    |  |   |    |    |  |   | (112    | )  |
| **Netincome before incometaxes**                           |  |                             |    |                 |  |    |    |              |  |                        |    |         |  |   |    |    |  |   |    |    |  | $      | 1,611   |    |
|                                                            |

10

----

QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed inthousands of US dollars except for share and per shareamounts)

|                                                            |  |                                  |         |                       |  |                   |         |                             |  |              |         |         |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------------------------|--|----------------------------------|---------|-----------------------|--|-------------------|---------|-----------------------------|--|--------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                       |  | Threemonths ended March 31, 2004 |
| Statement ofoperations by segment                          |  | Specialtyinsurance               |         | Specialty reinsurance |  | Technicalservices |         | Adjustments andeliminations |  | Consolidated |
| Directinsurance                                            |  | $                                | 15,949  |                  |  | $                 | — |                        |  | $            | — |    |  | $      | — |    |  | $      | 15,949  |    |
| Reinsuranceassumed                                         |  |                             | 22,083  |                  |  |              | 80,697  |                        |  |         | — |    |  |   | — |    |  |   | 102,780 |    |
| Totalgross premiumswritten                                 |  |                             | 38,032  |                  |  |              | 80,697  |                        |  |         | — |    |  |   | — |    |  |   | 118,729 |    |
| Premiumsceded                                              |  |                             | (6,274  | )                |  |              | — |                        |  |         | — |    |  |   | — |    |  |   | (6,274  | )  |
| Netpremiumswritten                                         |  | $                                | 31,758  |                  |  | $                 | 80,697  |                        |  | $            | — |    |  | $      | — |    |  | $      | 112,455 |    |
| Netpremiums earned                                         |  | $                                | 4,009   |                  |  | $                 | 23,226  |                        |  | $            | — |    |  | $      | — |    |  | $      | 27,235  |    |
| Technicalservicesrevenues                                  |  |                             | — |                  |  |              | — |                        |  |         | 7,036   |    |  |   | (529    | )  |  |   | 6,507   |    |
| Otherincome                                                |  |                             | — |                  |  |              | — |                        |  |         | 159     |    |  |   | — |    |  |   | 159     |    |
| Netlosses and lossexpenses                                 |  |                             | (2,175  | )                |  |              | (13,720 | )                      |  |         | — |    |  |   | — |    |  |   | (15,895 | )  |
| Directtechnical servicescosts                              |  |                             | — |                  |  |              | — |                        |  |         | (4,384  | )  |  |   | — |    |  |   | (4,384  | )  |
| Acquisitionexpenses                                        |  |                             | (822    | )                |  |              | (5,795  | )                      |  |         | — |    |  |   | — |    |  |   | (6,617  | )  |
| Generaland administrativeexpenses                          |  |                             | (8,649  | )                |  |              | (5,192  | )                      |  |         | (2,517  | )  |  |   | 529     |    |  |   | (15,829 | )  |
| **Segmentincome**                                          |  | $                                | (7,637  | )                |  | $                 | (1,481  | )                      |  | $            | 294     |    |  | $      | — |    |  | $      | (8,824  | )  |
| Depreciation of fixedassets and amortization ofintangibles |  |                             |    |                  |  |              |    |                        |  |         |    |    |  |   |    |    |  |   | (387    | )  |
| Netinvestmentincome                                        |  |                             |    |                  |  |              |    |                        |  |         |    |    |  |   |    |    |  |   | 3,235   |    |
| Netrealized gains oninvestments                            |  |                             |    |                  |  |              |    |                        |  |         |    |    |  |   |    |    |  |   | 1,195   |    |
| Otherincome                                                |  |                             |    |                  |  |              |    |                        |  |         |    |    |  |   |    |    |  |   | 32      |    |
| Netforeign exchangegains                                   |  |                             |    |                  |  |              |    |                        |  |         |    |    |  |   |    |    |  |   | 224     |    |
| **Netloss before incometaxes**                             |  |                             |    |                  |  |              |    |                        |  |         |    |    |  |   |    |    |  | $      | (4,525  | )  |
|                                                            |

Itemsof revenue and expense resulting from charges between segments areeliminated on consolidation of the segments. During the three monthsended March 31, 2005 and 2004, the technical services segment chargedthe underwriting segments $0.8 million and $0.5 million of revenues fortechnical services rendered.

The Company's specialtyinsurance segment writes business both on a direct basis with insuredclients or by assuming reinsurance of underlying policies that areissued on its behalf by third party insurers and reinsurers. OurLloyd's segment was not established until the fourth quarter of2004.

5.    Stock-based compensation

Employee stockawards under the Company's long term incentive compensation planare accounted for in accordance with APB 25. Compensation expense forstock options and stock-based awards granted to employees is recognizedusing the intrinsic value method to the extent that the fair value ofthe stock exceeds the exercise price of the option at the measurementdate. Any resulting compensation expense is recorded over the shorterof the vesting or service period.

The Company provides thedisclosure as set forth in SFAS 123 which requires pro-formacompensation expense for the Company's employee stock options andperformance share units to be measured as the fair value at their grantdate and recorded over the shorter of the vesting or serviceperiod.

|          |         |
|----------|---------|
| a)  | Options |

Inaccordance with SFAS 123, the fair value of options granted isestimated on the date of the grant using the Black-Scholesoption-pricing model with the following weighted average assumptionsfor the three months ended March 31, 2005: a dividend yield of0%; expected volatility of 23.98%; a risk-free interestrate of 4.14% and an expected life of the options ofapproximately 7 years. The 

11

----

QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed inthousands of US dollars except for share and per shareamounts)

following weighted average assumptions wereused for the three months ended March 31, 2004: a dividend yield of0%; expected volatility of 24.0%; a risk-free interestrate of 3.75% and an expected life of the options ofapproximately 7 years.

|          |                         |
|----------|-------------------------|
| b)  | Performance Share Units |

During the three months ended March 31, 2005, Performance ShareUnits were awarded to various employees pursuant to the Company's2003 Long Term Incentive Plan. The number of shares of common stock tobe received under these awards at the end of the performance periodwill depend on the attainment of performance objectives based on theCompany's GAAP average return on shareholders' equity overthe three year period ending December 31, 2007. The grantees willreceive shares of common stock in an amount ranging from zero to300% percent of the share award (as such amount is defined inthe grant).

Since unvested performance share units arecontingent upon satisfying performance objectives, those unvestedshares are considered to be contingently issuable shares and are notincluded in the computation of diluted earnings per share until allconditions for issuance are met. Performance share units are includedin basic shares outstanding when issued.

During the three monthsended March 31, 2005, awards for 106,835 performance share units weregranted at a weighted average grant date fair value of $8.87. Duringthe three months ended March  31, 2004, zero awards forperformance share units were granted.

The following tablesummarizes the Company's stock-based compensation, net income(loss) and income (loss) per share for the three months ended March 31,2005 and 2004 had the Company elected to recognize compensation costbased on the fair value of the Company's stock based awardsgranted at the grant date as prescribed by SFAS 123.

|                                                                                             |  |                                        |         |                                         |  |        |         |         |  |  |
|---------------------------------------------------------------------------------------------|--|----------------------------------------|---------|-----------------------------------------|--|--------|---------|---------|--|--|
|                                                                                        |  | Forthe threemonths endedMarch 31, 2005 |         | For thethree months ended March 31,2004 |
| **Stock compensationexpense**                                                               |  |                                   |    |                                    |  |   |    |    |
| As reported                                                                                 |  | $                                      | — |                                    |  | $      | — |    |
| Additional stock-basedemployee compensation expense determined under fair value basedmethod |  |                                   | (737    | )                                  |  |   | (614    | )  |
| Proforma                                                                                    |  | $                                      | (737    | )                                  |  | $      | (614    | )  |
| Netincome (loss)                                                                            |  |                                   |    |                                    |  |   |    |    |
| As reported                                                                                 |  | $                                      | 1,388   |                                    |  | $      | (4,525  | )  |
| Additional stock-basedemployee compensation expense determined under fair value basedmethod |  |                                   | (737    | )                                  |  |   | (614    | )  |
| Proforma                                                                                    |  | $                                      | 651     |                                    |  | $      | (5,139  | )  |
| Basicincome (loss) per share                                                                |  |                                   |    |                                    |  |   |    |    |
| Asreported.                                                                                 |  | $                                      | 0.02    |                                    |  | $      | (0.08   | )  |
| Proforma                                                                                    |  | $                                      | 0.01    |                                    |  | $      | (0.09   | )  |
| Dilutedincome (loss) per share                                                              |  |                                   |    |                                    |  |   |    |    |
| Asreported.                                                                                 |  | $                                      | 0.02    |                                    |  | $      | (0.08   | )  |
| Proforma                                                                                    |  | $                                      | 0.01    |                                    |  | $      | (0.09   | )  |
|                                                                                             |

12

----

QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed inthousands of US dollars except for share and per shareamounts)

6.    Reinsurance Ceded

Theeffect of reinsurance activity on premiums written, premiums earned andlosses and loss expenses incurred for the three months ended March 31,2005 and 2004 is shown below.

|                                 |  |                 |         |                 |  |                         |         |         |  |        |         |         |  |  |
|---------------------------------|--|-----------------|---------|-----------------|--|-------------------------|---------|---------|--|--------|---------|---------|--|--|
| Threemonths ended March 31,2005 |  | PremiumsWritten |         | Premiums Earned |  | Losses and LossExpenses |
| Directinsurance                 |  | $               | 82,471  |            |  | $                       | 35,633  |    |  | $      | 26,873  |    |
| Reinsuranceassumed              |  |            | 90,255  |            |  |                    | 75,352  |    |  |   | 42,021  |    |
| Totalgross premiumswritten      |  |            | 172,726 |            |  |                    | 110,985 |    |  |   | 68,894  |    |
| Cededreinsurance                |  |            | (29,849 | )          |  |                    | (19,499 | )  |  |   | (11,398 | )  |
| Net                             |  | $               | 142,877 |            |  | $                       | 91,486  |    |  | $      | 57,496  |    |
|                                 |

|                                 |  |                 |         |                 |  |                         |        |         |  |        |        |         |  |  |
|---------------------------------|--|-----------------|---------|-----------------|--|-------------------------|--------|---------|--|--------|--------|---------|--|--|
| Threemonths ended March 31,2004 |  | PremiumsWritten |         | Premiums Earned |  | Losses and LossExpenses |
| Directinsurance                 |  | $               | 38,032  |            |  | $                       | 4,507  |    |  | $      | 2,328  |    |
| Reinsuranceassumed              |  |            | 80,697  |            |  |                    | 23,226 |    |  |   | 13,720 |    |
| Totalgross premiumswritten      |  |            | 118,729 |            |  |                    | 27,733 |    |  |   | 16,048 |    |
| Cededreinsurance                |  |            | (6,274  | )          |  |                    | (498   | )  |  |   | (153   | )  |
| Net                             |  | $               | 112,455 |            |  | $                       | 27,235 |    |  | $      | 15,895 |    |
|                                 |

7.    Earningsper share

The following table sets forth the computation ofbasic and diluted earnings (loss) pershare.

|                                                          |  |                                          |            |                                         |  |        |            |         |  |  |
|----------------------------------------------------------|--|------------------------------------------|------------|-----------------------------------------|--|--------|------------|---------|--|--|
|                                                     |  | Forthe three months ended March 31, 2005 |            | For thethree months ended March 31,2004 |
| **Basic earnings (loss) pershare**                       |  |                                     |       |                                    |  |   |       |    |
| Net income(loss)                                         |  | $                                        | 1,388      |                                    |  | $      | (4,525     | )  |
| Weightedaverage common shares outstanding –basic   |  |                                     | 56,798,218 |                                    |  |   | 56,798,218 |    |
| Basicearnings (loss) pershare                            |  | $                                        | 0.02       |                                    |  | $      | (0.08      | )  |
| **Dilutedearnings (loss) per share**                     |  |
| Net earnings(loss)                                       |  | $                                        | 1,388      |                                    |  | $      | (4,525     | )  |
| Weightedaverage common sharesoutstanding                 |  |                                     | 56,798,218 |                                    |  |   | 56,798,218 |    |
| Weightedaverage common share equivalentsOptions          |  |                                     | 698        |                                    |  |   | —    |    |
| Warrants                                                 |  |                                     | —    |                                    |  |   | —    |    |
| Weightedaverage common shares outstanding –diluted |  |                                     | 56,798,916 |                                    |  |   | 56,798,218 |    |
| Dilutedearnings (loss) pershare                          |  | $                                        | 0.02       |                                    |  | $      | (0.08      | )  |
|                                                          |

Dueto a net loss for the three months ended March 31, 2004, the assumednet exercise of options and warrants under the treasury stock methodhas been excluded, as the effect would have been anti-dilutive.Accordingly, for the three months ended March 31, 2004, the calculationof weighted average common shares outstanding on a diluted basisexcludes 2,871,400 options and 2,542,813 warrants.

13

----

QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed inthousands of US dollars except for share and per shareamounts)

8.    Commitments andcontingencies

|          |                              |
|----------|------------------------------|
| a)  | Concentrations of creditrisk |

As of March 31, 2005, substantially all of theCompany's cash and cash equivalents, and investments were held bytwo custodians. Management considers these custodians to be of highcredit quality. The Company's investment portfolio is managed byexternal investment advisors in accordance with the Company'sinvestment guidelines. The Company's investment guidelinesrequire that the average credit quality of the investment portfolio istypically Aa3/AA- and that no more than 5% of the investmentportfolio's market value shall be invested in securities ratedbelow Baa3/BBB-. The Company also limits its exposure to any singleissuer to 5% or less of the total portfolio's market valueat the time of purchase, with the exception of U.S. government andagency securities. As of March 31, 2005, the largest single non-U.S.government and government agencies issuer accounted for less than2.5% of the aggregate market value of the externally managedportfolios.

The premiums receivable balance of $187.6 million asof March 31, 2005 includes approximately $24.9 million, or13.3%, from one third party agent that sources a residentialbuilders' and contractors' program that provides warranty,general liability, builders' risk and excess liability coveragesfor new home contractors throughout the U.S. The Company has notexperienced any losses related to premiums receivable from this thirdparty agent to date and monitors the aged premiums receivable balanceson a monthly basis.

|          |                                     |
|----------|-------------------------------------|
| b)  | Concentrations of premiumproduction |

The Company generates its business primarily throughbrokers and to a much lesser extent direct relationships with insurancecompanies. During the three months ended March 31, 2005, two brokersaccounted for approximately 43.9% and 21.1% of thespecialty reinsurance segment's gross premiums written and fourbrokers accounted for approximately 19.6%, 17.4%,13.0% and 10.5% of the Lloyd's segment'sgross premiums written. No other brokers accounted for more than10% of the specialty reinsurance, specialty insurance orLloyd's segments' gross written premium for the threemonths ended March 31, 2005.

During the three months ended March31, 2004, one broker accounted for approximately 16.0% of thespecialty insurance segment's gross premiums written and threebrokers accounted for approximately 41.8%, 17.8% and11.2% of the specialty reinsurance segment's grosspremiums written. No other brokers accounted for more than 10%of the underwriting segments' gross written premium for the threemonths ended March 31, 2004. The Company believes that all of itsbrokers are large and established companies.

During the threemonths ended March 31, 2005 and 2004, the Company continued writing aresidential builders' and contractors' program thatprovides warranty, general liability, builders' risk and excessliability coverages for new home contractors throughout the U.S. Thisprogram accounted for approximately $41.1 million, or 61.3%, ofthe specialty insurance segment gross written premiums andapproximately $4.6 million, or 5.2%, of the specialtyreinsurance segment gross written premiums for the three months endedMarch 31, 2005. Policies underwritten in this program are sourced byone third party agent that the Company believes is a large andestablished specialist in this class of business. This programaccounted for approximately $21.9 million, or 58.0%, of thespecialty insurance segment gross written premiums and approximately$2.2 million, or 2.7%, of the specialty reinsurance segmentgross written premiums for the three months ended March 31,2004.

14

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed inthousands of US dollars except for share and per shareamounts)

|          |                  |
|----------|------------------|
| c)  | Restrictedassets |

The Company is required to maintain assets on depositwith various regulatory authorities to support its insurance andreinsurance operations. These requirements are generally promulgated bythe regulations of the individual locations within which the Companyoperates. These funds on deposit are available to settle insurance andreinsurance liabilities.

The Company participates in theLloyd's of London market through Syndicate 4000 at Lloyd'sand has dedicated a significant amount of its capital to theLloyd's business. The regulations of the Council of Lloyd'sdetermine the amount of premium that may be written, also known asstamp capacity, based on the Company's funds at Lloyd's.The Company has funds at Lloyd's for every underwriting year inwhich we write business through Syndicate 4000 at Lloyd's. Thesefunds may not be withdrawn until each underwriting year is closed whichgenerally takes three years. Traditionally, three years have beennecessary to report substantially all premiums associated with anunderwriting year and to report most related claims, although claimsmay remain unsettled after the underwriting year is closed. ALloyd's syndicate typically closes an underwriting year byreinsuring outstanding claims on that underwriting year with theparticipants of the next underwriting year. As of March 31, 2005, cashand investments with a market value of $106.7 million are held byLloyd's as trustee.

The Company has also issued letters ofcredit ("LOC") under its Credit Agreement forwhich cash and cash equivalents and investments are pledged as securityin favor of certain ceding companies to collateralize its obligationsunder contracts of insurance and reinsurance and in favor of a landlordrelating to a lease agreement for office space.

The Company alsoutilizes trust funds in certain large transactions where the trustfunds are set up for the benefit of the ceding companies, and generallytake the place of letter of credit requirements. In addition, theCompany holds cash and cash equivalents and investments in trust tofund the Company's obligations associated with the assumption ofenvironmental remediation liabilities.

The fair values of theserestricted assets by category at March 31, 2005 are asfollows:

|                                                          |  |                          |        |             |  |        |         |        |  |  |
|----------------------------------------------------------|--|--------------------------|--------|-------------|--|--------|---------|--------|--|--|
|                                                     |  | March31, 2005            |
|                                                     |  | Cash andcash equivalents |        | Investments |
| Depositswith U.S. regulatoryauthorities                  |  | $                        | 100    |        |  | $      | 29,171  |   |
| Fundsdeposited withLloyd's                               |  |                     | 18,788 |        |  |   | 87,912  |   |
| LOCpledged assets                                        |  |                     | 5,339  |        |  |   | 139,042 |   |
| Trustfunds                                               |  |                     | 26,172 |        |  |   | 85,944  |   |
| Amounts held intrust funds related to depositliabilities |  |                     | 3,042  |        |  |   | 39,633  |   |
| Total                                                    |  | $                        | 53,441 |        |  | $      | 381,702 |   |
|                                                          |

15

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed inthousands of US dollars except for share and per shareamounts)

|          |                  |
|----------|------------------|
| d)  | Leasecommitments |

The Company leases office space and furniture andequipment under operating lease agreements. Certain office space leasesinclude an escalation clause that calls for annual increases to thebase rental payments. Rent expenses are being recognized on astraight-line basis over the respective lease terms. Future annualminimum payments under non-cancelable operating leases as of March 31,2005, are asfollows:

|                     |  |        |        |        |  |  |
|---------------------|--|--------|--------|--------|--|--|
| Yearending March31, |  |
| 2006                |  | $      | 4,481  |   |
| 2007                |  |   | 4,236  |   |
| 2008                |  |   | 3,783  |   |
| 2009                |  |   | 2,756  |   |
| 2010                |  |   | 2,798  |   |
| 2011andthereafter   |  |   | 22,701 |   |
| Total               |  | $      | 40,755 |   |
|                     |

Totalrent expense under operating leases for the three months ended March31, 2005 and 2004 was approximately $1.1 million.

9.    Junior subordinated debentures

On February 24,2005, the Company participated in a private placement of $20.0 millionof floating rate capital securities (the "Trust PreferredSecurities") issued by Quanta Statutory Capital Trust II("Quanta Trust II"). The Trust PreferredSecurities mature on June 15, 2035, are redeemable at theCompany's option at par beginning June 15, 2010, and requirequarterly distributions of interest by Quanta Trust II to the holder ofthe Trust Preferred Securities. Distributions will be payable at avariable per annum rate of interest, reset quarterly, equal to theLondon Interbank Offered Rate ("LIBOR") plus350 basis points. Quanta Trust II simultaneously issued 619 of itscommon securities to the Company for a purchase price of $0.6 million,which constitutes all of the issued and outstanding common securitiesof Quanta Trust II. The Company's investment of $0.6 million inthe common shares of Quanta Trust II is recorded in other assets in theconsolidated balance sheet.

Quanta Trust II used the proceedsfrom the sale of the Trust Preferred Securities and the issuance of itscommon securities to purchase $20.6 million junior subordinated debtsecurities, due June 15, 2035, in the principal amount of $20.6 millionissued by the Company (the "Debentures"). Thenet proceeds of $19.6 million from the sale of the debentures to QuantaTrust II, after the deduction of approximately $0.4 million ofcommissions paid to the placement agents in the transaction andapproximately $0.6 million representing the Company's investmentin Quanta Trust II, will be used by the Company to grow its specialtylines businesses and for working capital purposes.

TheDebentures were issued pursuant to an Indenture (the"Indenture"), dated February 24, 2005, by andbetween the Company and JPMorgan Chase Bank, N.A., as trustee. Theterms of the Debentures are substantially the same as the terms of theTrust Preferred Securities. The interest payments on the Debenturespaid by the Company will be used by Quanta Trust II to pay thequarterly distributions to the holders of the Trust PreferredSecurities. The Indenture permits the Company to redeem the Debentures(and thus a like amount of the Trust Preferred Securities) on or afterJune 15, 2010. If the Company redeems any amount of the Debentures,Quanta Trust II must redeem a like amount of the Trust PreferredSecurities.

Pursuant to a Guarantee Agreement (the"Guarantee Agreement"), dated February 24,2005, by and between the Company and JPMorgan Chase Bank, N.A., astrustee, the Company has agreed to 

16

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed inthousands of US dollars except for share and per shareamounts)

guarantee the payment of distributions andpayments on liquidation or redemption of the Trust PreferredSecurities, but only in each case to the extent of funds held by QuantaTrust II. The obligations of the Company under the Guarantee Agreementand the Trust Preferred Securities are subordinate to all of theCompany's debt.

The issuance costs incurred have beencapitalized and are included in other assets in the consolidatedbalance sheet. Issuance costs will be amortized over the term of theDebentures as a component of interest expense.

Quanta Trust IIis determined to be a Variable Interest Entity("VIE") under FASB Interpretation No. 46(revised December 2003) ("FIN46R"),"Consolidation of Variable InterestEntities." The Company was not determined to be theprimary beneficiary of Quanta Trust II and in accordance with FIN46Rhas not consolidated Quanta Trust II in the consolidated financialstatements. The earnings of Quanta Trust II are included in theconsolidated statement of operations and comprehensiveloss.

17

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|              |                                                                                      |
|--------------|--------------------------------------------------------------------------------------|
| ITEM2.  | MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS |

The followingdiscussion and analysis of our results of operations, financialcondition and liquidity and capital resources should be read inconjunction with our unaudited condensed consolidated financialstatements and related notes contained in this Form 10-Q and theaudited consolidated financial statements and related notes for theyear ended December 31, 2004, as well as"Management's Discussion and Analysis of FinancialCondition and Results of Operations," including thediscussions of critical accounting policies and of estimates andquantitative and qualitative disclosures about market risk, containedin the Form 10-K filed by the Company with the SEC on March 30,2005.

Safe Harbor Disclosure

The Private SecuritiesLitigation Reform Act of 1995 provides a "safeharbor" for forward-looking statements. Any written ororal statements made by or on our behalf may include forward-lookingstatements. Statements using words such as"believes,""expects,""intends,""estimates,""projects,""predicts,""assumes,""anticipates,""plans," and"seeks" and comparable terms, areforward-looking statements. Forward-looking statements are notstatements of historical fact and reflect our views and assumptions asof the date of this report regarding future events and operatingperformance. Because we have a limited operating history, manystatements relating to us and our business, including statementsrelating to our competitive strengths and business strategies, areforward-looking statements.

All forward-looking statementsaddress matters that involve risks and uncertainties. There areimportant factors that could cause our actual results to differmaterially from those indicated in these statements. We believe thatthese factors include but are not limited to thefollowing:

|              |                                                                                                                                                                                                                                                                                                                                   |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | actual results, changes inmarket conditions, the occurrence of catastrophic losses and otherfactors outside our control that may require us to alter ouranticipated methods of conducting our business, such as the nature,amount and types of risk we assume and the terms and limits of theproducts we write or intend towrite; |

|              |                                                                          |
|--------------|--------------------------------------------------------------------------|
| •  | the risk that we may not be ableto fully implement our businessstrategy; |

|              |                               |
|--------------|-------------------------------|
| •  | our limited operatinghistory; |

|              |                                                                                                                 |
|--------------|-----------------------------------------------------------------------------------------------------------------|
| •  | our insurance and reinsurancebusiness is not widely diversified among classes of risk or sources oforigination; |

|              |                                                                                                                           |
|--------------|---------------------------------------------------------------------------------------------------------------------------|
| •  | the ineffectiveness orobsolescence of our planned business strategy due to changes in currentor future market conditions; |

|              |                                                                                 |
|--------------|---------------------------------------------------------------------------------|
| •  | changes inregulation or tax laws applicable to us, our brokers or ourcustomers; |

|              |                                                             |
|--------------|-------------------------------------------------------------|
| •  | changes in the availability,cost or quality of reinsurance; |

|              |                                                                                  |
|--------------|----------------------------------------------------------------------------------|
| •  | ourability to hire, retain and integrate our management team and otherpersonnel; |

|              |                                                |
|--------------|------------------------------------------------|
| •  | changes in rating agencypolicies or practices; |

|              |                                                                                                                                    |
|--------------|------------------------------------------------------------------------------------------------------------------------------------|
| •  | risks relatingto our reliance on program managers, third party administrators, andother vendors to support our programsoperations; |

|              |                                                                                                                                                                                                                                                               |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | other risks of doingbusiness with program managers, including the risk we might be bound topolicyholder obligations beyond our underwriting intent, and the riskthat our program managers or agents may elect not to continue or renewtheir programs with us; |

|              |                                                |
|--------------|------------------------------------------------|
| •  | changes inaccounting policies or practices;and |

|              |                                                                                                                               |
|--------------|-------------------------------------------------------------------------------------------------------------------------------|
| •  | changes in general economicconditions, including inflation, foreign currency exchange rates,interest rates and other factors. |

This list of factors is notexhaustive and should be read with the other cautionary statements thatare included in this report and under "RiskFactors" in the Registration Statement.

18

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If one or more of these or other risks oruncertainties materialize, or if our underlying assumptions prove to beincorrect, our actual results may vary materially from our projections.Any forward-looking statements you read in this report reflect ourcurrent views with respect to future events and are subject to theseand other risks, uncertainties and assumptions relating to, among otherthings, our operations, results of operations, growth strategy andliquidity. All subsequent written and oral forward-looking statementsattributable to us or individuals acting on our behalf are expresslyqualified in their entirety by this paragraph. You are cautioned not toplace undue reliance on these forward-looking statements, which speakonly as of their dates. We undertake no obligation to publicly updateor review any forward-looking statement, whether as a result of newinformation, future events or otherwise.

Overview

General

Quanta Holdings was incorporated on May 23,2003 as a Bermuda holding company formed to provide specialty linesinsurance, reinsurance, risk assessment and technical services on aglobal basis through its affiliated companies. We commenced substantiveoperations on September 3, 2003 when we obtained our initial capitaland purchased ESC, our predecessor for accounting purposes. During theremainder of 2003, we wrote a small number of insurance and reinsurancecontracts. During the year ended December 31, 2004 and the three monthsended March 31, 2005 we continued to grow and diversify our specialtylines of business, and we had a significant increase in the number ofinsurance and reinsurance contracts underwritten.

Through ouroperating subsidiaries in Bermuda, the U.S. and Europe, we focus onwriting coverage for specialized classes of property and casualtyinsurance and reinsurance risks through teams of experienced andtechnically qualified underwriters. We define specialty insurance andreinsurance as those lines of business that are often unusual ordifficult to place and do not fit the underwriting criteria of standardcommercial product providers. We are using our Bermuda operationsprimarily to insure U.S. risks from Bermuda on a non-admitted basis andalso to underwrite some European risks. We are also writing specialtyinsurance and reinsurance in the United States on an admitted basisthrough our subsidiary, Quanta Indemnity Company, which is a U.S.licensed insurer with licenses in 45 states and is an accreditedreinsurer in Washington, D.C. Further, we write specialty insurancefrom the United States on an excess and surplus lines basis and U.S.reinsurance on a non-admitted basis through our subsidiary, QuantaSpecialty Lines Insurance Company. During the last quarter of 2004 webegan to underwrite European Union sourced specialty insurance andreinsurance business through Quanta Europe, our Irish subsidiarylocated in Dublin, Ireland, which is the headquarters of our Europeanbusiness and started to underwrite specialty insurance business throughSyndicate 4000 at Lloyd's in London. In the U.K., we obtained ourbranch license in February 2005 and are serving our London-basedclients for European insurance and reinsurance business through thatbranch.

We acquired Environmental Strategies Corporation, knownas ESC, on September 3, 2003. ESC is our predecessor company foraccounting and financial reporting purposes. ESC provides diversifiedenvironmental risk management services to assist customers inenvironmental remediation, regulatory analyses, technical support forenvironmental claims, merger and acquisition due diligence,environmental audits and risk assessments, and engineering andinformation management services. ESC also provides risk assessment andtechnical services support to our environmental underwriters. We havealso established Quanta Technical Services, which we use to providerisk assessment and evaluation technical services in our otherspecialty lines of insurance and to third parties on a fee basis.Through Quanta Technical Services and its subsidiaries, we also provideliability assumption programs under which these subsidiaries assumespecified liabilities (which may, at times, include taking title toproperty) associated with environmental conditions in properties andagree to provide technical services and to perform the requiredremediation services.

We only started writing insurance andreinsurance contracts in the fourth quarter of 2003 and caution youthat, because of our limited operating history, our financialinformation is not indicative of 

19

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the actual results that we expect to achievein future periods.  This report does contain our first quarter toquarter comparison of our business in 2004 and 2005 and, in general,reveals that our insurance and reinsurance businesses each have grownand the insurance segment has become a bigger proportion of ourbusiness in the first quarter of 2005 as compared to the first quarterof 2004.  We expect that this trend will continue throughout2005.  This trend is not expected to occur evenly during thequarters as the reinsurance business has traditionally been moreconcentrated in the first and third quarter.

We generatedapproximately $142.9 million of net premiums written after premiumsceded on purchased reinsurance protection and $91.5 million of netpremiums earned during the three months ended March 31, 2005 ascompared to approximately $112.5 million of net premiums written afterpremiums ceded on purchased reinsurance protection and $27.2 million ofnet premiums earned during the three months ended March 31, 2004.

The primary drivers of growth in our lines of business and netwritten premiums are the continued development of our relationshipswith important insurance and reinsurance brokers, our success duringthe January 2005 renewal season in the reinsurance industry, and thedevelopment of specialty insurance lines of business includingSyndicate 4000. Our specialty insurance segment demonstrated continuedpremium growth during the three months ended March 31, 2005 and ourLloyd's segment increased its underwriting specialty insurancebusiness following receipt of regulatory approvals during the fourthquarter of 2004. Our specialty insurance segment continues to become anincreasingly significant contributor to our overall business andrepresented approximately 38.8% of our total gross premiumswritten in the three months ended March 31, 2005 compared to32.0% in the three months ended March 31, 2004. We believe thatour net premiums written and net premiums earned will increase as wefurther develop our current businesses and enter new product lines andinsurance and reinsurance markets. In addition, we believe that ourportfolio is not yet fully diversified either among classes of risks orsource of origination. For example, during the three months ended March31, 2005, we grew our residential builders' andcontractors' program, which we refer to as the HBW program, thataccounted for approximately 61.3% of our specialty insurancesegment gross written premium. We expect that this concentration willremain significant through the remainder of 2005. In addition, the HBWprogram and the other insurance programs we write, accounted for 62.1% of our specialty insurance segment gross written premium inthe three months ended March 31, 2005. We expect that the otherinsurance programs we write will have increasing gross written premiumthrough the remainder of 2005 and that the concentration of ourprograms business in our specialty insurance segment will continue tobe significant. As described below, our specialty reinsurance segmentshowed significant concentrations across certain risk classes. Inaddition, our specialty reinsurance segment generated approximately43.9% and 21.1% of its gross written premiums through twobrokers. We expect, but cannot assure you, that our portfolio willcontinue to diversify through 2005.

A number of insurancecompanies have been subpoenaed by U.S. regulators in connection withinvestigations relating to business and accounting practices in theinsurance industry. To date, we have not been served any subpoenas. Wehave received, and have responded to, inquiries from the North CarolinaDepartment of Insurance and the Colorado Department of Insurance. FromJanuary 1, 2004 to September 30, 2004 we were party to placementservice agreements, known as PSAs and market service agreements, knownas MSAs, with Aon Corporation and Marsh Inc. and have paid a total of$31,000 under these agreements as of March 31, 2005. We have accruedapproximately $1.1 million in addition to the amount we have alreadypaid under these agreements. At this time, it is not possible for us todetermine the impact of any outcome of these investigations on ourfuture results of operations. In addition, we do not know what theramifications of the brokers' stated intent to formulate adifferent commission structure will be on our future results ofoperations, financial condition or liquidity as brokers seek ourparticipation in this commission structure.

With respect tomarket conditions, we believe that premium rates continue to remainunchanged with exceptions in the property insurance and property andcasualty reinsurance lines of business where we see deterioratingpricing trends. In the professional liability insurance market, wherewe had previously seen deteriorating pricing trends, we have seenrecent signs of greater rate stability, and 

20

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more prudent pricing appears to be takinghold. We believe that favorable market conditions will continue toexist in the markets we are targeting during the remainder of 2005. Wewill also continue to seek opportunities to provide insurance andreinsurance in areas that require both capacity and highly technicalunderwriting expertise.

Segment Information

Weorganize our business along five product lines and three geographies.Our two traditional product lines are specialty insurance and specialtyreinsurance. We also have programs and structured products productlines. The products we offer our clients are written either astraditional insurance or reinsurance policies or are provided as aprogram, a structured product or a combination of a traditional policywith a program or a structured product. Our fifth product line is ourtechnical services line. However, for financial reporting purposes,some of our product lines are aggregated for purposes of the reportablesegment disclosure included below:

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Specialty insurance.    Ourspecialty insurance segment excludes our Lloyd's operations,which, due to its characteristics, has its own reportable segment asdescribed below. Our specialty insurance segment includes ourtraditional, structured and program specialty insurance products. Ourtraditional specialty insurance products include technical riskproperty, professional liability, environmental liability, fidelity andcrime, surety, trade credit and political risk and marine and aviation.Our specialty insurance segment writes business both on a direct basiswith insured clients or by reinsuring policies that are issued on ourbehalf by third party insurers and reinsurers. Our specialty insuranceprograms include the HBWprogram. |

|              |                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Specialtyreinsurance.    Our specialty reinsurance segment includes ourtraditional, structured and program specialty reinsurance products. Ourspecialty reinsurance products include property, casualty and marineand aviation products while our structured reinsurance products includeour trade credit business lines. We currently do not write reinsuranceon a programbasis. |

|              |                                                                                                                                                                                                                                                                                                                                                                         |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Lloyd's.    Syndicate4000 at Lloyd's, our Lloyd's segment, was created inDecember 2004 and currently writes traditional specialty insuranceproducts including professional liability (professional indemnity anddirectors' and officers' coverage), fidelity and crime(financial institutions). We also plan to write specie and fine artcoverages. |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Technicalservices.    Our technical services segment provides diversifiedenvironmental investigation, remediation and engineering services,assessment services, other technical and information managementservices primarily in the environmental area in the U.S. Our technicalservices segment also provides technical and information managementservices to our specialty insurance and reinsurance segments. |

The determination of these reportable segments reflects how wemanage and monitor the performance of our insurance and reinsuranceoperations. We refer to the specialty insurance, specialty reinsuranceand Lloyd's segments as our underwriting segments. We refer toour risk consulting and management operations as our technical servicessegment. We evaluate each segment based on its underwriting ortechnical services results, as applicable, including items of revenueand expense that are associated with, and directly related to, eachsegment.

We allocate corporate general and administrativeexpenses to each segment based upon each product line's allocatedcapital for the current reporting period. We allocate capital to eachof our product lines through the estimated value-at-risk method, whichuses statistical analyses of historical market trends and volatility toestimate the probable amounts of capital at risk for each reportingperiod. We do not manage our assets by segment and, as a result, netinvestment income, and depreciation and amortization are not evaluatedat the segment level.

21

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Main Drivers of our Results

Revenues

We derive the majority of our revenues fromtwo principal sources: premiums from policies written by ourunderwriting segments and investment income from our investmentportfolios.

We record premiums written at the time that there issufficient evidence of agreement to the significant terms of thecontract but no earlier than the effective date of the policy. Theamount of our insurance and reinsurance premiums written depends on thenumber and type of policies we write, the amount of reinsuranceprotection we provide, as well as prevailing market prices.Furthermore, the amount of net premiums earned depends upon the type ofcontracts we write, the contractual periods of the contracts we write,the inception date of the contracts, the expired portions of thecontract periods and the type of purchased reinsurance protection.Because of all these factors, the amount of premiums written and cededmay not result in a correlative level of profitability.

Ourinvestment income depends on the average invested assets in ourinvestment portfolios and the yield that we earn on those investedassets. Our investment yield is a function of market interest rates andthe credit quality and maturity period of our invested assets. Ourinvestment portfolio consists principally of fixed income securities,short-term liquidity funds, cash, and cash equivalents. In addition, werealize capital gains or losses on sales of investments as a result ofchanging market conditions, including changes in market interest ratesand changes in the credit quality of our invested assets. Under U.S.GAAP, our available-for-sale investments are carried at fair marketvalue with unrealized gains and losses on the investments included onour balance sheet in accumulated other comprehensive income net ofincome taxes as a separate component of shareholders' equity. Ourtrading investments that relate to deposits associated with non-riskbearing contracts are recorded at estimated fair value with the changein fair value included in net realized gains and losses on investmentsin the consolidated statement of operations and comprehensive loss. Theobjective of our current investment strategy is to preserve investmentprincipal, maintain liquidity and to manage duration risk betweeninvestment assets and insurance liabilities, while maximizinginvestment returns through a diversified portfolio. Our investmentreturns are benchmarked against certain specified indices. However, thevolatility in claim payments and the interest rate environment cansignificantly affect the returns we generate on our investmentportfolios.

Our technical services segment operates primarily inthe environmental area and its revenues principally comprise fees fromtechnical services and risk management services provided under variousshort-term service contracts and from revenues for services performedby subcontractors we engage on behalf of clients. We also generaterevenues from remediation fees which are used to extinguishenvironmental remediation obligations that we have assumed undercontracts of remediation. The amount of technical services andremediation fees and subcontractor revenues is a function of politicaland economic conditions and the impact these conditions have onclients' discretionary spending on environmental projects.

Expenses

Our expenses primarily consist of net lossand loss expenses, acquisition expenses, direct technical servicescosts and general and administrative expenses.

Net loss and lossexpenses, which are net of loss and loss expenses recovered under ourceded reinsurance contracts, depend on the number and type of insuranceand reinsurance contracts we write and reflect our best estimate ofultimate losses and loss expenses we expect to incur on each contractwritten using various actuarial analyses. Actual losses and lossexpenses will depend on actual costs to settle insurance andreinsurance claims. Our ability to accurately estimate expectedultimate loss and loss expense at the time of pricing each insuranceand reinsurance contract and the occurrence of unexpected high lossseverity catastrophe events will be critical factors in determining ourprofitability.

Acquisition expenses, which are net of expensesrecovered under our ceded reinsurance contracts, consist principally ofcommissions, fees, brokerage and tax expenses that are directly relatedto 

22

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obtaining and writing insurance andreinsurance contracts. Typically, acquisition expenses are based on acertain percentage of the premiums written on contracts of insuranceand reinsurance. These expenses are a function of the number and typeof insurance and reinsurance contracts written.

General andadministrative expenses consist primarily of personnel relatedexpenses, information technology, other operating overheads andprofessional fees. From time to time we engage administrative serviceproviders and legal, accounting, tax and financial advisors. Generaland administrative expenses are a function of the development of ourbusiness and infrastructure, including the growth in personnel and thevolume of insurance and reinsurance contracts written. These generaland administrative expenses may be incurred directly by a segment orindirectly at the corporate level.

We also incur expensesdirectly related to and arising from our technical services andenvironmental remediation activities. These direct costs primarilyinclude expenses associated with direct technical labor, subcontractorswe engage on behalf of our technical services clients, and othertechnical services or remediation contract related expenses. Thesecosts are a function of, and are proportional to, the level oftechnical services and remediation revenues earned from the provisionof technical services and completion of remediation activities.

Results of Operations

The following is a discussion of ourconsolidated results of operations for the three months ended March 31,2005 and 2004.

Three months ended March 31, 2005 and 2004

Results of operations for the three months ended March 31, 2005 and2004 were asfollows:

|                                                  |  |                                  |          |                                  |  |        |         |         |  |  |
|--------------------------------------------------|--|----------------------------------|----------|----------------------------------|--|--------|---------|---------|--|--|
|                                             |  | Threemonths ended March 31, 2005 |          | Three monthsended March 31, 2004 |
|                                             |  | ($ inthousands)                  |
| **Revenues**                                     |  |
| Grosspremiumswritten                             |  | $                                | 172,726  |                             |  | $      | 118,729 |    |
| Netpremiumswritten                               |  | $                                | 142,877  |                             |  | $      | 112,455 |    |
| Netpremiumsearned                                |  | $                                | 91,486   |                             |  | $      | 27,235  |    |
| Technicalservices revenues                       |  |                             | 7,150    |                             |  |   | 6,507   |    |
| Netinvestment income                             |  |                             | 5,225    |                             |  |   | 3,235   |    |
| Netrealized (losses) gains oninvestments         |  |                             | (483     | )                           |  |   | 1,195   |    |
| Net foreignexchange (losses)gains                |  |                             | (112     | )                           |  |   | 224     |    |
| Otherincome                                      |  |                             | 1,686    |                             |  |   | 191     |    |
| Totalrevenues                                    |  |                             | 104,952  |                             |  |   | 38,587  |    |
| **Expenses**                                     |  |
| Netlosses and lossexpenses                       |  |                             | (57,496  | )                           |  |   | (15,895 | )  |
| Acquisitionexpenses                              |  |                             | (18,445  | )                           |  |   | (6,617  | )  |
| Directtechnical servicescosts                    |  |                             | (4,861   | )                           |  |   | (4,384  | )  |
| General andadministrativeexpenses                |  |                             | (20,871  | )                           |  |   | (15,829 | )  |
| Interestexpense                                  |  |                             | (826     | )                           |  |   | — |    |
| Depreciationand amortization of intangibleassets |  |                             | (842     | )                           |  |   | (387    | )  |
| Totalexpenses                                    |  |                             | (103,341 | )                           |  |   | (43,112 | )  |
| Income(loss) before incometaxes                  |  |                             | 1,611    |                             |  |   | (4,525  | )  |
| Incometaxes                                      |  |                             | (223     | )                           |  |   | — |    |
| Netincome(loss)                                  |  | $                                | 1,388    |                             |  | $      | (4,525  | )  |
|                                                  |

23

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Revenues.

Substantially all of our revenues were generated by our underwritingsubsidiaries in Bermuda, the U.S and Europe. Technical servicesrevenues were derived from the operations of ESC.

Premiums.    Gross premiums written were $172.7 million forthe three months ended March 31, 2005, an increase of $54.0 million, or45.5%, compared to $118.7 million for the three months endedMarch 31, 2004. The increase of $54.0 million in gross premiums writtenreflects the continued growth of our specialty lines of business, thecontribution of our Lloyd's segment and a solid January 2005renewal season for our specialty reinsurance segment.

We expectduring 2005 that our insurance and reinsurance gross and net premiumswritten will continue to grow and that our Lloyd's segment willbecome a more significant contributor as we focus on continuing toexecute our business strategy.

Gross premiums ceded were $29.9million for the three months ended March 31, 2005 an increase of $23.6million compared to $6.3 million for the three months ended March 31,2004. The increase in gross premiums ceded reflects the increase in ourgross premiums written and the reinsurance treaties that we haveentered into for our product lines in order to limit our net lossexposures to our planned net limits and to control our aggregateexposures to particular classes of risk. These reinsurance treatiesprovide us with reinsurance protection on either a quota share, excessof loss treaty or facultative basis for policies written in ourinsurance product lines of business.

Net premiums earned were$91.5 million for the three months ended March 31, 2005 an increase of$64.3 million, or 235.9%, compared to $27.2 million for thethree months ended March 31, 2004 reflecting the earning of premiums oncontracts written during the three months ended March 31, 2005 andduring the year ended December 31, 2004. We expect that our netpremiums earned will increase in future periods as we enter into moreinsurance and reinsurance contracts and as our existing portfoliosmature. Our net premiums written are typically earned over the riskperiods of the underlying insurance policies which are generally twelvemonths. Net written premiums that are not yet earned and are deferredas unearned premium reserves, net of deferred reinsurance premiums,totaled $251.9 million at March 31, 2005 and will be earned andrecognized in our results of operations in future periods. Because weonly began to write insurance and reinsurance business during thefourth quarter of 2003 and because our Lloyd's segment commencedoperations in December 2004, we believe that our net premiums earnedare not yet representative of a fully developed and diversifiedportfolio of insurance and reinsurance contracts.

Technicalservices revenues.    Technical services revenues were $7.1million for the three months ended March 31, 2005 an increase of $0.6million, or 9.9%, compared to $6.5 million for the three monthsended March 31, 2004. Technical services revenues of $7.1 million forthe three months ended March 31, 2005 consisted of $3.9 million fromdirect labor and $3.2 million from subcontractor relatedactivities.

Net investment income and net realizedlosses.    Net investment income and net realized losses totaled$4.7 million for the three months ended March 31, 2005 an increase of$0.3 million, or 7.0%, compared to $4.4 million for the threemonths ended March 31, 2004. This is due to an increase in netinvestment income of $2.0 million compared to the three months endedMarch 31, 2004 which is attributable to the larger amount of investedassets and to a lesser extent by interest rates and is offset by achange in net realized losses of $1.7 million.

Net investmentincome was $5.2 million for the three months ended March 31, 2005 andwas derived primarily from interest earned on fixed maturity and shortterm investments, partially offset by investment management fees andamortization of discounts on fixed maturity investments. Our averageannualized effective yield (calculated by dividing net investmentincome by the average amortized cost of invested assets, net of amountspayable or receivable for investments purchased or sold) wasapproximately 3.2% for the three months ended March 31, 2005.Net realized losses of $0.4 million were generated primarily from thesale of fixed maturity securities as we sought to manage our totalinvestment returns and the duration of our investment portfolios.

As of March 31, 2005, the average duration of our investmentportfolio was approximately 2.6 years with an average credit rating ofapproximately "AA".

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Other income.    Other income was$1.7 million for the three months ended March 31, 2005 and includesamounts recognized on non-traditional insurance and reinsurancecontracts of $1.0 million. A more detailed description of thesenon-traditional contracts is provided under "-Non-Traditional Contracts" below.

Expenses.

Net losses and lossexpenses.    Net losses and loss expenses were $57.5 million forthe three months ended March 31, 2005 an increase of $41.6 million, or261.7%, compared to $15.9 million for the three months endedMarch 31, 2004. The increase in net losses and loss expenses is due tothe increase in the number of insurance and reinsurance contracts weentered into and the associated net premiums earned as our insuranceand reinsurance portfolios continue to mature. Net losses and lossexpenses are a function of our net premiums earned and our expectedultimate losses and loss expenses for reported and unreported claims oncontracts of insurance and reinsurance underwritten. Included in ourexpected ultimate losses during the three months ended March 31, 2005are reported loss estimates, including $4.9 million related to damagecaused by an oil pipeline in California which ruptured during amudslide, for which the damage is covered by a insurance contractissued by our environmental liability product line, and adversedevelopment of $1.0 million related to contracts of reinsuranceinsuring claims arising from the 2004 hurricanes Charley, Frances, Ivanand Jeanne. Our estimate of our exposure to ultimate claim costs fromthese reported losses is based on currently available information,claims notifications received to date, industry loss estimates, outputfrom industry models, a detailed review of affected contracts anddiscussion with cedants and brokers. The actual amount of losses fromreported events may vary significantly from our estimates. As of March31, 2005, other than claims related to the ruptured oil pipeline inCalifornia and the four hurricanes we have received a limited amount ofother reported losses. However, we participate in lines of businesswhere claims may not be reported for some period of time after thoseclaims are incurred.

Our total net loss ratio (calculated bydividing net losses and loss expenses by net premiums earned) was62.8% for the three months ended March 31, 2005 an increase of4.4% compared to a total net loss ratio of 58.4% for thethree months ended March 31, 2004. The increase in the total net lossratio is due to the ruptured oil pipeline in California and the adversedevelopment related to the hurricanes. We expect that our total netloss ratio will decrease during 2005 as we continue to expand anddiversify our lines of business and increase our net premiums earned.This expectation could change depending upon the occurrence of unusualor unexpected claim events.

Acquisitionexpenses.    Acquisition expenses were $18.4 million for thethree months ended March 31, 2005 an increase of $11.8 million, or178.8%, compared to $6.6 million for the three months endedMarch 31, 2005. The increase in acquisition expenses is due to theincrease in the number of insurance and reinsurance contracts weentered into and the associated net premiums earned. Our acquisitioncost ratio (calculated by dividing acquisition expenses by net premiumsearned) for the three months ended March 31, 2005 was 20.2% adecrease of 4.1% compared to our acquisition cost ratio of24.3% for the three months ended March 31, 2004. The decrease isdue in part to our specialty reinsurance property product line writingmore excess of loss contracts during the three months ended March 31,2005, rather than quota share contracts which generally carry highercommissions, ceding commission income that we are recovering on ourspecialty insurance segment's reinsurance treaties and lowercommissions payable on our HBW program as a result of the contractscontaining sliding scale commission provisions that vary with changesin the selected loss ratio. Deferred acquisition costs include, as ofMarch 31, 2005, $46.3 million of acquisition expenses on writtencontracts of insurance and reinsurance that will by amortized in futureperiods as the premiums written to which they relate are earned.

Direct technical services costs.    Direct technicalservices costs were $4.9 million for the three months ended March 31,2005 an increase of $0.5 million, or 10.9%, compared to $4.4million for the three months ended March 31, 2004 and were comprised ofsubcontractor and direct labor expenses. Direct technical servicescosts, as a percentage of technical services revenues, wasapproximately 68.0% for the period and was consistent with67.4% for the three months ended March 31, 2004.

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General and administrativeexpenses.    General and administrative expenses were $20.9million for the three months ended March 31, 2005 an increase of $5.1million, or 31.9%, compared to $15.8 million for the threemonths ended March 31, 2004 and were comprised of $13.3 million ofpersonnel related expenses and $7.6 million of other general andadministrative expenses. The increase in general and administrative isin line with expectations as we grew our lines of business andincreased the number of employees. General and administrative expensesinclude $19.2 million related to our underwriting segment, including$0.8 million of expenses charged by our technical services segment forinformation management services provided, and $2.5 million of expensesrelated to our technical services segment.

Our general andadministrative expense ratio (calculated by dividing underwritingrelated general and administrative expenses by net premiums written)was 13.4% for the three months ended March 31, 2005 an increaseof 1.1% compared to 12.3% for the three months endedMarch 31, 2004 due to the additional number of employees hired anddevelopment of our infrastructure as we grew our lines of business inthe first quarter of 2005.

Depreciation and amortization ofintangible assets.    Depreciation and amortization of intangibleassets was $0.8 million for the three months ended March 31, 2005 anincrease of $0.4 million, or 117.6%, compared to $0.4 millionfor the three months ended March 31, 2004 and consisted of amortizationof intangible assets related to the acquisition of ESC and depreciationof fixed assets. The increase in depreciation and amortization is dueto the purchase of additional fixed assets throughout 2004 as we grewour lines of business.

We have not recorded any net deferredincome tax benefits or assets relating to tax operating lossesgenerated by our subsidiaries since our results of operations include a100% valuation allowance against net deferred tax assets. Forthe three months ended March 31, 2005, the net valuation allowance wasapproximately $1.7 million.

Results by Operating Segments

Underwriting

We principally provide insurance andreinsurance protection for risks that are often unusual or difficult toplace, that do not fit the underwriting criteria of standard commercialproduct carriers and that require extensive technical underwriting andassessment resources in order to be profitably underwritten. Ourunderwriting objective is to deploy capital to what we believe are themost attractive lines of business at the most opportune times in orderto maximize our risk-adjusted returns on capital. In measuring theperformance of our specialty insurance, specialty reinsurance andLloyd's segments, we consider each segment's netunderwriting income and a number of financial ratios. Net underwritingincome is the sum of net premiums earned less net losses and lossexpenses, acquisition expenses and direct and allocated general andadministrative expenses. The financial ratios we use include the netloss and loss expense ratio, the acquisition expense ratio and thegeneral and administrative expense ratio. Our net loss and loss expenseratio is calculated as net losses and loss expenses incurred divided bynet premiums earned. Our acquisition expense ratio is calculated bydividing acquisition expenses by net premiums earned. Our net loss andloss expense ratio and acquisition expense ratio provide a measure ofthe current profitability of the earned portions of our writteninsurance and reinsurance contracts. Our general and administrativeexpense ratio is calculated by dividing underwriting related generaland administrative expenses by net premiums written and indicates thelevel of indirect costs that we incur in acquiring and writinginsurance and reinsurance business. Our combined ratio is the aggregateof our loss and loss expense, acquisition expense and general andadministrative expense ratios. We believe that these financial ratiosappropriately reflect the profitability of our underwriting segments. Acombined ratio of less than 100% indicates an underwritingprofit and over 100%, an underwriting loss. Because we have alimited operating history, our combined ratio may be subject tosignificant volatility and may not be indicative of futureprofitability.

We allocate indirect corporate general andadministrative expenses among each of our segments, including thoserelated to underwriting operations, as described above under"Segment Information."

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Three months ended March 31, 2005and 2004

The following table summarizes our net underwritingresults and profitability measures for our segments for the threemonths ended March 31, 2005 and 2004:

Specialtyinsurance

|                                        |  |                                  |         |                                 |  |        |         |         |  |        |         |          |  |  |
|----------------------------------------|--|----------------------------------|---------|---------------------------------|--|--------|---------|---------|--|--------|---------|----------|--|--|
|                                   |  | Threemonths ended March 31, 2005 |         | Three monthsended March 31,2004 |  | Change |
|                                   |  |                             |         | ($ inthousands)                 |  |
| Directinsurance                        |  | $                                | 66,178  |                            |  | $      | 15,949  |    |  | $      | 50,229  |     |
| Reinsuranceassumed                     |  |                             | 848     |                            |  |   | 22,083  |    |  |   | (21,235 | )   |
| Totalgross premiumswritten             |  |                             | 67,026  |                            |  |   | 38,032  |    |  |   | 28,994  |     |
| Premiumsceded                          |  |                             | (24,930 | )                          |  |   | (6,274  | )  |  |   | (18,656 | )   |
| Netpremiumswritten                     |  | $                                | 42,096  |                            |  | $      | 31,758  |    |  | $      | 10,338  |     |
| Netpremiumsearned                      |  | $                                | 34,540  |                            |  | $      | 4,009   |    |  | $      | 30,531  |     |
| Otherincome                            |  |                             | 254     |                            |  |   | — |    |  |   | 254     |     |
| Netlosses and lossexpenses             |  |                             | (26,005 | )                          |  |   | (2,175  | )  |  |   | (23,830 | )   |
| Acquisitionexpenses                    |  |                             | (6,340  | )                          |  |   | (822    | )  |  |   | (5,518  | )   |
| Generaland administrativeexpenses      |  |                             | (9,465  | )                          |  |   | (8,649  | )  |  |   | (816    | )   |
| Netunderwriting (loss)income           |  | $                                | (7,016  | )                          |  | $      | (7,637  | )  |  | $      | 621     |     |
| Ratios:                                |  |
| Lossand loss expenseratio              |  |                             | 75.3    | %                          |  |   | 54.3    | %  |  |   | (21.0   | )%  |
| Acquisitionexpenseratio                |  |                             | 18.4    | %                          |  |   | 20.5    | %  |  |   | 2.1     | %   |
| Generaland administrative expenseratio |  |                             | 22.5    | %                          |  |   | 27.2    | %  |  |   | 4.7     | %   |
| Combinedratio                          |  |                             | 116.2   | %                          |  |   | 102.0   | %  |  |   | (14.2   | )%  |
|                                        |

Premiums.    Grossand net written premiums were $67.0 million and $42.1 million for thethree months ended March 31, 2005 compared to $38.0 million and $31.8million for the three months ended March 31, 2004. The increase in ourspecialty insurance segment's gross and net premiums written wasdue primarily to growth in U.S. insurance business as we grew from ourstart-up phase into a more recognized insurer. The increase reflectsour increasing participation in the insurance marketplace anddevelopment of our insurance portfolios.

The table below showsgross written premiums by product line for the three months ended March31, 2005 and 2004 whether written on a traditional insurance, programsor structuredbasis:

|                               |  |                                  |        |                                  |  |        |         |        |  |  |
|-------------------------------|--|----------------------------------|--------|----------------------------------|--|--------|---------|--------|--|--|
|                          |  | Threemonths ended March 31, 2005 |        | Three monthsended March 31, 2004 |
|                          |  | ($ inthousands)                  |
| Technical risk property       |  | $                                | 43,887 |                             |  |   | 22,040  |   |
| Professionalliability         |  |                             | 8,918  |                             |  |   | 4,205   |   |
| Environmentalliability        |  |                             | 5,842  |                             |  |   | 10,196  |   |
| Fidelity andcrime             |  |                             | 3,892  |                             |  |   | 1,591   |   |
| Surety                        |  |                             | 2,871  |                             |  |   | — |   |
| Tradecredit and politicalrisk |  |                             | 1,616  |                             |  |   | — |   |
| Total                         |  | $                                | 67,026 |                             |  | $      | 38,032  |   |
|                               |

Duringthe three months ended March 31, 2005 we continued to write, in ourtechnical risk property product line, a residential builders' andcontractors' program that provides warranty, general liability,builders' risk and excess liability coverage's for new homecontractors throughout the U.S. This program, which we refer to as theHBW program, accounted for approximately $41.1 million, or93.7%, of the technical risk property line of business and $41.1million of total specialty insurance 

27

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segment gross written premiums in the threemonths ended March 31, 2005. The policies in the program areunderwritten through a third party agent that we believe is anestablished specialist in this technical field. We expect that thisprogram will continue to contribute substantial net written premiumsduring the remainder of 2005 and that we will experience further growthand diversification in our other specialty insurance lines ofbusiness.

Approximately 61.3% of our specialty insurancesegment gross written premiums of $67.0 million were generated throughour HBW program. The remaining 38.7% of our specialty insurancesegment gross written premiums were generated through seventy brokers,none of which accounted for more than 10% of our total specialtyinsurance segment gross written premiums.

Ceded premiums were$24.9 million during the three months ended March 31, 2005 an increaseof $18.6 million compared to $6.3 million for the three months endedMarch 31, 2004. The increase in ceded premiums reflects the increase inour gross written premiums and the reinsurance treaties that we haveentered into for each of our specialty insurance product lines in orderto limit our net loss exposures to our planned net limits and tocontrol our aggregate exposures to particular classes of risk. Grosspremiums written and ceded premiums are earned over the period of eachinsured risk. The terms of our insurance contracts range from betweenone and ten years. Net premiums earned during the three months endedMarch 31, 2005 were $34.5 million representing the earning andamortization of premiums written and ceded during the year endedDecember 31, 2004 and the three months ended March 31, 2005.

Other income.    Other income was $0.3 million for thethree months ended March 31, 2005 and related to income, includingfees, recognized on non-traditional insurance contracts. A moredetailed description of these non-traditional contracts is providedunder "- Non-Traditional Contracts"below.

Net losses and loss expenses.    Net losses andloss expenses were $26.0 million for the three months ended March 31,2005 an increase of $23.8 million compared to $2.2 million for thethree months ended March 31, 2004. The increase of $23.8 million in netlosses and loss expenses incurred was due to the increase in the numberof insurance contracts we entered into and the associated net premiumsearned. Net losses and loss expenses were a function of our netpremiums earned and our expected ultimate losses and loss expenses forreported and unreported claims on contracts of insurance underwritten.Included in our expected ultimate losses during the three months endedMarch 31, 2005 is $4.9 million of specific loss related to damages froma ruptured oil pipeline in California which was covered by an insurancecontract issued by our environmental liability product line.

Ourloss ratio was 75.3% for the three months ended March 31, 2005compared to 54.3% for the three months ended March 31, 2004. Theincrease of 21.0% in our loss ratio is due, in part, to theenvironmental loss described above. We have received a limited numberof other loss notifications in our specialty insurance segment.However, we participate in lines of business where claims may not bereported for some period of time after those claims are incurred. Weexpect that our loss and loss expense ratio will decrease during 2005as we continue to expand and diversify our lines of business andincrease our net premiums earned.

Acquisitionexpenses.    Acquisition expenses were $6.3 million for the threemonths ended March 31, 2005 an increase of $5.5 million compared to$0.8 million for the three months ended March 31, 2004. The increase of$5.5 million in acquisition expenses was due to the increase in thenumber of insurance contracts we entered into and the associated netpremiums earned. These acquisition expenses primarily representedbrokerage fees, commission fees and premium tax expenses and were netof ceding commissions earned on purchased reinsurance treaties.

Our acquisition expense ratio was 18.4% for the three monthsended March 31, 2005 a decrease of 2.1% compared to 20.5%for the three months ended March 31, 2004. The reduction in ouracquisition expense ratio in the specialty insurance segment isprimarily due to the acquisition costs on our technical risk propertycontracts, including the residential builders' andcontractors' risk program described above, being lower during thethree months ended March 31, 2005 as a result of the contractscontaining sliding scale commission provisions that vary with changesin the selected loss 

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ratio. The reduction in our acquisitionexpense ratio is also due to ceding commission income that we areearning on the reinsurance treaties that we have entered into for eachof our specialty insurance product lines. We expect that ouracquisition expense ratio will remain constant during 2005.

General and administrative expenses.    Direct andallocated indirect general and administrative expenses totaled $9.5million for the three months ended March 31, 2005 an increase of $0.8compared to $8.7 million for the three months ended March 31, 2004. Theincrease in our general and administrative expense ratio was due to theadditional number of employees hired throughout 2004 as we grew ourspecialty insurance lines of business.

Our general andadministrative expense ratio was 22.5% of net premiums writtenfor the three months ended March 31, 2005 a decrease of 4.7%compared to 27.2% for the three months ended March 31, 2004 andwas due to the increase in our net premiums written. We expect ourgeneral and administrative expense ratio to continue to decrease,although not evenly, during the remainder of 2005 as we continue toexpand our lines of business and increase our net premiums written.

Specialtyreinsurance

|                                        |  |                                  |         |                                 |  |        |         |         |  |        |         |         |  |  |
|----------------------------------------|--|----------------------------------|---------|---------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                   |  | Threemonths ended March 31, 2005 |         | Three monthsended March 31,2004 |  | Change |
|                                   |  |                             |         | ($ inthousands)                 |  |
| Reinsuranceassumed                     |  | $                                | 89,407  |                            |  | $      | 80,697  |    |  | $      | 8,710   |    |
| Totalgross premiumswritten             |  |                             | 89,407  |                            |  |   | 80,697  |    |  |   | 8,710   |    |
| Premiumsceded                          |  |                             | (1,297  | )                          |  |   | — |    |  |   | (1,297  | )  |
| Netpremiumswritten                     |  | $                                | 88,110  |                            |  | $      | 80,697  |    |  | $      | 7,413   |    |
| Netpremiumsearned                      |  | $                                | 53,637  |                            |  | $      | 23,226  |    |  | $      | 30,411  |    |
| Otherincome                            |  |                             | 790     |                            |  |   | — |    |  |   | 790     |    |
| Netlosses and lossexpenses             |  |                             | (29,648 | )                          |  |   | (13,720 | )  |  |   | (15,928 | )  |
| Acquisitionexpenses                    |  |                             | (11,772 | )                          |  |   | (5,795  | )  |  |   | (5,977  | )  |
| Generaland administrativeexpenses      |  |                             | (5,156  | )                          |  |   | (5,192  | )  |  |   | 36      |    |
| Netunderwriting income(loss)           |  | $                                | 7,851   |                            |  | $      | (1,481  | )  |  | $      | 9,332   |    |
| Ratios:                                |  |
| Lossand loss expenseratio              |  |                             | 55.3    | %                          |  |   | 59.1    | %  |  |   | 3.8     | %  |
| Acquisitionexpenseratio                |  |                             | 21.9    | %                          |  |   | 25.0    | %  |  |   | 3.1     | %  |
| Generaland administrative expenseratio |  |                             | 5.9     | %                          |  |   | 6.4     | %  |  |   | 0.5     | %  |
| Combinedratio                          |  |                             | 83.1    | %                          |  |   | 90.5    | %  |  |   | 7.4     | %  |
|                                        |

Premiums.    Grossand net premiums written were $89.4 million and $88.1 million for thethree months ended March 31, 2005 compared to $80.7 million of grossand net premiums for the three months ended March 31, 2004. Theincrease in our specialty reinsurance segment's gross and netwritten premiums was due primarily to the reinsurance opportunitiesduring the January 2005 renewal season and premium generated fromexisting reinsurance contracts entered into during the year endedDecember 31, 2004 as our risks attaching reinsurance policiesmature.

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The table below shows gross writtenpremiums by product line whether written on a traditional reinsurance,programs or structuredbasis:

|                                   |  |                                  |        |                                  |  |        |        |        |  |  |
|-----------------------------------|--|----------------------------------|--------|----------------------------------|--|--------|--------|--------|--|--|
|                              |  | Threemonths ended March 31, 2005 |        | Three monthsended March 31, 2004 |
|                              |  | ($ inthousands)                  |
| Property                          |  | $                                | 44,439 |                             |  | $      | 44,966 |   |
| Casualty                          |  |                             | 29,104 |                             |  |   | 20,325 |   |
| Marine,technical risk andaviation |  |                             | 15,864 |                             |  |   | 15,406 |   |
| Total                             |  | $                                | 89,407 |                             |  | $      | 80,697 |   |
|                                   |

Ourproperty reinsurance gross premiums written during the three monthsended March 31, 2005 are summarized in the table below by riskclass.

|                                   |  |        |       |         |  |  |
|-----------------------------------|--|--------|-------|---------|--|--|
| Homeownersand commercial property |  |   | 73.6  | %  |
| Crophail                          |  |   | 26.4  | %  |
| Total                             |  |   | 100.0 | %  |
|                                   |

Ourhomeowners and commercial property risk class includes a single treatycovering property risks of small regional accounts throughout the U.S.,which accounted for approximately 32.9% of our total propertyreinsurance gross premiums written during the three months ended March31, 2005. Our crop hail category covers crops throughout the U.S.

Our property premiums written include contracts written on excess ofloss and quota share bases. Of our total property reinsurance grosspremiums written for the three months ended March 31, 2005,17.7% represents excess of loss contracts that we believe areexposed to losses from natural catastrophe events worldwide. Themajority of our property quota share contracts are exposed to naturalperils, including natural catastrophes.

Our casualty reinsurancegross premiums written during the three months ended March 31, 2005 aresummarized in the table below by risk class.

|                                 |  |        |       |         |  |  |
|---------------------------------|--|--------|-------|---------|--|--|
| Directorsand officers'liability |  |   | 28.2  | %  |
| Other professionalliability     |  |   | 15.5  | %  |
| Other                           |  |   | 56.3  | %  |
| Total                           |  |   | 100.0 | %  |
|                                 |

Ourcasualty reinsurance gross premiums written included in our"other" casualty category, was spread across21 different risk classes, none of which accounted for more than10% of our casualty reinsurance premiums written for the threemonths ended March 31, 2005.

Approximately 43.9% and21.1% of our reinsurance segment gross written premiums weregenerated through Guy Carpenter & Company, Inc. and BenfieldGroup.

Gross reinsurance premiums written are being earned overthe periods of reinsured or underlying insured risks which aretypically one year. Ceded premiums were $1.3 million during the threemonths ended March 31, 2005 under the reinsurance treaties we purchasedfor our marine, technical risk and aviation product line. Grosspremiums written and ceded premiums are earned over the period of eachinsured risk. We expect to purchase additional reinsurance treatiesduring the second quarter of 2005 in order to limit our net lossexposures to our planned net limits and to control our aggregateexposures to particular classes of risk for our property reinsuranceproduct line.

Net premiums earned of $53.6 million reflect theearning of premiums on contracts written during the year ended December31, 2004 and during the three months ended March 31, 2005.

Other income.    Other income was $0.8 million for thethree months ended March 31, 2005 and related to income, includingfees, recognized on non-traditional reinsurance contracts. A moredetailed description of these non-traditional contracts is providedunder "- Non-Traditional Contracts"below.

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Net losses and lossexpenses.    Net losses and loss expenses were $29.6 million forthe three months ended March 31, 2005 an increase of $15.9 millioncompared to $13.7 million for the three months ended March 31, 2004.The increase of $15.9 million in net losses and loss expenses incurredwas due to the increase in the number of reinsurance contracts weentered into and the associated net premiums earned. Net losses andloss expenses were a function of our net premiums earned and ourexpected ultimate losses and loss expenses for reported and unreportedclaims on contracts of reinsurance underwritten. Included in ourexpected ultimate losses is adverse development of $1.0 million relatedto our loss estimates on contracts of reinsurance and insuranceinsuring claims arising from hurricanes Charley, Frances, Ivan andJeanne. The actual amount of losses from the hurricanes may varysignificantly from the estimate. Other than claims related to the 2004hurricanes, as of March 31, 2005 we have received a limited amount ofother reported losses. However, we participate in lines of businesswhere claims may not be reported for some period of time after thoseclaims are incurred.

Our total net loss ratio (calculated bydividing net losses and loss expenses by net premiums earned) was55.3% for the three months ended March 31, 2005 a decrease of3.8% compared to 59.1% for the three months ended March31, 2004. The decrease in our total net loss ratio reflects a decreasein the concentration of crop hail contracts included in the specialtyreinsurance segment's net premiums earned during the three monthsended March 31, 2005 compared to the three months ended March 31, 2004.We expect that this ratio will remain constant during the remainder of2005 barring any further significant catastrophe losses. In addition,we expect during the second quarter of 2005 to enter into reinsurancetreaties in our property reinsurance line of business to reduce thepotential impact to our total net loss ratio from catastrophic eventsof similar magnitude as we experienced in 2004.

Acquisitionexpenses.    Acquisition expenses were $11.8 million for thethree months ended March 31, 2005 an increase of $6.0 million comparedto $5.8 million for the three months ended March 31, 2004. The increasein acquisition expenses was due to the increase in the number ofreinsurance contracts we entered into and the associated net premiumsearned. These acquisition expenses primarily represented brokerage andceding commissions.

Our acquisition expense ratio was21.9% for the three months ended March 31, 2005 a decrease of3.1% compared to 25.0% for the three months ended March31, 2004. The decrease partly reflects the nature and type of contractswritten in 2005 versus 2004, particularly in our property reinsuranceproduct line where we have written more excess of loss contracts thanquota share contracts with generally lower commission rates.

General and administrative expenses.    Direct andallocated indirect general and administrative expenses totaled $5.2million for the three months ended March 31, 2005 and were constantcompared to the three months ended March 31, 2004. Our general andadministrative expense ratio was 5.9% of net premiums writtenfor the three months ended March 31, 2005 a decrease of 0.5%compared to 6.4% for the three months ended March 31, 2004 andwas due to the increase in our net premiums written.

Lloyd's

We did not commence writingbusiness at our Lloyd's Syndicate 4000 until the fourth quarterof 2004 and accordingly there is no comparative review of the threemonths ended March 31, 2005 to the three months ended March 31,2004.

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|                                        |  |                                  |         |         |  |  |
|----------------------------------------|--|----------------------------------|---------|---------|--|--|
|                                   |  | Threemonths ended March 31, 2005 |
|                                   |  | ($in thousands)                  |
| Directinsurance                        |  | $                                | 16,293  |    |
| Reinsuranceassumed                     |  |                             | — |    |
| Totalgross premiums written            |  |                             | 16,293  |    |
| Premiumsceded                          |  |                             | (3,622  | )  |
| Netpremiumswritten                     |  | $                                | 12,671  |    |
| Netpremiums earned                     |  | $                                | 3,309   |    |
| Otherincome                            |  |                             | — |    |
| Net losses and lossexpenses            |  |                             | (1,843  | )  |
| Acquisitionexpenses                    |  |                             | (333    | )  |
| General and administrativeexpenses     |  |                             | (4,560  | )  |
| Netunderwriting (loss)income           |  | $                                | (3,427  | )  |
| Ratios:                                |  |
| Lossand loss expenseratio              |  |                             | 55.7    | %  |
| Acquisition expenseratio               |  |                             | 10.1    | %  |
| General andadministrative expenseratio |  |                             | 36.0    | %  |
| Combinedratio                          |  |                             | 101.8   | %  |
|                                        |

Premiums.    Wecommenced underwriting specialty insurance lines at Syndicate 4000 atLloyd's in December 2004. Gross and net written premiums were$16.3 million and $12.7 million for the three months ended March 31,2005 and represented professional liability insurance business. Weexpect that our gross and net premiums written will increase in futureperiods as we continue to grow our Syndicate 4000 at Lloyd's andenter into additional insurance contracts.

Net premiums earnedin the three months ended March 31, 2005 were $3.3 million and reflectthe earning of premiums on contracts written during the year endedDecember 31, 2004 and during the three months ended March 31, 2005. Weexpect that our gross and net premiums written and net premiums earnedwill increase in future periods as Syndicate 4000 at Lloyd'scontinues to grow and enters into additional insurance contracts.

Losses and loss expenses.    Net losses and loss expensesincurred were $1.8 million for the three months ended March 31, 2005and reflect a loss and loss expense ratio (calculated as losses andloss expenses incurred divided by net premium earned) of 55.7%.For the three months ended March 31, 2005, given the segment'slimited operating history and historical claims experience, we adoptedan expected loss ratio methodology to estimate our ultimate cost oflosses. As of March 31, 2005, we had not received any notifications ofsignificant reported losses that were covered under Syndicate4000's insurance contracts. However, we participate in lines ofbusiness where claims may not be reported for some period of time afterthose claims are incurred.

Acquisitionexpenses.    Acquisition expenses were $0.3 million for the threemonths ended March 31, 2005 and reflect an acquisition expense ratio of10.1% and were a function of the number and type of insurancecontracts we entered into and the associated net premiums earned. Theseacquisition expenses primarily represented brokerage expenses.

General and administrative expenses.    Direct andallocated indirect general and administrative expenses totaled $4.6million, or 36.0%, of net premiums written for the three monthsended March 31, 2005 and were largely comprised of employee and otherLloyd's and corporate related expenses. We expect our general andadministrative expense ratio to decrease during the remainder of 2005as we continue to expand our lines of business and increase our netpremiums written.

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Technical services

Three months ended March 31, 2005 and2004

|                                   |  |                                 |        |                                |  |        |        |         |  |        |      |         |  |  |
|-----------------------------------|--|---------------------------------|--------|--------------------------------|--|--------|--------|---------|--|--------|------|---------|--|--|
|                              |  | Threemonths endedMarch 31, 2005 |        | Three monthsendedMarch 31,2004 |  | Change |
|                              |  |                            |        | ($ inthousands)                |  |
| Technical servicesrevenues        |  | $                               | 7,999  |                           |  | $      | 7,036  |    |  | $      | 963  |    |
| Otherincome                       |  |                            | 123    |                           |  |   | 159    |    |  |   | (36  | )  |
| Directtechnical servicescosts     |  |                            | (4,861 | )                         |  |   | (4,384 | )  |  |   | (477 | )  |
| Generaland administrativeexpenses |  |                            | (2,539 | )                         |  |   | (2,517 | )  |  |   | (22  | )  |
| Nettechnical servicesincome       |  | $                               | 722    |                           |  | $      | 294    |    |  | $      | 428  |    |
|                                   |

Technicalservices revenues.    Technical services revenues were $8.0million for the three months ended March 31, 2005, an increase of $1.0million, or 13.7%, compared to $7.0 million for the three monthsended March 31, 2004. The increase of $1.0 million in technicalservices revenues consists is attributable to increases in direct laborrevenue which is a result of an increase in client spending onenvironmental projects.

Other income.    Other incomewas $0.1 million for the three months ended March 31, 2005 as comparedto $0.2 million for the three months ended March 31, 2004. Other incomewas primarily generated from our liability assumption program underwhich we assume specified environmental liabilities. This incomerepresents fees earned relating to the remediation servicesperformed.

Direct technical services costs.    Directtechnical services costs were $4.9 million for the three months endedMarch 31, 2005, an increase of $0.5 million, or 10.9%, comparedto $4.4 million for the three months ended March 31, 2004. The increasein direct technical services costs was primarily attributable toincreased direct labor expenses which resulted from an increase in thenumber, and change in the scope and nature of, remediation projectsundertaken during the three months ended March 31, 2005 compared to thethree months ended March 31, 2004. Direct technical services costs, asa percentage of revenue was 60.8% for the three months endedMarch 31, 2005 compared to 62.3% for the three months endedMarch 31, 2004. The reduction in direct technical services costs as apercentage of revenues was primarily due to the decreased subcontractoractivity as a percentage of revenues during the period.

General and administrative expenses.    Direct and indirectallocated general and administrative expenses were $2.5 million for thethree months ended March 31, 2005 which was constant with $2.5 millionfor the three months ended March 31, 2004.

Financial Conditionand Liquidity

Quanta Holdings is organized as a Bermuda holdingcompany, and as such, has no direct operations of its own. Our assetsconsist of investments in our subsidiaries through which we conductsubstantially all of our insurance, reinsurance and technical servicesoperations. As of March 31, 2005, we had operations in Bermuda, theU.S., Ireland and the U.K., including Syndicate 4000 atLloyd's.

As a holding company, we will have continuingfunding needs for general corporate expenses, the payment of principaland interest on current and future borrowings, taxes, and the paymentof other obligations. Funds to meet these obligations will comeprimarily from dividends, interest and other statutorily permissiblepayments from our operating subsidiaries. The ability of our operatingsubsidiaries to make these payments is limited by the applicable lawsand regulations of the domiciles in which the subsidiaries operate.These laws and regulations subject our subsidiaries to significantrestrictions and require, among other things, that some of oursubsidiaries maintain minimum solvency requirements and limit theamount of dividends that these subsidiaries can pay to us.

Financial condition

Our available-for-saleinvestments, excluding trading investments related to depositliabilities, totaled $611.0 million as of March 31, 2005 compared to$559.4 million at December 31, 2004. The 

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majority of our investment portfolioconsists of fixed maturity investments which are managed by thefollowing external investment advisors: Pacific Investment ManagementCompany LLC, JP Morgan Investment Management Inc. and Loomis, Sayles& Company, L.P. Custodians of our externally managed investmentportfolios are JP Morgan Chase Bank N.A. and Citibank N.A. Included inour investment portfolio is a mortality-risk-linked security for whichthe repayment of principal is dependent on the performance of aspecified mortality index. The total market value of this security was$20.0 million as of March 31, 2005. As of March 31, 2005, all of thefixed maturity investments were investment grade, with a weightedaverage credit rating of "AA" based onratings assigned by S&P. Our cash and cash equivalents totaled$53.0 million as of March 31, 2005 compared to $32.8 million atDecember 31, 2004. The increase in our available-for-sale investmentsand cash and cash equivalents is primarily due to the growth in ourpremiums written during the three months ended March 31, 2005 and theissuance of $21.6 million of Junior Subordinated Debentures, partiallyoffset by claims notifications and associated loss payments we havemade up to and including March 31, 2005. We expect that our fixedmaturity investments and cash and cash equivalent balances willdecrease during the early part of 2005 as we continue to pay loss andloss expenses related to reported claims, particularly those arisingfrom the hurricane events during the third quarter of 2004.

Ourinsurance and reinsurance premiums receivable balances totaled $187.6million as of March 31, 2005 compared to $146.8 million at December 31,2004. The increase in premiums receivable reflects our growth acrossall specialty insurance and reinsurance segments during the threemonths ended March 31, 2005 and the associated increase in the level ofpremiums written. Included in our premiums receivable are approximately$142.5 million of written premium installments that are not yetcurrently due under the terms of the related insurance and reinsurancecontracts. As of March 31, 2005, based on our review of the remainingbalance of $45.1 million, which represents premiums installments thatare currently due, there are no individually significant balances thatare delinquent or uncollectible.

Our deferred acquisition costsand unearned premiums, net of deferred reinsurance premiums, totaled$46.3 million and $251.9 million, respectively, as of March 31, 2005compared to $41.5 million and $200.5 million as of December 31, 2004.These increases were due to the growth in our premiums written duringthe three months ended March 31, 2005. These amounts represent premiumsand acquisition expenses on written contracts of insurance andreinsurance that will be recognized in earnings in future periods.Substantially all of these amounts will be recognized over the next 12months.

Our reserves for losses and loss adjustment expenses,net of reinsurance recoverable, totaled $190.5 million as of March 31,2005 compared to $146.3 million as of December 31, 2004. The increasein our net loss and loss expense reserves reflects the growth in ourbusiness, the associated insured risks we assumed during the threemonths ended March 31, 2005 and include our estimate of ultimate unpaidloss expenses totaling $9.3 million relating to hurricanes Charley,Frances, Ivan and Jeanne and $4.9 million relating to the environmentalclaim that we incurred during the three months ended March 31, 2005.Our estimate of our unpaid exposure to ultimate claim costs associatedwith these losses is based on currently available information, claimnotifications received to date, industry loss estimates, output fromindustry models, a detailed review of affected contracts and discussionwith clients, cedants and brokers. The actual amount of future losspayments relating to these loss events may vary significantly from thisestimate. As of March 31, 2005 we have received a limited amount ofother reported losses. However, we participate in lines of businesswhere claims may not be reported for some period of time after thoseclaims are incurred.

Our shareholders' equity was $425.0million as of March 31, 2005 compared to $430.9 million as of December31, 2004, reflecting a decrease of $5.9 million that was primarilyrelated to a net change in unrealized losses on our investmentportfolios of $7.3 million during the three months ended March 31, 2005which was offset by our net income of $1.4 million for the three monthsended March 31, 2005. As of March 31, 2005, we have provided a100% cumulative valuation allowance against our deferred taxassets in the amount of $15.0 million. These deferred tax assets weregenerated primarily from net operating losses. As a start-up companywith limited operating history, the realization of these deferred taxassets is neither assured nor accurately determinable.

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Liquidity

OperatingCashflow

We generated net operating cash flow of approximately$31.8 million during the three months ended March 31, 2005, primarilyrelated to premiums and investment income received and offset bygeneral and administrative expenses paid. In addition, we alsogenerated net proceeds from the issuance of Junior SubordinatedDebentures of $19.6 million. During the same period, we invested netcash of $31.2 million in our investment assets and, as of March 31,2005, had net cash and cash equivalent balances of $53.0 million.Included in our cash and cash equivalents and investments is $106.7million that is held by Lloyd's to support our underwritingactivities, $112.1 million held in trust funds for the benefit ofceding companies and to fund our obligations associated with theassumption of an environmental remediation liability, $144.4 millionthat is pledged as collateral for letters of credit, $29.3 million thatis on deposit with, or has been pledged to, U.S. state insurancedepartments and $42.7 million held in trust funds that are related toour deposit liabilities. Our cash flows from operations for the threemonths ended March 31, 2005 provided us with sufficient liquidity tomeet operating cash requirements during that period.

Sources of cash

Our sources of cash consist primarilyof existing cash and cash equivalents, premiums written, proceeds fromsales and redemptions of investment assets, capital or debt issuances,investment income, reinsurance recoveries, and, to a lesser extent, oursecured bank credit facility and collections of receivables fortechnical services rendered to third parties.

On July 13, 2004,Quanta Holdings and certain designated insurance subsidiaries enteredinto a credit agreement providing for a secured bank credit facilityand a revolving credit facility with a syndicate of lenders in theamount of $150 million. Up to $25 million may be borrowed under thefacility on a revolving basis for general corporate purposes andworking capital requirements. The facility is secured by specifiedinvestments of the borrowers. As of March 31, 2005, we had $144.4million of secured letters of credit issued and outstanding under thefacility. As of March 31, 2005, we have not made any borrowings underthe revolving credit facility. The availability to a borrower is basedon the amount of eligible investments pledged by that borrower and nomaterial adverse change provisions. Regulatory restrictions will alsolimit the amount of investments that may be pledged by our U.S.insurance borrowers and, consequently, the amount available for lettersof credit and borrowings under the facility to those borrowers.

The credit agreement has certain financial covenants, including aleverage ratio (consolidated indebtedness to consolidated totalcapital) of not greater than 0.35 to 1, a minimum consolidated networth of at least $340 million and maintenance of the Company'sinsurance ratings. In addition, the credit agreement contains certaincovenants restricting the activities of Quanta Holdings and itssubsidiaries, such as the incurrence of additional indebtedness, liensand dividends and other payments to Quanta Holdings. Quanta Holdingshas also unconditionally and irrevocably guaranteed all of theobligations of its subsidiaries to the lenders. The facility terminateson July 12, 2005. We intend to renew this facility or enter into a newfacility but cannot assure you that this will be available to us onterms that are commercially reasonable, or at all. We may also enterinto other credit facilities to support portions of our business.

On February 24, 2005, we participated in a private placement of$20.0 million of floating rate capital securities (the"Trust Preferred Securities") issued byQuanta Capital Statutory Trust II (Quanta Trust II"), asubsidiary Delaware trust formed on February 24, 2004. The TrustPreferred Securities mature on June 15, 2035 are redeemable at ouroption at par beginning June 15, 2010, and require quarterlydistributions of interest by Quanta Trust II to the holder of the TrustPreferred Securities. Distributions will be payable at a variable perannum rate of interest, reset quarterly, equal to the London InterbankOffered Rate ("LIBOR") rate plus 350 basispoints. Quanta Trust II used the proceeds from the sale of the TrustPreferred Securities and the issuance of its common securities topurchase $20.6 million of junior subordinated debt securities, dueMarch 15, 2035, in the principal amount of $20.6 million issued by us(the "Trust II Debentures"). We are using thenet proceeds of 

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$19.6 million, after the deduction ofapproximately $0.4 million of commissions paid to the placement agentsin the transaction, from the sale of the Trust II Debentures to QuantaTrust II for working capital purposes and to support the growth of ourbusiness.

Uses of cash

In the near term, ourprincipal cash requirements are expected to be investments in operatingsubsidiaries, losses and loss adjustment expenses and other policyholder benefits, brokerage and commissions, expenses to develop andimplement our business strategy, other operating expenses, premiumsceded, capital expenditures, the servicing of borrowing arrangements(including the Junior Subordinated Debentures), and taxes. Thepotential for a large claim under one of our insurance or reinsurancecontracts means that we may need to make substantial and unpredictablepayments within relatively short periods of time. While our board ofdirectors currently does not intend to declare dividends or make anyother distributions to the shareholders of Quanta Holdings, our boardplans to periodically reevaluate our dividend policy. Our cashrequirements will also include the payment of any future dividends toour shareholders if and when our board of directors determines tochange our dividend policy.

We paid additional claims of $8.1million during the first quarter of 2005 relating to the hurricaneevents of 2004. We expect that our cash requirements for the payment ofthese and other claims will be significant in future periods as wereceive and settle claims, including those relating to thesehurricanes.

We are in the process of hiring additional employeesin 2005 to complement the growth in our specialty insurance andreinsurance segments. As a result our general and administrativeexpenses for the three months ended March 31, 2005 are not fullyrepresentative of our expected employee base. We anticipate that ourcash requirements for the payment of annual salaries and benefits forthese employees will increase in future periods as compared to thethree months ended March 31, 2005.

We incurred capitalexpenditures of $1.2 million during the three months ended March 31,2005 related primarily to the purchase and development of informationtechnology assets. During the remainder of 2005, we expect capitalexpenditures principally relating to information systems, furniture andfixtures and leasehold improvements to be less than $10 million. Weexpect to fund these capital expenditures through cash provided by ouroperating activities.

In addition to these cash requirements,under the purchase agreement with ESC, we will be required to payESC's former shareholders an earn-out payment if ESC achievesspecified EBITDA targets. EBITDA generally is defined to mean earningsbefore interest, taxes, depreciation and amortization. Under theearn-out arrangements, if EBITDA for the two-year period endingDecember 31, 2005 is $7.5 million or greater, we will be required topay an earn-out payment of $5.0 million. If EBITDA is greater than $7.0million and less than $7.5 million, then we will be required to pay apro rata portion of the $5.0 million. We cannot, at this time,determine with any certainty whether ESC will achieve these EBITDAtargets, or estimate the amount of any potential earn-out payments thatwould be required if these targets are achieved.

We may alsohave substantial liabilities to clients, third parties and governmentauthorities for property damage, personal injuries, breach of contractor breach of warranty claims, fines and penalties and regulatory actionthat could adversely affect our business arising from the assessment,analysis and assumption of environmental liabilities, and themanagement, remediation, and engineering of environmental conditionsconstitute a significant portion of our technical services business.From time to time, we may offer a liability assumption program underwhich a special-purpose entity assumes specified liabilities (at timesincluding taking title to property) associated with environmentalconditions for which we provide technical services, which may beinsured or guaranteed by us. These businesses involve significantrisks, including the possibility that we may have substantialliabilities to clients, third parties and governmental authorities forproperty damage, personal injuries, breach of contract or breach ofwarranty claims, fines and penalties and regulatory action that couldadversely affect our business.

While we had sufficient liquidityto pay the losses we experienced in the past hurricane season, we mayraise additional funds to further expand our business strategy, enternew lines of business and 

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manage our expected growth. We may raisecapital through debt or equity or other securities. The amount andtiming of this capital raise will depend on many factors, including ourability to write new business successfully and to establish premiumrates and reserves at levels sufficient to cover losses. At this time,we are not able to quantify the amount of additional capital we mayraise or will require in the future or predict the timing of any otherfuture capital needs. Any future equity or debt financing, if availableat all, may be on terms that are not favorable to us. If we raisecapital through equity financings, your interest in our company will bediluted, and the securities we issue may have rights, preferences andprivileges that are senior to those of the shares that are currentlyissued and outstanding. If we cannot maintain or obtain adequatecapital to manage our business strategy and expected growth targets,our business, results of operations and financial condition may beadversely affected.

Commitments

We have contractualobligations relating to commitments under the trust preferredsecurities and non-cancelable operating leases for property and officeequipment described above under "Liquidity"as of March 31, 2005 asfollows:

|                                          |  |                      |         |                 |  |           |         |           |  |                  |         |        |  |        |         |        |  |        |         |        |  |  |
|------------------------------------------|--|----------------------|---------|-----------------|--|-----------|---------|-----------|--|------------------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                                     |  | Paymentsdue byperiod |
| Contractualobligations($000's)           |  | Total                |         | Lessthan 1 year |  | 1-3 years |         | 3-5 years |  | Morethan 5 years |
| Long-term debtobligations                |  | $                    | 61,857  |            |  | $         | — |      |  | $                | — |   |  | $      | — |   |  | $      | 61,857  |   |
| Intereston long-term debt obligations(1) |  |                 | 116,354 |            |  |      | 3,868   |      |  |             | 7,736   |   |  |   | 7,736   |   |  |   | 97,014  |   |
| Operatingleaseobligations                |  |                 | 40,755  |            |  |      | 4,481   |      |  |             | 8,019   |   |  |   | 5,554   |   |  |   | 22,701  |   |
| Total                                    |  | $                    | 218,966 |            |  | $         | 8,349   |      |  | $                | 15,755  |   |  | $      | 13,290  |   |  | $      | 181,572 |   |
|                                          |

|  |
|--|
|  |  |
|  |

|  |                                                                                                                                                                                             |
|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (1)The interest on the long-term debt obligation is based on a spreadabove LIBOR. We have reflected the interest due based upon the currentinterest rate at March 31, 2005 on the facility. |

Off-balance sheet arrangements

Other than as describedunder "Liquidity" related to our TrustPreferred Securities offerings through the Quanta Capital StatutoryTrust I ("Quanta Trust I") and Quanta TrustII (together "Quanta Trust I and II"), as ofMarch 31, 2005, we have not entered into any off-balance sheetarrangements with special purpose entities or variable interestentities. We did not consolidate Quanta Trust I and II, theissuers' of the Trust Preferred Securities and variable interestentities, since we are not the primary beneficiary of Quanta Trust I orII. As of March 31, 2005, we have recorded the $61.9 million ofDebentures, which were issued to Quanta Trust I and II, on ourconsolidated balance sheet. The net proceeds of $58.4 million from thesale of the Debentures to Quanta Trust I and II will be used forworking capital purposes and to support the growth of our business.Distributions will be payable at a variable per annum rate of interest,reset quarterly, equal to LIBOR plus 385 basis points by the Company toQuanta Trust I and equal to LIBOR plus 350 basis points by the Companyto Quanta Trust II as described above under"Commitments." The Debentures are redeemableat the Company's option at par beginning March 15, 2010.

Adequacy of Regulatory and Rating Capital

While insuranceregulation differs by location, each jurisdiction requires that minimumlevels of capital be maintained in order to write new insurancebusiness. Factors that affect capital requirements generally includepremium volume, the extent and nature of loss and loss expensereserves, the type and form of insurance and reinsurance businessunderwritten and the availability of reinsurance protection fromadequately rated retrocessionaires on terms that are acceptable tous.

In all of the jurisdictions in which we operate insurers andreinsurers are required to maintain certain minimum levels of capitaland risk-based capital, the calculation of which includes numerousfactors as specified by the respective insurance regulatory authoritiesand the related insurance 

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regulations. We capitalize our insuranceoperations in excess of the minimum regulatory requirements so that wemay maintain adequate financial ratings. Generally, a higher financialrating creates a higher demand for insurance products. A higherfinancial rating will enable us both to write more business and to bemore selective in the business we underwrite. Accordingly, allocationof capital sufficient to achieve business objectives is a criticalaspect of any insurance organization, particularly a start-up insuranceoperation such as ours.

We currently have sufficient capital andsurplus to meet regulatory and rating agency requirements at ourcurrent rating levels. Substantially all of our capital has beendistributed among our rated operating subsidiaries based on ourassessment of the levels of capital that we believe are prudent tosupport our expected levels of business, the applicable regulatoryrequirements, and the recommendations of the insurance regulatoryauthorities and rating agencies.

Posting of Security by OurNon-U.S. Operating Subsidiaries

Our Bermuda, United Kingdom,and Irish operating subsidiaries are not licensed, accredited orotherwise approved as reinsurers anywhere in the United States. ManyU.S. jurisdictions do not permit insurance companies to take credit ontheir U.S. statutory financial statements for reinsurance to coverunpaid liabilities, such as loss and loss adjustment expense andunearned premium reserves, obtained from unlicensed or non-admittedinsurers without appropriate security acceptable to U.S. insurancecommissioners. Typically, this type of security will take the form of aletter of credit issued by an acceptable bank, the establishment of atrust, funds withheld or a combination of these elements.

Asdescribed under "Liquidity" above we enteredinto a secured bank credit facility with a syndicate of lenders thatallows us to provide to our insured clients up to $150 million inletters of credit as security under the terms of insurance andreinsurance contracts. The availability to a borrower is based on theamount of eligible investments pledged by that borrower and no materialadverse change provisions. Regulatory restrictions will also limit theamount of investments that may be pledged by our U.S. insuranceborrowers and, consequently, the amount available for letters of creditand borrowings under the facility to those borrowers. As of March 31,2005, we had $144.4 million of secured letters of credit issued andoutstanding under the facility.

If we fail to maintain adequateletter of credit facilities, and are unable to otherwise provide thenecessary security, U.S. insurance companies may be less willing topurchase our reinsurance products, which could have a material adverseeffect on our results of operations.

Ratings

Ratings byindependent agencies are an important factor in establishing thecompetitive position of insurance and reinsurance companies and areimportant to our ability to market and sell our products. Ratingorganizations continually review the financial positions of insurers.S&P maintains a letter scale rating system ranging from"AAA" (Extremely Strong) to"R" (under regulatory supervision). A.M. Bestmaintains a letter scale rating system ranging from"A++" (Superior) to"F" (in liquidation). The objective ofS&P and A.M. Best's ratings systems is to provide an opinionof an insurer's or reinsurer's financial strength andability to meet ongoing obligations to its policyholders. These ratingsreflect our ability to pay policyholder claims and are not applicableto our securities, nor are they a recommendation to buy, sell or holdour shares. These ratings are subject to periodic review by, and may berevised or revoked at the sole discretion of, S&P and A.M.Best.

We have received a rating of"A-" (excellent) from A.M. Best, which is thefourth highest of fifteen rating levels and indicates A.M. Best'sopinion of our financial strength and ability to meet ongoingobligations to our future policyholders. We cannot assure you that wewill be able to maintain this rating. A significant ratings downgradewould result in a substantial loss of business and businessopportunities as insureds and ceding companies purchase insurance fromcompanies with higher claims-paying and financial strength ratingsinstead of from us and would have a material adverse effect on lettersof credit outstanding under our credit facility and on certain otheragreements. We have not been rated by S&P.

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Critical Accounting Policies andEstimates

Our management makes certain judgments, estimates andassumptions in the application of accounting policies used to determineinherently subjective amounts reported in our condensed consolidatedfinancial statements. If management uses different assumptions andestimates than it currently does, it could produce materially differentestimates of the reported amounts. For a detailed discussion of ourcritical accounting policies, judgments, estimates and assumptionsmanagement uses please refer to the Form 10-K for the year endedDecember 31, 2004 as filed with the SEC on March 30, 2005. There wereno significant changes in the application of our critical accountingpolicies and estimates subsequent to December 31, 2004.

Non-Traditional Contracts

We write non-traditionalcontracts of insurance and reinsurance. We may account for thesetransactions as deposits held on behalf of our clients instead of asinsurance and reinsurance premiums, as appropriate. Under the depositmethod of accounting, revenues and expenses from insurance andreinsurance contracts are not recognized as written premium andincurred losses. Instead, amounts from these contracts are recognizedas other income or investment income over the expected contract orservice period.

Pursuant to our revenue recognition policy, acontract is non-traditional if it contains certain terms and featuresor otherwise results in a structure  that we believe limits ourinsurance risks, including timing risks, or that does not provide for areasonable possibility of significant loss. These terms or featuresinclude, among others, experience based adjustable features,consideration of investment income,  an amount of funding orfinancing of a portion of potential expected losses and coverage forthe adverse development of previously incurred losses. Non-traditionalcontracts are also those contracts that are not necessarily intended toprovide for the transfer of economic risk but for which coverage istriggered by a non-insurance event or for which coverage is provided toachieve temporary accounting or regulatory relief or other non-economicor risk management  benefits. For example, one of ournon-traditional contracts is a life surplus relief transaction thatprovides temporary statutory capital benefit to a U.S. life insuranceentity. We use the test set forth in SFAS 113 to ascertain whether webelieve our underwriting risk is limited or whether there is not areasonable possibility of significant loss. These tests include anumber of subjective judgments. Because of this subjectivity and in thecontext of evolving practices and application of existing and futurestandards, we could be required in the future to adjust our accountingtreatment of these transactions. This could have a material effect onour financial condition and results of operations.

During thefirst quarter of 2005, we recognized in "otherincome" $1.0 million  of fees and revenues relatingto non-traditional contracts which we accounted for using the depositmethod. If these contracts transferred risk as determined by Statementof Financial Accounting Standards ("SFAS")No. 113 "Accounting and Reporting for Reinsurance ofShort-Duration and Long-Duration Contracts", grosspremium relating to these contracts would total approximately$28 million in the first quarter  of 2005.

Of the $1.0million, $0.2 million of this other income relates to fees earned froma surplus relief life reinsurance arrangement with a U.S. insurancecompany which meets our definition of a non-traditionalcontract.   In the fourth quarter  of 2004, under thiscontract we made an arrangement with our client and assumed, throughnovation agreements, several life reinsurance  contracts it hadmade. Because we assumed these contracts, our client, which is subjectto insurance regulation in the United States and therefore is requiredto maintain a certain amount of statutory capital, may reduce itsstatutory capital requirements. In exchange for our assumption of thecontracts we received a fee. The arrangement, among other things, alsoprovides that on certain dates and during specific periods, our clienthas the right but not the obligation to recapture the life reinsurancecontracts we have assumed, provided that the underlying cedants do notreasonably withhold their consent to this recapture.   We believethat our client is economically incentivized to exercise the recaptureprovision in the future, as the amount of statutory relief that theclient receives from its regulator over the period of this contractreduces over time.

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We believe the arrangement, including ourclient's option to recapture, and the assumption of the lifeinsurance contracts constitute one contract with minimal mortality,credit or other insurance or economic risk which leads us to the use ofdeposit accounting. Although we believe our client will exercise therecapture, we cannot assure you  that this will be thecase.   If our client does not recapture the underlying insurancecontracts in the future, we may be viewed as having had the risksdescribed above and, as a result, we could become the life reinsurerand may be required to account for some or all of the underlyinginsurance contracts as life insurance, recognizing life premiumswritten and life benefit reserves in our consolidated statement ofoperations. With respect to this particular arrangement, at this time,we believe that the gross life reinsurance premiums written, ofapproximately $5.6 million, that we would have had to recognize haddeposit accounting not been appropriate, would not have had a materialeffect on our financial position and results of operations. However, asthe underlying life insurance contracts mature the effect on ourfinancial condition and results of operations may become material.

The remaining $0.8 million of the $1.0 million of other incomerelates to revenues earned from three reinsurance contracts accountedfor as deposits. Although these contracts did possess some underwritingand timing risks as prescribed by SFAS No. 113, we do not believe weare exposed to a reasonable possibility of significant loss.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK

Market risk can be described as the risk of change in fairvalue of a financial instrument due to changes in interest rates,creditworthiness, foreign exchange rates or other factors. We areexposed to potential loss from these factors. Our most significantfinancial instruments are our investment assets which consist primarilyof fixed maturity securities and cash equivalents that are denominatedin both U.S. and foreign currencies. External investment professionalsmanage our investment portfolios in accordance with our investmentguidelines. Our investment guidelines also permit our investmentmanagers to use derivative instruments in very limited circumstances.We will seek to mitigate market risks by a number of actions, asdescribed below.

Derivative Valuation Risk

Our derivative policy permits the use of derivatives to manage ourportfolio's duration, yield curve, currency exposure, creditexposure, exposure to volatility and to take advantage ofinefficiencies in derivatives markets. We may also enter intoderivative transactions (1) to hedge capital market risks that may bepresent in our contracts of insurance or reinsurance and (2) asreplication transactions which we define as a set of derivative,insurance and/or securities transactions that, when combined, producethe equivalent economic result of an investment security or insuranceor reinsurance contract that meets our investment or underwritingguidelines.

We utilize derivative instruments only when webelieve the terms and structure of the contracts are thoroughlyunderstood and its total return profile and risk characteristics can befully analyzed. Also, any single derivative or group of derivatives inthe aggregate cannot create risk characteristics that are inconsistentwith our overall risk profile and investment portfolio guidelines.

Foreign Currency Risk and Functional Currency

Ourreporting currency is the U.S. dollar. Although we have not experiencedany significant net exposures to foreign currency risk, we expect thatin the future our exposure to market risk for changes in foreignexchange rates will be concentrated in our investment assets,investments in foreign subsidiaries, premiums receivable and insurancereserves arising from known or probable losses that are denominated inforeign currencies. We generally manage our foreign currency risk bymaintaining assets denominated in the same currency as our insuranceliabilities resulting in a natural hedge or by entering into foreigncurrency forward derivative contracts in an effort to hedge againstmovements in the value of foreign currencies against the U.S. dollar.These contracts are not designated as specific hedges for financialreporting purposes and therefore realized and unrealized gains andlosses on these contracts are recorded in income in the period in whichthey occur. These contracts generally have 

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maturities of three months or less. Aforeign currency forward contract results in an obligation to purchaseor sell a specified currency at future date and price specified at thetime of the contract. Foreign currency forward contracts will noteliminate fluctuations in the value of our assets and liabilitiesdenominated in foreign currencies but rather allow us to establish arate of exchange for a future point in time. We have not and do notexpect to enter into such contracts with respect to a material amountof our assets or liabilities.

Our non-U.S. subsidiaries maintainboth assets and liabilities in their functional currencies, principallyEuro and sterling. Assets and liabilities denominated in foreigncurrencies are exposed to changes in currency exchange rates. Exchangerate fluctuations in Euro and sterling functional currencies againstour U.S. dollar reporting currency are reported as a separate componentof other comprehensive (loss) income in shareholders' equity.Foreign exchange risk associated with non-US dollar functionalcurrencies of our foreign subsidiaries is reviewed as part of our riskmanagement process and we employ foreign currency risk managementstrategies, as described above, to manage our exposure. Exchange ratefluctuations against non-U.S. dollar functional currencies maymaterially impact our consolidated statement of operations andfinancial position.

Our investment guidelines limit the amountof our investment portfolio that may be denominated in foreigncurrencies to 20% (as measured by market value). Furthermore,our guidelines limit the amount of foreign currency denominatedinvestments that can be held without a corresponding hedge against theforeign currency exposure to 5% (as measured by market value).As of March 31, 2005, our investment portfolio included $11.9 million,or 2.1%, of our total net invested assets, of securities thatwere denominated in foreign currencies and were purchased by ourinvestment managers for the purpose of improving overall portfolioyield. $10.9 million of these securities were rated AAA and $1.0million were rated BAA, and were substantially hedged into U.S. dollarsaccording to our investment guidelines by entering into foreigncurrency forward contracts. At March 31, 2005, the net fair marketvalue of foreign currency forward contracts relating to foreigncurrency denominated investments was $0.3 million.

Interest Rate Risk

Our exposure to market risk forchanges in interest rates is concentrated in our investment portfolio.Our investment portfolio primarily consists of fixed income securities.Accordingly, our primary market risk exposure is to changes in interestrates. Fluctuations in interest rates have a direct impact on themarket valuation of fixed income securities. As interest rates rise,the market value of our fixed-income portfolio falls, and the converseis also true.

Our strategy for managing interest rate riskincludes maintaining a high quality investment portfolio that isactively managed by our managers in accordance with our investmentguidelines in order to balance our exposure to interest rates with therequirement to tailor the duration, yield, currency and liquiditycharacteristics to the anticipated cash outflow characteristics ofclaim reserve liabilities. As of March 31, 2005, assuming parallelshifts in interest rates, the impact of an immediate 100 basis pointincrease in market interest rates on our net invested assets, includingcash and cash equivalents, under Management by Third Party InvestmentManagers of approximately $642.1 million would have been an estimateddecrease in market value of approximately $18.0 million, or2.8%, and the impact on our net invested assets, including cashand cash equivalents, under management by third party investmentmanagers of an immediate 100 basis point decrease in market interestrates would have been an estimated increase in market value ofapproximately $15.3 million, or 2.4%.

As of March 31,2005, our investment portfolio included AAA rated mortgage-backedsecurities with a market value of $153.3 million, or 25.1%,excluding trading investments related to deposit liabilities. As withother fixed income investments, the fair market value of thesesecurities fluctuates depending on market and other general economicconditions and the interest rate environment. Changes in interest ratescan also expose us to prepayment and extension risks on theseinvestments. In periods of declining interest rates, the frequency ofmortgage prepayments generally increase as mortgagees seek to refinanceat a lower interest rate cost. Mortgage prepayments result in the earlyrepayment of the underlying principal of mortgage-backed securitiesrequiring us to reinvest the 

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proceeds at the then current market rates.When interest rates increase, these assets are exposed to extensionrisk, which occurs when holders of underlying mortgages reduce thefrequency on which they prepay the outstanding principal before thematurity date and delay any refinancing of the outstandingprincipal.

Credit Risk

We have exposure tocredit risk primarily as a holder of fixed income securities. This riskis defined as the default or the potential loss in market valueresulting from adverse changes in the borrower's ability to repaythe debt. Our risk management strategy and investment policy is toinvest in debt instruments of high credit quality issuers and to limitthe amount of credit exposure with respect to particular ratingscategories and to any one issuer. We attempt to limit our overallcredit exposure by purchasing fixed income securities that aregenerally rated investment grade by Moody's Investors Service,Inc. and/or S&P. Our investment guidelines require that the averagecredit quality of our portfolio will be Aa3/AA- and that no more than5% of our investment portfolio's market value shall beinvested in securities rated below BBB-/Baa3. We also limit ourexposure to any single issuer to 5% or less of ourportfolio's market value at the time of purchase, with theexception of U.S. government and agency securities. As of March 31,2005, the average credit quality of our investment portfolio was AA,and all fixed income securities held were investment grade. Included inour investment portfolio was $20.0 million in par value of variablerate mortality linked securities issued by a single issuer which matureon January 1, 2007. We are subject to loss of principal and interest inthe event of the occurrence of certain changes in a predefinedmortality index. As of March 31, 2005, the fair value of the securitywas $20.0 million and represented approximately 3.3% of ourinvestments excluding trading investments related to depositliabilities.

We are also exposed to the credit risk of ourinsurance and reinsurance brokers to whom we make claims payments forinsureds and our reinsureds, as well as to the credit risk of ourreinsurers and retrocessionaires who assume business from us. Tomitigate the risk of nonpayment of amounts due under thesearrangements, we have established business and financial standards forreinsurer and broker approval, incorporating ratings by major ratingagencies and considering the financial condition of the counterpartyand the current market information.

We are also exposed tocredit risk relating to our premiums receivable balance. As of March31, 2005, our premiums receivable balance was $187.6 million. Webelieve that credit risk exposure related to these balances ismitigated by several factors, including but not limited to creditmonitoring controls performed as part of the underwriting process andmonitoring of aged receivable balances. In addition, as the majority ofour insurance and reinsurance contracts permit the right of offset thepremiums receivable against losses payable, we believe that the creditrisk in this area is substantially reduced.

Effects ofInflation

We do not believe that inflation has had a materialeffect on our consolidated results of operations. The effects ofinflation could cause the severity of claim costs to increase in thefuture. Our estimates for losses and loss expenses include assumptions,including those relating to inflation, about future payments forsettlement of claims and claims handling expenses. To the extentinflation causes these costs to increase above our estimated reservesthat are established for these claims, we will be required to increasereserves for losses and loss expenses with a corresponding reduction inour earnings in the period in which the deficiency is identified. Theactual effects of inflation on our results cannot be accuratelydetermined until claims are ultimately settled.

ITEM4.    CONTROLS AND PROCEDURES

Evaluation of DisclosureControls and Procedures

As of the end of the period covered bythis report, our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, evaluated theeffectiveness of the design and 

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operation of our disclosure controls andprocedures as defined in Rule 13a-15(e) under the Securities ExchangeAct of 1934. Based upon that evaluation, our Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls andprocedures are effective in allowing information required to bedisclosed in reports filed under the Securities and Exchange Act of1934 to be recorded, processed, summarized and reported within timeperiods specified in the rules and forms of the Securities and ExchangeCommission.

Changes in Internal Controls

In connectionwith the evaluation described above, our management, including ourChief Executive Officer and our Chief Financial Officer, identified nochange in our internal control over financial reporting that occurredduring the three months ended March 31, 2005, and that has materiallyaffected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

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PART II. OTHERINFORMATION

ITEM 1.    LEGAL PROCEEDINGS

We are nota party to any pending or threatened material litigation and are notcurrently aware of any pending or threatened material litigation otherthan routine legal proceedings that we believe are, in the aggregate,not material to our financial condition and results of operations. Inthe normal course of business we may become involved in various claimsand legal proceedings.

ITEM 2.    UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS

During the three monthsended March 31, 2005, the Company issued to certain employees anaggregate of 880,942 options to purchase common stock and 106,835performance share units. These transactions were completed withoutregistration of the relevant security under the Securities Act of 1933,as amended, in reliance upon the exemptions provided by Section 4(2)for transactions not involving a public offering.

ITEM6.    EXHIBITS

|            |                                             |
|------------|---------------------------------------------|
| 10.1  | Form of Non-QualifiedStock Option Agreement |

|            |                                              |
|------------|----------------------------------------------|
| 10.2  | Form ofPerformance Based Share UnitAgreement |

|            |                                                                                                                                                   |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1  | Certification of the ChiefExecutive Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuantto Section 302 of the Sarbanes-Oxley Act of2002. |

|            |                                                                                                                                                   |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2  | Certification of the ChiefFinancial Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuantto Section 302 of the Sarbanes-Oxley Act of2002. |

|            |                                                                                                                                                     |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.1  | Certification of the ChiefExecutive Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of2002. |

|            |                                                                                                                                                     |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.2  | Certification of the ChiefFinancial Officer pursuant to 18 U.S.C Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

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SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

|                  |  |                                                                |  |  |  |  |
|------------------|--|----------------------------------------------------------------|--|--|--|--|
|             |  |                                                           |
|             |  | **QuantaCapital HoldingsLtd.**                                 |
|             |  |                                                           |
|             |  |                                                           |
| Date:May 4, 2005 |  | /s/ Tobey J. Russ                                              |
|             |  | Tobey J. Russ                                                  |
|             |  | (On behalfof the registrant and as Principal ExecutiveOfficer) |
|             |  |                                                           |
|             |  |                                                           |
| Date:May 4, 2005 |  | /s/ John S. Brittain,Jr.                                       |
|             |  | John S. Brittain,Jr.                                           |
|             |  | (Principal FinancialOfficer)                                   |
|                  |

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Index toExhibits

|            |                                             |
|------------|---------------------------------------------|
| 10.1  | Form of Non-Qualified StockOption Agreement |

|            |                                               |
|------------|-----------------------------------------------|
| 10.2  | Form of PerformanceBased Share Unit Agreement |

|            |                                                                                                                                                   |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1  | Certificationof the Chief Executive Officer required by Rule 13a-14(a) or Rule15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of2002. |

|            |                                                                                                                                                   |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2  | Certification of the ChiefFinancial Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuantto Section 302 of the Sarbanes-Oxley Act of2002. |

|            |                                                                                                                                                     |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.1  | Certification of the ChiefExecutive Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of2002. |

|            |                                                                                                                                                    |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.2  | Certification of the ChiefFinancial Officer pursuant to 18 U.S.C Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of2002. |

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