Table of Contents

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UNITEDSTATESSECURITIES AND EXCHANGECOMMISSIONWashington, D.C.20549

FORM10-Q

|  |        |                                                                                       |
|--|--------|---------------------------------------------------------------------------------------|
|  |   | QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 |

For the quarterly period ended March  31,2006

|  |        |                                                                                        |
|--|--------|----------------------------------------------------------------------------------------|
|  |   | TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 |

For the transition period from        to                        

Commission file number 000-50885

QUANTACAPITAL HOLDINGS LTD.

(Exact name ofregistrant as specified in itscharter)

|                                                             |  |                                                     |  |  |  |  |
|-------------------------------------------------------------|--|-----------------------------------------------------|--|--|--|--|
| Bermuda                                                     |  | n/a                                                 |
| (Stateor other jurisdiction ofincorporation ororganization) |  | (I.R.S. Employer IdentificationNo.)                 |
| 1Victoria Street, Second FloorHamiltonHM11Bermuda           |  | 441-294-6350                                        |
| (Addressof principal executive offices and zipcode)         |  | (Registrant's telephone number, including areacode) |
|                                                             |

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past90 days.Yes     No 

Indicate bycheck mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of‘‘accelerated and large accelerated filer’’in Rule 12b-2 of the Exchange Act. (Check one).

Large Accelerated Filer        Accelerated Filer        Non-Accelerated Filer  

Indicate by check mark whether theregistrant is a shell company (as defined in Exchange Act Rule12b-2). Yes     No 

As of May1,  2006 there were 69,946,861 common shares, $0.01 par value pershare,outstanding.

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QUANTA CAPITALHOLDINGS LTD.

INDEX TO FORM10-Q

|         |  |                                                                                                                                  |  |         |        |        |  |  |  |  |
|---------|--|----------------------------------------------------------------------------------------------------------------------------------|--|---------|--------|--------|--|--|--|--|
|    |  |                                                                                                                             |  | PageNo. |
| PARTI.  |  | FINANCIALINFORMATION                                                                                                             |  |    |   |   |
| Item1   |  | FinancialStatements                                                                                                              |  |    |   |   |
|    |  | Condensed ConsolidatedBalance Sheets at March 31, 2006 (unaudited) andDecember 31,2005                                           |  |    | 3      |   |
|    |  | UnauditedCondensed Consolidated Statements of Operations and Comprehensive Lossfor the three months ended March 31, 2006 and2005 |  |    | 4      |   |
|    |  | Unaudited CondensedConsolidated Statements of Changes in Shareholders' Equity forthe three months ended March 31, 2006 and2005   |  |    | 5      |   |
|    |  | Unaudited CondensedConsolidated Statements of Cash Flows for the three months endedMarch 31, 2006 and2005                        |  |    | 6      |   |
|    |  | Notes to the UnauditedCondensed Consolidated FinancialStatements                                                                 |  |    | 7      |   |
| Item2   |  | Management's Discussion and Analysis of FinancialCondition and Results ofOperations                                              |  |    | 21     |   |
| Item3   |  | Quantitative and Qualitative Disclosures about MarketRisk                                                                        |  |    | 57     |   |
| Item 4  |  | Controlsand Procedures                                                                                                           |  |    | 60     |   |
| PARTII. |  | OTHERINFORMATION                                                                                                                 |  |    |   |   |
| Item1   |  | LegalProceedings                                                                                                                 |  |    | 61     |   |
| Item1A  |  | Risk Factors                                                                                                                     |  |    | 61     |   |
| Item6   |  | Exhibits                                                                                                                         |  |    | 62     |   |
|         |

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PART1. FINANCIAL INFORMATION

ITEM 1. FINANCIALSTATEMENTS

QUANTA CAPITAL HOLDINGS LTD.CONDENSEDCONSOLIDATED BALANCE SHEETS(Expressed in thousands of U.S.dollars except for share and per shareamounts)

|                                                                                                                                                                                                                           |  |              |           |                  |  |        |           |         |  |  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--------------|-----------|------------------|--|--------|-----------|---------|--|--|
|                                                                                                                                                                                                                      |  | March31,2006 |           | December 31,2005 |
|                                                                                                                                                                                                                      |  | (unaudited)  |           |             |
| Assets                                                                                                                                                                                                                    |  |         |      |             |  |   |      |    |
| Investmentsat fair value (amortized cost: March  31,  2006, $822,806;December  31,  2005,$736,425)                                                                                                                        |  |         |      |             |  |   |      |    |
| Available forsaleinvestments                                                                                                                                                                                              |  | $            | 785,153   |             |  | $      | 699,121   |    |
| Tradinginvestments related to depositliabilities                                                                                                                                                                          |  |         | 37,929    |             |  |   | 38,316    |    |
| Totalinvestments at fairvalue                                                                                                                                                                                             |  |         | 823,082   |             |  |   | 737,437   |    |
| Cash and cashequivalents                                                                                                                                                                                                  |  |         | 118,990   |             |  |   | 178,135   |    |
| Restrictedcash and cashequivalents                                                                                                                                                                                        |  |         | 85,945    |             |  |   | 82,843    |    |
| Accruedinvestmentincome                                                                                                                                                                                                   |  |         | 6,024     |             |  |   | 5,404     |    |
| Premiumsreceivable                                                                                                                                                                                                        |  |         | 147,023   |             |  |   | 146,837   |    |
| Lossesand loss adjustment expensesrecoverable                                                                                                                                                                             |  |         | 198,341   |             |  |   | 190,353   |    |
| Otheraccountsreceivable                                                                                                                                                                                                   |  |         | 10,262    |             |  |   | 11,434    |    |
| Netreceivable for investments sold                                                                                                                                                                                        |  |         | —   |             |  |   | 3,047     |    |
| Deferred acquisitioncosts, net                                                                                                                                                                                            |  |         | 28,718    |             |  |   | 33,117    |    |
| Deferredreinsurancepremiums                                                                                                                                                                                               |  |         | 108,331   |             |  |   | 112,096   |    |
| Propertyand equipment, net of accumulated depreciation of $5,751 (December31, 2005:$4,874)                                                                                                                                |  |         | 4,276     |             |  |   | 5,034     |    |
| Goodwill andother intangibleassets                                                                                                                                                                                        |  |         | 24,692    |             |  |   | 24,877    |    |
| Otherassets                                                                                                                                                                                                               |  |         | 24,289    |             |  |   | 21,477    |    |
| Totalassets                                                                                                                                                                                                               |  | $            | 1,579,973 |             |  | $      | 1,552,091 |    |
| Liabilities                                                                                                                                                                                                               |  |         |      |             |  |   |      |    |
| Reservefor losses and lossexpenses                                                                                                                                                                                        |  | $            | 592,252   |             |  | $      | 533,983   |    |
| Unearnedpremiums                                                                                                                                                                                                          |  |         | 316,347   |             |  |   | 336,550   |    |
| Environmentalliabilitiesassumed                                                                                                                                                                                           |  |         | 4,447     |             |  |   | 5,911     |    |
| Reinsurancebalancespayable                                                                                                                                                                                                |  |         | 61,647    |             |  |   | 57,499    |    |
| Accountspayable and accruedexpenses                                                                                                                                                                                       |  |         | 28,229    |             |  |   | 39,051    |    |
| Net payablefor investmentssold                                                                                                                                                                                            |  |         | 12,707    |             |  |   | —   |    |
| Depositliabilities                                                                                                                                                                                                        |  |         | 50,797    |             |  |   | 51,509    |    |
| Deferredincome and otherliabilities                                                                                                                                                                                       |  |         | 9,627     |             |  |   | 9,729     |    |
| Juniorsubordinateddebentures                                                                                                                                                                                              |  |         | 61,857    |             |  |   | 61,857    |    |
| Totalliabilities                                                                                                                                                                                                          |  | $            | 1,137,910 |             |  | $      | 1,096,089 |    |
| Mandatorilyredeemable preferred shares ($0.01 par value; 25,000,000shares authorized; 3,130,525 issued and outstanding at March31,  2006 and 3,000,000 issued and outstanding at December31,2005)     |  | $            | 74,998    |             |  | $      | 71,838    |    |
| Commitmentsand contingencies (Note7)                                                                                                                                                                                      |  |         |      |             |  |   |      |    |
| Shareholders'equity                                                                                                                                                                                                       |  |         |      |             |  |   |      |    |
| Common shares($0.01 par value; 200,000,000 shares authorized; 69,946,861 issuedand outstanding at March  31,  2006 and December31,2005)                                                                                   |  |         | 699       |             |  |   | 699       |    |
| Additional paid-incapital                                                                                                                                                                                                 |  |         | 582,298   |             |  |   | 581,929   |    |
| Accumulateddeficit                                                                                                                                                                                                        |  |         | (216,145  | )           |  |   | (199,010  | )  |
| Accumulatedother comprehensiveincome                                                                                                                                                                                      |  |         | 213       |             |  |   | 546       |    |
| Totalshareholders'equity                                                                                                                                                                                                  |  | $            | 367,065   |             |  | $      | 384,164   |    |
| Totalliabilities, redeemable preferred shares and shareholders'equity                                                                                                                                                     |  | $            | 1,579,973 |             |  | $      | 1,552,091 |    |
|                                                                                                                                                                                                                           |

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

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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 threemonths ended March 31,2006 |            | For thethreemonths ended March31,2005 |
| Revenues                                                                                      |  |                                   |       |                                  |  |   |       |    |
| Grosspremiumswritten                                                                          |  | $                                      | 114,869    |                                  |  | $      | 172,726    |    |
| Netpremiumswritten                                                                            |  | $                                      | 62,714     |                                  |  | $      | 142,877    |    |
| Change innet unearnedpremiums                                                                 |  |                                   | 16,854     |                                  |  |   | (51,391    | )  |
| Netpremiumsearned                                                                             |  |                                   | 79,568     |                                  |  |   | 91,486     |    |
| Technicalservices revenues                                                                    |  |                                   | 7,741      |                                  |  |   | 7,263      |    |
| Netinvestment income                                                                          |  |                                   | 10,776     |                                  |  |   | 5,225      |    |
| Netrealized losses oninvestments                                                              |  |                                   | (8,320     | )                                |  |   | (483       | )  |
| Netforeign exchange losses                                                                    |  |                                   | (319       | )                                |  |   | (112       | )  |
| Otherincome                                                                                   |  |                                   | 1,037      |                                  |  |   | 1,573      |    |
| Totalrevenues                                                                                 |  |                                   | 90,483     |                                  |  |   | 104,952    |    |
| Expenses                                                                                      |  |                                   |       |                                  |  |   |       |    |
| Netlosses and lossexpenses                                                                    |  |                                   | 54,382     |                                  |  |   | 57,496     |    |
| Acquisitionexpenses                                                                           |  |                                   | 13,933     |                                  |  |   | 20,477     |    |
| Directtechnical servicescosts                                                                 |  |                                   | 5,000      |                                  |  |   | 4,861      |    |
| General andadministrativeexpenses                                                             |  |                                   | 30,023     |                                  |  |   | 20,871     |    |
| Interestexpense                                                                               |  |                                   | 1,262      |                                  |  |   | 826        |    |
| Depreciation offixed assets and amortization of intangibleassets                              |  |                                   | 1,070      |                                  |  |   | 842        |    |
| Totalexpenses                                                                                 |  |                                   | 105,670    |                                  |  |   | 105,373    |    |
| Lossbefore incometaxes                                                                        |  |                                   | (15,187    | )                                |  |   | (421       | )  |
| Incometaxexpense                                                                              |  |                                   | 32         |                                  |  |   | 223        |    |
| Netloss                                                                                       |  |                                   | (15,219    | )                                |  |   | (644       | )  |
| Dividendson preferredshares                                                                   |  |                                   | 1,916      |                                  |  |   | —    |    |
| Netloss available to ordinaryshareholders                                                     |  |                                   | (17,135    | )                                |  |   | (644       | )  |
| Othercomprehensive loss                                                                       |  |                                   |       |                                  |  |   |       |    |
| Netloss                                                                                       |  |                                   | (15,219    | )                                |  |   | (644       | )  |
| Netunrealized investment losses arising during the period, net of incometaxes                 |  |                                   | (8,555     | )                                |  |   | (7,763     | )  |
| Foreigncurrency translationadjustments                                                        |  |                                   | (98        | )                                |  |   | (5         | )  |
| Reclassificationof net realized losses on investments included in net loss, net ofincometaxes |  |                                   | 8,320      |                                  |  |   | 483        |    |
| Othercomprehensiveloss                                                                        |  |                                   | (333       | )                                |  |   | (7,285     | )  |
| Comprehensiveloss                                                                             |  | $                                      | (15,552    | )                                |  | $      | (7,929     | )  |
| Weightedaverage common share and common share equivalents–                              |  |                                   |       |                                  |  |   |       |    |
| basic                                                                                         |  |                                   | 69,946,861 |                                  |  |   | 56,798,218 |    |
| diluted                                                                                       |  |                                   | 69,946,861 |                                  |  |   | 56,798,218 |    |
| Basicloss pershare                                                                            |  | $                                      | (0.24      | )                                |  | $      | (0.01      | )  |
| Diluted losspershare                                                                          |  | $                                      | (0.24      | )                                |  | $      | (0.01      | )  |
|                                                                                               |

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

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QUANTA CAPITAL HOLDINGS LTD.UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'EQUITY(Expressed in thousands of U.S. dollars except for shareand per shareamounts)

|                                                                   |  |                                         |          |                                       |  |        |         |         |  |  |
|-------------------------------------------------------------------|--|-----------------------------------------|----------|---------------------------------------|--|--------|---------|---------|--|--|
|                                                              |  | Forthe three months ended March 31,2006 |          | For thethreemonths ended March31,2005 |
| Share capital – preferredshares of par value $0.01each      |  | $                                       | —  |                                  |  | $      | — |    |
| Sharecapital – common shares of par value $0.01each         |  |                                    |     |                                  |  |   |    |    |
| Balance at beginning ofperiod                                     |  |                                    | 699      |                                  |  |   | 568     |    |
| Issued duringperiod                                               |  |                                    | —  |                                  |  |   | — |    |
| Balanceat end ofperiod                                            |  |                                    | 699      |                                  |  |   | 568     |    |
| Additionalpaid-in capital                                         |  |                                    |     |                                  |  |   |    |    |
| Balance atbeginning ofperiod                                      |  |                                    | 581,929  |                                  |  |   | 523,771 |    |
| Non-cashstock compensation expense                                |  |                                    | 369      |                                  |  |   | — |    |
| Balanceat end ofperiod                                            |  |                                    | 582,298  |                                  |  |   | 523,771 |    |
| Accumulateddeficit                                                |  |                                    |     |                                  |  |   |    |    |
| Balance at beginningof period                                     |  |                                    | (199,010 | )                                |  |   | (93,058 | )  |
| Netloss available to common shareholders forperiod                |  |                                    | (17,135  | )                                |  |   | (644    | )  |
| Balanceat end ofperiod                                            |  |                                    | (216,145 | )                                |  |   | (93,702 | )  |
| Accumulatedother comprehensive income(loss)                       |  |                                    |     |                                  |  |   |    |    |
| Balance at beginning ofperiod                                     |  |                                    | 546      |                                  |  |   | (372    | )  |
| Net change inunrealized losses on investments, net of incometaxes |  |                                    | (235     | )                                |  |   | (7,280  | )  |
| Foreign currencytranslationadjustments                            |  |                                    | (98      | )                                |  |   | (5      | )  |
| Balanceat end ofperiod                                            |  |                                    | 213      |                                  |  |   | (7,657  | )  |
| Totalshareholders'equity                                          |  | $                                       | 367,065  |                                  |  | $      | 422,980 |    |
|                                                                   |

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

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

|                                                                              |  |                                        |          |                                       |  |        |          |         |  |  |
|------------------------------------------------------------------------------|--|----------------------------------------|----------|---------------------------------------|--|--------|----------|---------|--|--|
|                                                                         |  | Forthe threemonths ended March 31,2006 |          | For thethreemonths ended March31,2005 |
| Cashflows from operatingactivities                                           |  |                                   |     |                                  |  |   |     |    |
| Netloss                                                                      |  | $                                      | (15,219  | )                                |  | $      | (644     | )  |
| Adjustmentsto reconcile net loss to net cash provided by operatingactivities |  |                                   |     |                                  |  |   |     |    |
| Depreciationof property andequipment                                         |  |                                   | 885      |                                  |  |   | 657      |    |
| Amortizationof intangibleassets                                              |  |                                   | 185      |                                  |  |   | 185      |    |
| Amortizationof net discounts oninvestments                                   |  |                                   | (938     | )                                |  |   | 375      |    |
| Netrealized losses oninvestments                                             |  |                                   | 8,320    |                                  |  |   | 483      |    |
| Netchange in fair value of derivativeinstruments                             |  |                                   | 101      |                                  |  |   | (470     | )  |
| Non-cashstock compensationexpense                                            |  |                                   | 369      |                                  |  |   | —  |    |
| Changesin assets andliabilities:                                             |  |                                   |     |                                  |  |   |     |    |
| Restrictedcash and cashequivalents                                           |  |                                   | (3,102   | )                                |  |   | (10,959  | )  |
| Accruedinvestmentincome                                                      |  |                                   | (620     | )                                |  |   | 206      |    |
| Premiumsreceivable                                                           |  |                                   | (186     | )                                |  |   | (38,793  | )  |
| Lossesand loss adjustment expensesrecoverable                                |  |                                   | (7,988   | )                                |  |   | (11,355  | )  |
| Deferredacquisitioncosts                                                     |  |                                   | 4,399    |                                  |  |   | (4,789   | )  |
| Deferredreinsurancepremiums                                                  |  |                                   | 3,765    |                                  |  |   | (10,029  | )  |
| Otheraccountsreceivable                                                      |  |                                   | 1,172    |                                  |  |   | 2,151    |    |
| Otherassets                                                                  |  |                                   | (2,812   | )                                |  |   | (9,820   | )  |
| Reservefor losses and lossexpenses                                           |  |                                   | 58,269   |                                  |  |   | 55,609   |    |
| Unearnedpremiums                                                             |  |                                   | (20,203  | )                                |  |   | 61,420   |    |
| Environmentalliabilitiesassumed                                              |  |                                   | (1,464   | )                                |  |   | (112     | )  |
| Reinsurancebalancespayable                                                   |  |                                   | 4,148    |                                  |  |   | 1,611    |    |
| Accountspayable and accruedexpenses                                          |  |                                   | (10,822  | )                                |  |   | (2,374   | )  |
| Depositliabilities                                                           |  |                                   | (712     | )                                |  |   | (689     | )  |
| Deferredincome and otherliabilities                                          |  |                                   | (102     | )                                |  |   | (846     | )  |
| Netcash provided by operatingactivities                                      |  |                                   | 17,445   |                                  |  |   | 31,817   |    |
| Cashflows used in investingactivities                                        |  |                                   |     |                                  |  |   |     |    |
| Proceeds from saleof fixed maturities and short-terminvestments              |  |                                   | 387,083  |                                  |  |   | 288,978  |    |
| Purchasesof fixed maturities and short-terminvestments                       |  |                                   | (464,790 | )                                |  |   | (319,003 | )  |
| Purchasesof property andequipment                                            |  |                                   | (127     | )                                |  |   | (1,173   | )  |
| Netcash used in investingactivities                                          |  |                                   | (77,834  | )                                |  |   | (31,198  | )  |
| Cashflows provided by financingactivities                                    |  |                                   |     |                                  |  |   |     |    |
| Proceeds fromissuance of preferred shares, net of offeringcosts              |  |                                   | 3,160    |                                  |  |   | —  |    |
| Dividends onpreferred shares                                                 |  |                                   | (1,916   | )                                |  |   | —  |    |
| Proceeds fromjunior subordinated debentures, net of issuancecosts            |  |                                   | —  |                                  |  |   | 19,591   |    |
| Netcash provided by financingactivities                                      |  |                                   | 1,244    |                                  |  |   | 19,591   |    |
| (Decrease)increase in cash and cashequivalents                               |  |                                   | (59,145  | )                                |  |   | 20,210   |    |
| Cash andcash equivalents at beginning ofperiod                               |  |                                   | 178,135  |                                  |  |   | 32,775   |    |
| Cashand cash equivalents at end ofperiod                                     |  | $                                      | 118,990  |                                  |  | $      | 52,985   |    |
|                                                                              |

Theaccompanying notes are an integral part of these unaudited condensedconsolidated financialstatements

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS(Expressed in thousands of U.S. dollars except for shareamounts, or as otherwisestated)

|          |                                                  |
|----------|--------------------------------------------------|
| 1.  | Description ofbusiness and basis of presentation |

Quanta Capital Holdings Ltd.(‘‘Quanta Holdings’’), incorporated onMay  23,  2003, is a holding company organized under thelaws of Bermuda. Quanta Holdings and its subsidiaries, collectivelyreferred to as the ‘‘Company’’ were formedto provide specialty insurance, reinsurance, risk assessment and risktechnical services and products on a global basis. Quanta Holdingsconducts its insurance and reinsurance operations principally throughwholly-owned subsidiaries incorporated in Bermuda, the United States ofAmerica (the ‘‘U.S.’’) and Europe.

On December  20,  2005, Quanta Holdings, pursuant to anUnderwriting Agreement dated December  14,  2005 withFriedman, Billings, Ramsey & Co.(‘‘FBR’’) and BB&T Capital Markets (the‘‘Underwriters’’), sold 3,000,00010.25% Series A Preferred Shares. On January  11,2006, the Underwriters purchased an additional 130,525 10.25%Series A Preferred Shares following the exercise of the over-allotmentoption that was granted to them on December  14,  2005.

On December  20,  2005, Quanta Holdings sold 13,136,841common shares for cash pursuant to an Underwriting Agreement datedDecember  14,  2005 with the Underwriters, which includesthe exercise in full of the Underwriters’ over-allotment optionof 1,713,501 common shares.

On March  2,  2006, A.M.Best announced that it had downgraded the financial strength ratingassigned to Quanta Reinsurance Ltd. ("QuantaBermuda") and its subsidiaries and Quanta Europe Ltd.("Quanta Europe"), to‘‘B++’’ (very good), under review withnegative implications. The A.M. Best ‘‘A’’(excellent) rated Lloyd's market, including our Lloyd'ssyndicate, was not subject to the rating downgrade. The downgrade andqualification of the Company's rating with negative implicationshas significantly adversely affected the Company's business, itsopportunities to write new and renewal business and its ability toretain key employees. A.M. Best may further downgrade theCompany's financial strength ratings.

A downgrade in theCompany's rating below ‘‘B++’’ (verygood) will cause a default under its credit facility. TheCompany's obligations under the credit facility are currentlyfully secured by investments and cash. If a default occurs under thecredit facility, the Company's lenders may require the Company tocash collateralize a portion or all of the outstanding letters ofcredit issued under the facility, which may be accomplished through thesubstitution or liquidation of collateral. Among other things, thelenders would also have the right to cancel outstanding letters ofcredit issued under the facility and we would be limited in releasingcollateral without the lenders' consent. Further, a downgrade inthe Company's rating below ‘‘B++’’(very good) will trigger termination provisions or require the postingof additional security in certain of the Company's otherinsurance and reinsurance contracts. As a result, the Company may berequired to post additional security either through the issuance ofletters of credit or the placement of securities in trust under theterms of those insurance or reinsurance contracts.

The Company isnot writing new business in its professional liability, fidelity,environmental and marine and aviation insurance product lines or in itsreinsurance and structured product lines and it is no longer seekingnew business in its surety line and will cease seeking any new businessin its marine and aviation reinsurance, casualty reinsurance and tradecredit and political risk insurance lines during the second quarter of2006. Certain of the Company's insurance and many of itsreinsurance contracts contain termination rights triggered by the A.M.Best rating downgrade. Additionally, many of the Company's otherinsurance contracts and certain of its reinsurance contracts providefor cancellation at the option of the policyholder regardless of theCompany's financial strength rating, including those contractsthat are part of the Company's residential builders' andcontractors' program, or the HBW program. As of April30,  2006, the Company had received notice of cancellation onapproximately 5.7% of its in-force policies, calculated usinggross premiums written as a percentage of total gross written premiumsduring 2005. Based on discussions with the program manager of the HBWprogram, the Company understands that the program manager will divert asubstantial portion of the HBW 

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS(Expressed in thousands of U.S. dollars except for shareamounts, or as otherwisestated)

program business to other carriers during2006. As a result, the Company currently estimates that the grosspremiums written under the HBW program during 2006 will be less than35% of the gross premiums written during 2005. Further, theCompany has also been notified by several significant clients in itsinsurance and reinsurance product lines that they do not intend torenew their contracts with the Company. The Company has also beenremoved from the approved listing of several of its important brokers,including Aon Corporation and Marsh Inc. The downgrade of theCompany's financial rating or the continued qualification of theCompany's current rating continues to cause concern about itsviability among brokers and other marketing sources, resulting in amovement of business away from the Company to other carriers. TheCompany also believes that the publicity around the recent downgrade ofits financial rating is adversely affecting its Lloyd'soperations although Syndicate 4000 is part of Lloyd's A.M. Best‘‘A’’ rated platform.

Following theCompany's recent ratings downgrade by A.M. Best, Lloyd'shas agreed with the Company that in order to benefit the continuedunderwriting of Syndicate 4000 in the Lloyd's of London marketduring the 2007 underwriting year, Syndicate 4000 would be betterserved by a diversification of its capital base with one or morethird-party capital sources, if the Company would be able to securesuch capital. In particular, the Company believes Syndicate 4000 mayreceive an increased submission flow if its capital base is diversifiedthrough one or more third-party capital sources. Capital for the 2007underwriting year, including any capital from a third-party source,must be in place by November  30,  2006. If the Companyobtains capital provided by any third-party source, it would either addit to its existing funds or it may be able to remove some of the fundsit has deposited to support its underwriting capacity of itsLloyd's syndicate. However, the Company can make no assurancesthat it will be successful in obtaining any third-party source ofcapital to support its Lloyd's syndicate.

As a result ofthe matters described in Note 23 to the Company’s ConsolidatedFinancial Statements for the year ended December  31,2005, included in the Company’s Form 10-K, and in Note 9 tothese Unaudited Consolidated Financials Statements for the three monthsended March  31,  2006, due to the general uncertaintysurrounding the Company resulting from A.M. Best’s downgrade ofthe Company’s financial strength ratings and decision to explorestrategic alternatives, the Company has concluded that it may no longerbe able to hold its securities for a sufficient period of time to allowrecovery. Accordingly, during the three months ended March31,  2006, the Company has recorded $6.1  million in otherthan temporary impairment losses. The realization of these lossesrepresents the maximum amount of potential losses in theCompany’s investment securities if it sold all of thesesecurities as of March  31,  2006 and is primarilyattributable to changes in interest rates and not changes in creditquality. As a result of this decision, the affected investments werereduced to their estimated fair value, which becomes their new costbasis. The recognition of the losses has no effect on theCompany's shareholders' equity, the market value of theCompany's investments, the Company's cash flows or theCompany's liquidity. It is possible that the impairment factorsevaluated by the Company and fair values will change in subsequentperiods, resulting in additional material impairment charges.

Inaddition, during the three months ended March  31,  2006,the Company has incurred additional severance costs of approximately$5.2  million as a result of the Company analyzing its businesslines, position in the market and internal operations following therecent downgrade of the Company’s financial strength ratings byA.M. Best.

Interim financial information

These unauditedcondensed consolidated financial statements include the accounts of theCompany and have been prepared in conformity with generally acceptedaccounting principles in the United States of America(‘‘GAAP’’) for interim financialinformation and with the instructions for Form 10-Q and Article 10 ofRegulation S-X. Accordingly, certain information and footnote

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS(Expressed in thousands of U.S. dollars except for shareamounts, or as otherwisestated)

disclosures normally included in financialstatements prepared in accordance with GAAP have been condensed, oromitted, pursuant to the rules and regulations of the Securities andExchange Commission (the ‘‘SEC’’). In theopinion of management, the condensed consolidated financial statementsinclude all adjustments necessary (consisting of only normal andrecurring accruals) for a fair statement of the financial position andresults of operations as at the end of and for the interim periodspresented. The results of operations for any interim period are notnecessarily indicative of the results that may be expected for anyother interim period or for a full year. All significant inter-companybalances and transactions have been eliminated onconsolidation.

These unaudited condensed consolidated financialstatements should be read in conjunction with the Company'saudited consolidated financial statements for the year endedDecember  31,  2005, included in the Form 10-K filed by theCompany with the SEC on March  31,  2006.

Thepreparation of financial statements in conformity with GAAP requiresmanagement to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assetsand liabilities 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; |

|  |              |                                                                      |
|--|--------------|----------------------------------------------------------------------|
|  | •  | certain estimatedpremiums written, unearned premiums andreceivables; |

|  |              |                                  |
|--|--------------|----------------------------------|
|  | •  | reinsurance balancesrecoverable; |

|  |              |                                                 |
|--|--------------|-------------------------------------------------|
|  | •  | the valuation of goodwilland intangible assets; |

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

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

|  |              |                                      |
|--|--------------|--------------------------------------|
|  | •  | annual incentive planprovisions; and |

|  |              |                                       |
|--|--------------|---------------------------------------|
|  | •  | deferred income taxesand liabilities. |

2.    Significant accountingpolicies

A detailed discussion and analysis of theCompany's significant accounting policies is provided in thenotes to the Company's audited consolidated financial statementsas of and for the year ended December  31,  2005 includedin its Form 10-K.

Accounting for stock-basedcompensation

The Company has a long-term stock-based employeeincentive plan (the ‘‘Incentive Plan’’),which is described more fully in Note 8. Prior to January1,  2006, the Company accounted for the Incentive Plan under therecognition and measurement provisions of APB Opinion No. 25,Accounting for Stock Issued to Employees (‘‘APB25’’) and related Interpretations, as permitted by FASBStatement No. 123, Accounting for Stock-Based Compensation(‘‘SFAS 123’’). No stock-based employeecompensation cost was recognized in the Statement of Operations for theyears ended December  31,  2005 or 2004, as all optionsgranted under the Incentive Plan had an exercise price equal to themarket value of the underlying common stock on the date of grant.Effective January  1,  2006, the Company adopted the fairvalue recognition provisions of FASB Statement No. 123(R),Share-Based Payment (‘‘SFAS123(R)’’), using the modified-prospective-transitionmethod. Under that transition method, 

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS(Expressed in thousands of U.S. dollars except for shareamounts, or as otherwisestated)

compensation cost recognized in the firstquarter of 2006 includes: (a) compensation cost for all share-basedpayments granted prior to, but not yet vested as of January1,  2006, based on the grant date fair value estimated inaccordance with the original provisions of SFAS 123, and (b)compensation cost for all share-based payments granted subsequent toJanuary  1,  2006, based on the grant-date fair valueestimated in accordance with the provisions of SFAS 123(R). Results forprior periods have not been restated.

As a result of adoptingSFAS 123(R) on January  1,  2006, the Company's lossbefore income taxes and net loss for the three months endedMarch  31,  2006, are $0.4  million greater than ifit had continued to account for share-based compensation under APB 25.Basic and diluted earnings per share for the period ended March31,  2006 would have been $(0.24), which is the same result as ifthe Company had not adopted SFAS 123(R).

The following tableillustrates the effect on net income and earnings per share if theCompany had applied the fair value recognition provisions of SFAS 123to options granted under the Company's stock option plans in theperiod prior to January  1,  2006. For purposes of this proforma disclosure, the value of the options is estimated using aBlack-Scholes-Merton option-pricing formula and amortized to expenseover the options' vestingperiods.

|                                                                                             |  |                                          |         |                                         |  |        |         |         |  |  |
|---------------------------------------------------------------------------------------------|--|------------------------------------------|---------|-----------------------------------------|--|--------|---------|---------|--|--|
|                                                                                        |  | Forthe three months ended March 31, 2006 |         | For thethree months ended March 31,2005 |
| Stock compensationexpense                                                                   |  |                                     |    |                                    |  |   |    |    |
| Asreported                                                                                  |  | $                                        | (369    | )                                  |  | $      | — |    |
| Additionalstock-based employee compensation expense determined under fair valuebased method |  |                                     | — |                                    |  |   | (737    | )  |
| Proforma                                                                                    |  | $                                        | (369    | )                                  |  | $      | (737    | )  |
| Netloss                                                                                     |  |                                     |    |                                    |  |   |    |    |
| Asreported                                                                                  |  | $                                        | (17,135 | )                                  |  | $      | (644    | )  |
| Additionalstock-based employee compensation expense determined under fair valuebased method |  |                                     | — |                                    |  |   | (737    | )  |
| Proforma                                                                                    |  | $                                        | (17,135 | )                                  |  | $      | (1,381  | )  |
| Basicloss per share                                                                         |  |                                     |    |                                    |  |   |    |    |
| Asreported                                                                                  |  | $                                        | (0.24   | )                                  |  | $      | (0.01   | )  |
| Proforma                                                                                    |  | $                                        | (0.24   | )                                  |  | $      | (0.02   | )  |
| Dilutedloss per share                                                                       |  |                                     |    |                                    |  |   |    |    |
| Asreported                                                                                  |  | $                                        | (0.24   | )                                  |  | $      | (0.01   | )  |
| Proforma                                                                                    |  | $                                        | (0.24   | )                                  |  | $      | (0.02   | )  |
|                                                                                             |

3.    Recentaccounting pronouncements

In November  2005, the FinancialAccounting Standards Board's(‘‘FASB’’) issued FSP FAS 115-1 and FAS124-1, ‘‘The meaning of other than temporaryimpairment and its Application to CertainInvestments’’ (‘‘FSP FAS115-1’’), which addresses the determination as to when aninvestment is considered impaired, whether that impairment is otherthan temporary, and the measurement of an impairment loss by referenceto various existing accounting literature. FSP FAS 115-1 replaces theguidance set forth in paragraphs 10-18 of Emerging Issues Task Force(‘‘EITF’’) 03-1 ‘‘Themeaning of Other-Than-Temporary Impairment and Its Application toCertain Investments’’, with references to existingother-than-temporary impairment guidance. It also supersedes EITF D-44‘‘Recognition of Other-Than-Temporary Impairment uponthe Planned Sale of a Security Whose Cost Exceeds FairValue’’ and clarifies that an impairment should berecognized as a loss at a date no later than the date 

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS(Expressed in thousands of U.S. dollars except for shareamounts, or as otherwisestated)

the impairment is deemedother-than-temporary, even if the decision to sell has not been made.The new guidance will be applied prospectively and will be effectivefor other than temporary impairment analysis conducted fromJanuary  1,  2006. The adoption of FSP FAS 115-1 is notexpected to have a material effect on the Company's consolidatedresults of operations, financial position or cashflows.

4.    Segment information

The following tablessummarize the Company's results before income taxes for eachreportable segment for the three months ended March  31,2006 and 2005 based on the reportable segments in effect during thequarter ended March  31,  2006.

During the year endedDecember  31,  2005, the Company changed the composition ofits reportable segments such that the Lloyd's operating segment,which was previously a reportable segment, is aggregated with theCompany's specialty insurance reportable segment. The threemonths ended March  31,  2005 comparatives have beenrestated to conform with the presentation for the three months endedMarch  31,2006.

|                                                            |  |                                  |         |                      |  |                   |         |                   |  |                            |         |              |         |         |         |         |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------------------------|--|----------------------------------|---------|----------------------|--|-------------------|---------|-------------------|--|----------------------------|---------|--------------|---------|---------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                       |  | Threemonths ended March  31,2006 |
| Statement of operations bysegment                          |  | Specialtyinsurance               |         | Specialtyreinsurance |  | Underwritingtotal |         | Technicalservices |  | Adjustmentsandeliminations |         | Consolidated |
| Directinsurance                                            |  | $                                | 75,845  |                 |  | $                 | — |              |  | $                          | 75,845  |         |         | $       | — |    |  | $      | — |    |  | $      | 75,845  |    |
| Reinsuranceassumed                                         |  |                             | 8,498   |                 |  |              | 30,526  |              |  |                       | 39,024  |         |         |    | — |    |  |   | — |    |  |   | 39,024  |    |
| Totalgross premiumswritten                                 |  |                             | 84,343  |                 |  |              | 30,526  |              |  |                       | 114,869 |         |         |    | — |    |  |   | — |    |  |   | 114,869 |    |
| Premiumsceded                                              |  |                             | (29,599 | )               |  |              | (22,556 | )            |  |                       | (52,155 | )       |         |    | — |    |  |   | — |    |  |   | (52,155 | )  |
| Netpremiumswritten                                         |  | $                                | 54,744  |                 |  | $                 | 7,970   |              |  | $                          | 62,714  |         |         | $       | — |    |  | $      | — |    |  | $      | 62,714  |    |
| Netpremiumsearned                                          |  | $                                | 58,039  |                 |  | $                 | 21,529  |              |  | $                          | 79,568  |         |         | $       | — |    |  | $      | — |    |  | $      | 79,568  |    |
| Technicalservicesrevenues                                  |  |                             | — |                 |  |              | — |              |  |                       | — |         |         |    | 8,145   |    |  |   | (404    | )  |  |   | 7,741   |    |
| Otherincome                                                |  |                             | 130     |                 |  |              | 874     |              |  |                       | 1,004   |         |         |    | 120     |    |  |   | — |    |  |   | 1,124   |    |
| Netlosses and lossexpenses                                 |  |                             | (38,731 | )               |  |              | (15,761 | )            |  |                       | (54,492 | )       |         |    | — |    |  |   | 110     |    |  |   | (54,382 | )  |
| Directtechnical servicescosts                              |  |                             | — |                 |  |              | — |              |  |                       | — |         |         |    | (5,000  | )  |  |   | — |    |  |   | (5,000  | )  |
| Acquisitionexpenses                                        |  |                             | (8,366  | )               |  |              | (5,567  | )            |  |                       | (13,933 | )       |         |    | — |    |  |   | — |    |  |   | (13,933 | )  |
| Generaland administrativeexpenses                          |  |                             | (20,448 | )               |  |              | (6,957  | )            |  |                       | (27,405 | )       |         |    | (2,912  | )  |  |   | 294     |    |  |   | (30,023 | )  |
| Segment(loss)income                                        |  | $                                | (9,376  | )               |  | $                 | (5,882  | )            |  | $                          | (15,258 | )       |         | $       | 353     |    |  | $      | — |    |  | $      | (14,905 | )  |
| Depreciationof fixed assets and amortization ofintangibles |  |                             |         |                 |  |              |         |              |  |                       |         | $            | (1,070  | )  |
| Interestexpense                                            |  |                             |         |                 |  |              |         |              |  |                       |         |         | (1,262  | )  |
| Netinvestmentincome                                        |  |                             |         |                 |  |              |         |              |  |                       |         |         | 10,776  |    |
| Netrealized losses oninvestments                           |  |                             |         |                 |  |              |         |              |  |                       |         |         | (8,320  | )  |
| Otherlosses                                                |  |                             |         |                 |  |              |         |              |  |                       |         |         | (87     | )  |
| Netforeign exchangelosses                                  |  |                             |         |                 |  |              |         |              |  |                       |         |         | (319    | )  |
| Lossbefore incometaxes                                     |  |                             |         |                 |  |              |         |              |  |                       |         | $            | (15,187 | )  |
|                                                            |

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS(Expressed in thousands of U.S. dollars except for shareamounts, or as otherwisestated)

|                                                            |  |                                  |         |                      |  |                   |         |                   |  |                            |         |              |       |         |         |         |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------------------------|--|----------------------------------|---------|----------------------|--|-------------------|---------|-------------------|--|----------------------------|---------|--------------|-------|---------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                       |  | Threemonths ended March 31, 2005 |
| Statementof operations bysegment                           |  | Specialtyinsurance               |         | Specialtyreinsurance |  | Underwritingtotal |         | Technicalservices |  | Adjustmentsandeliminations |         | Consolidated |
| Directinsurance                                            |  | $                                | 82,471  |                 |  | $                 | — |              |  | $                          | 82,471  |         |       | $       | — |    |  | $      | — |    |  | $      | 82,471  |    |
| Reinsuranceassumed                                         |  |                             | 848     |                 |  |              | 89,407  |              |  |                       | 90,255  |         |       |    | — |    |  |   | — |    |  |   | 90,255  |    |
| Totalgross premiumswritten                                 |  |                             | 83,319  |                 |  |              | 89,407  |              |  |                       | 172,726 |         |       |    | — |    |  |   | — |    |  |   | 172,726 |    |
| Premiumsceded                                              |  |                             | (28,552 | )               |  |              | (1,297  | )            |  |                       | (29,849 | )       |       |    | — |    |  |   | — |    |  |   | (29,849 | )  |
| Netpremiumswritten                                         |  | $                                | 54,767  |                 |  | $                 | 88,110  |              |  | $                          | 142,877 |         |       | $       | — |    |  | $      | — |    |  | $      | 142,877 |    |
| Netpremiumsearned                                          |  | $                                | 37,849  |                 |  | $                 | 53,637  |              |  | $                          | 91,486  |         |       | $       | — |    |  | $      | — |    |  | $      | 91,486  |    |
| Technicalservicesrevenues                                  |  |                             | — |                 |  |              | — |              |  |                       | — |         |       |    | 8,112   |    |  |   | (849    | )  |  |   | 7,263   |    |
| Otherincome                                                |  |                             | 254     |                 |  |              | 790     |              |  |                       | 1,044   |         |       |    | 10      |    |  |   | — |    |  |   | 1,054   |    |
| Netlosses and lossexpenses                                 |  |                             | (27,848 | )               |  |              | (29,648 | )            |  |                       | (57,496 | )       |       |    | — |    |  |   | — |    |  |   | (57,496 | )  |
| Directtechnical servicescosts                              |  |                             | — |                 |  |              | — |              |  |                       | — |         |       |    | (4,861  | )  |  |   | — |    |  |   | (4,861  | )  |
| Acquisitionexpenses                                        |  |                             | (6,673  | )               |  |              | (13,804 | )            |  |                       | (20,477 | )       |       |    | — |    |  |   | — |    |  |   | (20,477 | )  |
| Generaland administrativeexpenses                          |  |                             | (14,025 | )               |  |              | (5,156  | )            |  |                       | (19,181 | )       |       |    | (2,539  | )  |  |   | 849     |    |  |   | (20,871 | )  |
| Segment(loss)income                                        |  | $                                | (10,443 | )               |  | $                 | 5,819   |              |  | $                          | (4,624  | )       |       | $       | 722     |    |  | $      | — |    |  | $      | (3,902  | )  |
| Depreciationof fixed assets and amortization ofintangibles |  |                             |         |                 |  |              |         |              |  |                       |         | $            | (842  | )  |
| Interestexpense                                            |  |                             |         |                 |  |              |         |              |  |                       |         |         | (826  | )  |
| Netinvestmentincome                                        |  |                             |         |                 |  |              |         |              |  |                       |         |         | 5,225 |    |
| Netrealized losses oninvestments                           |  |                             |         |                 |  |              |         |              |  |                       |         |         | (483  | )  |
| Otherincome                                                |  |                             |         |                 |  |              |         |              |  |                       |         |         | 519   |    |
| Netforeign exchangelosses                                  |  |                             |         |                 |  |              |         |              |  |                       |         |         | (112  | )  |
| Lossbefore incometaxes                                     |  |                             |         |                 |  |              |         |              |  |                       |         | $            | (421  | )  |
|                                                            |

Itemsof revenue and expense resulting from charges between segments areeliminated on consolidation of the segments. During the three monthsended March  31,  2006 and 2005, the technical servicessegment charged the underwriting segments $0.4  million and$0.8  million of revenues for technical services and informationmanagement 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 andreinsurers.

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS(Expressed in thousands of U.S. dollars except for shareamounts, or as otherwisestated)

5.    Loss per share

Thefollowing table sets forth the computation of basic and diluted losspershare.

|                                                          |  |                           |            |               |  |        |            |         |  |  |
|----------------------------------------------------------|--|---------------------------|------------|---------------|--|--------|------------|---------|--|--|
|                                                     |  | Forthe three months ended |
|                                                     |  | March 31, 2006            |            | March 31,2005 |
| Basic loss pershare                                      |  |                      |       |          |  |   |       |    |
| Net loss available toordinaryshareholders                |  | $                         | (17,135    | )        |  | $      | (644       | )  |
| Weightedaverage common shares outstanding –basic   |  |                      | 69,946,861 |          |  |   | 56,798,218 |    |
| Basicloss pershare                                       |  | $                         | (0.24      | )        |  | $      | (0.01      | )  |
| Dilutedloss per share                                    |  |                      |       |          |  |   |       |    |
| Net lossavailable to ordinaryshareholders                |  | $                         | (17,135    | )        |  | $      | (644       | )  |
| Weightedaverage common sharesoutstanding                 |  |                      | 69,946,861 |          |  |   | 56,798,218 |    |
| Weightedaverage common shareequivalents                  |  |                      |       |          |  |   |       |    |
| Options                                                  |  |                      | —    |          |  |   | —    |    |
| Warrants                                                 |  |                      | —    |          |  |   | —    |    |
| Weightedaverage common shares outstanding –diluted |  |                      | 69,946,861 |          |  |   | 56,798,218 |    |
| Dilutedloss pershare                                     |  | $                         | (0.24      | )        |  | $      | (0.01      | )  |
|                                                          |

Dueto a net loss for all periods presented, the assumed net exercise ofoptions and warrants under the treasury stock method has been excluded,as the effect would have been anti-dilutive. Accordingly, for the threemonths ended March  31,  2006, the calculation of weightedaverage common shares outstanding on a diluted basis excludes 3,055,470options and 2,542,813 warrants. For the three months ended March31,  2005, the calculation of weighted average common sharesoutstanding on a diluted basis excludes 3,933,342 options and 2,542,813warrants.

6.    Reinsurance

The Company utilizesreinsurance and retrocessional agreements principally to increaseaggregate capacity and to limit net exposures to losses arising onbusiness assumed. The Company's reinsurance agreements providefor the recovery of a portion of losses and loss expenses fromreinsurers.

Reinsurance assets due from our reinsurers includelosses and loss adjustment expenses recoverable and deferredreinsurance premiums. The Company is subject to credit risk withrespect to reinsurance ceded because the ceding of risk does notrelieve the Company from its primary obligations to its policyholders.It is expected that the companies to which insurance has been cededwill honor their obligations. Failure of the Company's reinsurersto honor their obligations could result in credit losses.

Theaverage credit rating of the Company's reinsurers as ofMarch  31,  2006 is A (Excellent) by A.M. Best. As ofMarch  31,  2006, the losses and loss adjustment expensesrecoverable from reinsurers balance in the consolidated balance sheetincluded approximately 24% due from Everest Reinsurance Ltd., areinsurer rated A+ (Superior) by A.M. Best, and approximately15% due from various Lloyd's syndicates, which are rated A(Excellent) by A.M. Best. No other reinsurers accounted for more than10% of the losses and loss adjustment expense recoverablebalance as of March  31,2006.

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS(Expressed in thousands of U.S. dollars except for shareamounts, or as otherwisestated)

The following table lists our largestreinsurers measured by the amount of losses and loss adjustmentexpenses recoverable at March  31,  2006 and thereinsurers' financial strength rating from A.M.Best:

|                                         |  |                                              |       |                |  |               |  |  |  |  |
|-----------------------------------------|--|----------------------------------------------|-------|----------------|--|---------------|--|--|--|--|
|                                    |  | Lossesand LossAdjustment ExpensesRecoverable |       | A.M.BestRating |
| Reinsurer                               |  | ($ inmillions)                               |       |           |
| Everest ReinsuranceCompany              |  | $                                            | 48.2  |           |  | A+            |
| Lloyd's                                 |  |                                         | 30.9  |           |  | A   |
| ArchReinsurance                         |  |                                         | 19.3  |           |  | A−      |
| XLCapital Ltd.                          |  |                                         | 11.3  |           |  | A+            |
| Allianz Marine& Aviation            |  |                                         | 10.7  |           |  | A−      |
| NewReinsurance Company                  |  |                                         | 10.0  |           |  | A+            |
| GlacierReinsurance AG                   |  |                                         | 8.4   |           |  | A−      |
| The ToaReinsurance Company, Ltd.(Tokyo) |  |                                         | 8.1   |           |  | A   |
| Aspen Insurance                         |  |                                         | 7.5   |           |  | A   |
| TransatlanticReinsurance Company        |  |                                         | 7.2   |           |  | A+            |
| OdysseyAmerica Reinsurance              |  |                                         | 7.1   |           |  | A   |
| MaxRe                                   |  |                                         | 6.7   |           |  | A−      |
| Other ReinsurersRated A− orBetter |  |                                         | 15.1  |           |  | A−      |
| All OtherReinsurers                     |  |                                         | 7.8   |           |  | Various       |
| Total                                   |  | $                                            | 198.3 |           |  |          |
|                                         |

Theeffect of reinsurance activity on premiums written, premiums earned andlosses and loss expenses incurred for the three months endedMarch  31,  2006 and 2005 is shownbelow.

|                                 |  |                 |         |                 |  |                        |         |         |  |        |         |         |  |  |
|---------------------------------|--|-----------------|---------|-----------------|--|------------------------|---------|---------|--|--------|---------|---------|--|--|
| Threemonths ended March 31,2006 |  | PremiumsWritten |         | Premiums Earned |  | Losses andLossExpenses |
| Directinsurance                 |  | $               | 75,845  |            |  | $                      | 86,426  |    |  | $      | 52,605  |    |
| Reinsuranceassumed              |  |            | 39,024  |            |  |                   | 49,205  |    |  |   | 27,333  |    |
| Gross                           |  |            | 114,869 |            |  |                   | 135,631 |    |  |   | 79,938  |    |
| Cededreinsurance                |  |            | (52,155 | )          |  |                   | (56,063 | )  |  |   | (25,556 | )  |
| Net                             |  | $               | 62,714  |            |  | $                      | 79,568  |    |  | $      | 54,382  |    |
|                                 |

|                                 |  |                 |         |                 |  |                         |         |         |  |        |         |         |  |  |
|---------------------------------|--|-----------------|---------|-----------------|--|-------------------------|---------|---------|--|--------|---------|---------|--|--|
| 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  |    |
| Gross                           |  |            | 172,726 |            |  |                    | 110,985 |    |  |   | 68,894  |    |
| Cededreinsurance                |  |            | (29,849 | )          |  |                    | (19,499 | )  |  |   | (11,398 | )  |
| Net                             |  | $               | 142,877 |            |  | $                       | 91,486  |    |  | $      | 57,496  |    |
|                                 |

7.    Commitmentsand contingencies

a)    Concentrations of creditrisk

As of March  31,  2006 and December31,  2005, substantially all of the Company's cash and cashequivalents, and investments were held by three custodians. Managementbelieves these custodians to be of high credit quality. TheCompany's investment portfolio is managed by external investment

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS(Expressed in thousands of U.S. dollars except for shareamounts, or as otherwisestated)

advisors in accordance with theCompany's investment guidelines. The Company's investmentguidelines require that the average credit quality of the investmentportfolio is typically Aa3/AA− and that no more than 5%of the investment portfolio's market value shall be invested insecurities rated below Baa3/BBB−. The Company also limits itsexposure to any single issuer to 5% or less of the totalportfolio's market value at the time of purchase, with theexception of U.S. government and agency securities. As of March31,  2006 and 2005, the largest single non-U.S. government andgovernment agencies issuer accounted for less than 2.5% of theaggregate market value of the externally managedportfolios.

Other accounts receivable as of March31,  2006 and December  31,  2005 consist principallyof amounts relating to technical services engagements and include$7.9  million and $7.0  million in billed accountsreceivable and $2.4  million and $2.5  million in unbilledamounts for work in progress. As of March  31,  2006 andDecember  31,  2005, one customer accounted forapproximately 20% of the technical services other accountsreceivable balance. As of December  31,  2005, twocustomers accounted for approximately 24% and 16% of thetechnical services other accounts receivable balance. No othercustomers accounted for more than 10% of the technical servicesother accounts receivable balance as of March  31,  2006and December  31,  2005. The Company extends credit to itscustomers in the normal course of business and monitors the balances ofindividual accounts to assess any collectibility issues. The Companyand its predecessor have not experienced significant losses related totechnical services receivables in the past.

The premiumsreceivable balances of $147.0  million and $146.8  millionas of March  31,  2006 and December  31,  2005include approximately $25.5  million, or 17.4%, andapproximately $20.3  million, or 13.8%, from one thirdparty agent that sources the residential builders' andcontractors' program that provides new home contractorsthroughout the U.S. with general liability, builders' risk andexcess liability insurance coverages as well as reinsurance forwarranty coverage (under the HBW program). The Company has notexperienced any losses related to premiums receivables from this thirdparty agent to date and monitors the aged premiums receivable balanceson a monthly basis.

Concentrations related to losses and lossadjustment expenses recoverable from reinsurers are discussed furtherin Note 6.

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,  2006,two brokers accounted for approximately 50.5% and 39.1%of the specialty reinsurance segment's gross premiums written. Noother brokers accounted for more than 10% of the specialtyinsurance or the specialty reinsurance segments' gross writtenpremium for the three months ended March  31,2006.

During the three months ended March  31,  2005,two brokers accounted for approximately 43.9% and 21.1%of the specialty reinsurance segment's gross premiums written. Noother brokers accounted for more than 10% of the specialtyinsurance or the specialty reinsurance segments' gross writtenpremium for the three months ended March  31,  2005.

The Company believes that all of its brokers are significant andestablished companies.

During the three months ended March31,  2006 and 2005, the HBW program accounted for approximately$43.7  million, or 51.8%, and $41.1  million, or61.3%, of the specialty insurance segment gross written premiumsfor the three months ended March  31,  2006 and 2005.Policies underwritten in this program are sourced by one third partyagent that the Company believes is a large and established specialistin this class of business.

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 by

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS(Expressed in thousands of U.S. dollars except for shareamounts, or as otherwisestated)

the regulations of the individual locationswithin which the Company operates. These funds on deposit are availableto settle insurance and reinsurance liabilities.

The Companyparticipates in the Lloyd's of London market through Syndicate4000 at Lloyd's and has dedicated a significant amount of itscapital to the Lloyd's business. The regulations of the Councilof Lloyd's determine the amount of premium that may be written,also known as stamp capacity, based on the Company's Funds atLloyd's. The Company will maintain Funds at Lloyd's forevery underwriting year in which it has business through Syndicate 4000at Lloyd's. These funds may not be withdrawn until eachunderwriting year is closed which currently takes three years andrequires the purchase of reinsurance. Traditionally, three years havebeen necessary 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 March31,  2006 and December  31  2005, cash andinvestments with a market value of $114.6  million are held byLloyd's as trustee, which includes an additional $6.3million of investments deposited to support the Company's 2006underwriting year. The cash and investments held by Lloyd's areincluded within the table below and may not be withdrawn until eachunderwriting year is closed, which generally takes three years. AtMarch  31,  2006, in addition to its Funds atLloyd's, the Company had cash and investments of $11.6million that were held under Premium Trust Funds for payments anddischarge of certain trust outgoings, and a further $28.7million held on deposit pursuant to regulatory requirements. AtDecember  31,  2005, in addition to its Funds atLloyd's, the Company had cash and investments of $15.1million that was held under Premium Trust Funds for payments anddischarge of certain trust outgoings, and a further $13.5million held on deposit pursuant to regulatory requirements.

TheCompany has also issued letters of credit(‘‘LOC’’) under its credit agreement forwhich cash and cash equivalents and investments are pledged assecurity, in favor of certain ceding companies to collateralize itsobligations under contracts of insurance and reinsurance and in favorof a landlord relating to a lease agreement for office space.

The Company also utilizes trust funds in certain large transactionswhere the trust funds are set up for the benefit of the cedingcompanies, and generally take the place of letter of creditrequirements. In addition, the Company holds cash and cash equivalentsand investments in trust to fund the Company's obligationsassociated with the assumption of environmental remediationliability.

The fair values of these restricted assets by categoryat March  31,  2006 and December  31,  2005 areasfollows:

|                                                          |  |                         |        |                  |  |                         |         |             |  |        |        |        |  |        |         |        |  |  |
|----------------------------------------------------------|--|-------------------------|--------|------------------|--|-------------------------|---------|-------------|--|--------|--------|--------|--|--------|---------|--------|--|--|
|                                                     |  | March31, 2006           |        | December 31,2005 |
|                                                     |  | Cash andcashequivalents |        | Investments      |  | Cash andcashequivalents |         | Investments |
| Depositswith U.S. regulatoryauthorities                  |  | $                       | 6,352  |             |  | $                       | 23,388  |        |  | $      | 422    |   |  | $      | 29,328  |   |
| Fundsdeposited withLloyd's                               |  |                    | 34,554 |             |  |                    | 120,318 |        |  |   | 35,472 |   |  |   | 107,759 |   |
| LOCpledged assets                                        |  |                    | 17,014 |             |  |                    | 241,219 |        |  |   | 17,865 |   |  |   | 199,342 |   |
| Trustfunds                                               |  |                    | 14,721 |             |  |                    | 160,223 |        |  |   | 15,544 |   |  |   | 118,686 |   |
| Amountsheld in trust funds related to depositliabilities |  |                    | 13,304 |             |  |                    | 37,929  |        |  |   | 13,540 |   |  |   | 38,316  |   |
| Total                                                    |  | $                       | 85,945 |             |  | $                       | 583,077 |        |  | $      | 82,843 |   |  | $      | 493,431 |   |
|                                                          |

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 

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS(Expressed in thousands of U.S. dollars except for shareamounts, or as otherwisestated)

rental payments. Rent expenses are beingrecognized on a straight-line basis over the respective lease terms.Future annual minimum payments under non-cancelable operating leases asof March  31,  2006, are asfollows:

|                     |  |        |        |        |  |  |
|---------------------|--|--------|--------|--------|--|--|
| Yearending March31, |  |   |
| 2007                |  | $      | 5,471  |   |
| 2008                |  |   | 4,694  |   |
| 2009                |  |   | 3,368  |   |
| 2010                |  |   | 3,385  |   |
| 2011                |  |   | 3,058  |   |
| 2012andthereafter   |  |   | 21,143 |   |
| Total               |  | $      | 41,119 |   |
|                     |

Totalrent expense under operating leases for the three months endedMarch  31,  2006 and 2005, was approximately $1.6million and $1.1  million.

8.    Options and stockbased compensation

In July  2003, the shareholders of theCompany approved the long-term incentive plan (the‘‘Incentive Plan’’). The Incentive Planprovides for the grant to eligible employees, directors and consultantsof stock options, stock appreciation rights, restricted shares,restricted share units, performance awards, dividend equivalents andother share-based awards. The Incentive Plan is administered by theCompany and the Compensation Committee of the Board of Directors. TheCompensation Committee determines the dates, amounts, exercise prices,vesting periods and other relevant terms of the awards. Option awardsare generally granted with an exercise price equal to the market priceof the Company's stock at the date of grant; those option awardsgenerally vest based on four years of continuous service and have sevento ten-year contractual terms. Recipients of awards may exercise at anytime after they vest and before they expire, except that no awards maybe exercised after ten years from the date of grant.

Performanceshare units are also awarded to various employees pursuant to theIncentive Plan. The number of shares of common stock to be receivedunder these awards at the end of the performance period will depend onthe attainment of performance objectives based on the Company'sGAAP average return on shareholders' equity over a three yearperiod. The grantees will receive shares of common stock in an amountranging from zero to 300% percent of the share award (as suchamount is defined in the grant).

Since unvested performanceshare units are contingent upon satisfying performance objectives,those unvested shares are considered to be contingently issuable sharesand are not included in the computation of diluted earnings per shareuntil all conditions for issuance are met. Performance share units areincluded in basic shares outstanding when issued.

Awards withgraded vesting features will be accounted for using the graded-vestingmethod in accordance with FASB Interpretation No. 28‘‘Accounting for Stock Appreciation Rights and OtherVariable Stock Option or Award Plans.’’

As ofMarch  31,  2006 and 2005, the maximum number of sharesavailable for award and issuance under the Incentive Plan was 9,350,000and 5,850,000.

In accordance with SFAS 123 and SFAS 123(R), thefair value of each option award is estimated on the date of grant usinga Black-Scholes-Merton option-pricing formula that uses the assumptionsnoted in the following table. Expected volatilities are based onimplied volatilities from traded options on the Company's stock,historical volatility of the Company's stock, and other factors.The Company uses historical data to estimate employee termination. Theexpected term of options granted is 

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS(Expressed in thousands of U.S. dollars except for shareamounts, or as otherwisestated)

calculated using the Staff AccountingBulletin No. 107 simplified method. It is the mid-point between thevesting date and the expiration date and represents the period of timethat options granted are expected to be outstanding. The risk-free ratefor periods within the contractual life of the option is based on theU.S. Treasury yield curve in effect at the time of grant. The dividendyield is based on historical data.

|                         |  |                             |      |         |  |        |      |         |  |  |
|-------------------------|--|-----------------------------|------|---------|--|--------|------|---------|--|--|
|                    |  | Threemonths ended March 31, |
|                    |  | 2006                        |      | 2005    |
| Expectedvolatility      |  |                        | 24.0 | %  |  |   | 24.0 | %  |
| Dividendyield           |  |                        | 0.0  | %  |  |   | 0.0  | %  |
| Risk-freeinterestrate   |  |                        | 4.50 | %  |  |   | 4.14 | %  |
| Expectedterm (in years) |  |                        | 7    |    |  |   | 7    |    |
|                         |

The followingis a summary of the Company's stock options and related activityduring the three months ended March  31,  2006 and2005:

|                                        |  |                                  |           |                                 |  |        |         |                               |  |        |           |        |  |        |         |        |  |  |
|----------------------------------------|--|----------------------------------|-----------|---------------------------------|--|--------|---------|-------------------------------|--|--------|-----------|--------|--|--------|---------|--------|--|--|
|                                   |  | Threemonths ended March 31, 2006 |           | Three months endedMarch 31,2005 |
|                                   |  | Number                           |           | Weighted-averageexerciseprice   |  | Number |         | Weighted-averageexerciseprice |
| Outstanding – beginning ofperiod |  |                             | 3,402,194 |                            |  | $      | 9.55    |                          |  |   | 3,052,400 |   |  | $      | 9.99    |   |
| Granted                                |  |                             | 20,000    |                            |  |   | 4.80    |                          |  |   | 935,942   |   |  |   | 8.92    |   |
| Exercised                              |  |                             | —   |                            |  |   | — |                          |  |   | —   |   |  |   | — |   |
| Forfeited                              |  |                             | (366,724  | )                          |  |   | (8.92   | )                        |  |   | —   |   |  |   | — |   |
| Outstanding– end ofperiod        |  |                             | 3,055,470 |                            |  | $      | 9.60    |                          |  |   | 3,988,342 |   |  | $      | 9.73    |   |
|                                        |

Theweighted-average grant date fair value of options granted during thethree months ended March  31,  2006 and 2005 was $1.80 and$2.22.

The fair value of performance share units and restrictedshares awarded under the Incentive Plan is determined based on theclosing trading price of the Company's shares on the grant date.The following is a summary of the Company's non vestedperformance share units and restricted shares and related activityduring the three months ended March  31,  2006 and2005:

|                                       |  |                                 |         |                                 |  |        |         |                            |  |        |         |        |  |        |         |        |  |  |
|---------------------------------------|--|---------------------------------|---------|---------------------------------|--|--------|---------|----------------------------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                                  |  | Threemonths ended March 31,2006 |         | Three months ended March31,2005 |
|                                  |  | Number                          |         | Weighted-averageshareprice      |  | Number |         | Weighted-averageshareprice |
| Non vested – beginning ofperiod |  |                            | 148,335 |                            |  | $      | 7.30    |                       |  |   | — |   |  | $      | — |   |
| Granted                               |  |                            | — |                            |  |   | — |                       |  |   | 106,702 |   |  |   | 8.92    |   |
| Vested                                |  |                            | — |                            |  |   | — |                       |  |   | — |   |  |   | — |   |
| Forfeited                             |  |                            | (8,368  | )                          |  |   | (8.92   | )                     |  |   | — |   |  |   | — |   |
| Nonvested – end ofperiod        |  |                            | 139,967 |                            |  | $      | 7.20    |                       |  |   | 106,702 |   |  | $      | 8.92    |   |
|                                       |

Therewere no performance share units or restricted shares granted during thethree months ended March  31,  2006.

Thecompensation cost that was expensed in the Statement of Operationsduring the three months ended March  31,  2006 was$0.4  million.

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS(Expressed in thousands of U.S. dollars except for shareamounts, or as otherwisestated)

The following is a summary of theCompany's outstanding options and exercisable options as ofMarch 31,2006.

|                         |  |                    |           |                      |  |                                  |       |                 |  |                      |  |        |           |        |  |   |         |        |  |  |  |  |
|-------------------------|--|--------------------|-----------|----------------------|--|----------------------------------|-------|-----------------|--|----------------------|--|--------|-----------|--------|--|---|---------|--------|--|--|--|--|
|                    |  | Optionsoutstanding |           | Optionsexercisable   |
| Range ofexercise prices |  | Number ofoptions   |           | Averageexerciseprice |  | Averageremainingcontractual life |       | Numberofoptions |  | Averageexerciseprice |
| $4.59–$4.80       |  |               | 36,666    |                 |  | $                                | 4.70  |            |  | 6.80years            |  |   | —   |   |  | $ | — |   |
| $6.39                   |  |               | 10,000    |                 |  | $                                | 6.39  |            |  | 6.44years            |  |   | —   |   |  | $ | — |   |
| $7.85                   |  |               | 2,000     |                 |  | $                                | 7.85  |            |  | 6.08years            |  |   | —   |   |  | $ | — |   |
| $8.55– $9.00      |  |               | 921,654   |                 |  | $                                | 8.88  |            |  | 6.49 years           |  |   | 230,414   |   |  | $ | 8.88    |   |
| $10.00 –$10.50    |  |               | 2,037,150 |                 |  | $                                | 10.00 |            |  | 7.44years            |  |   | 1,340,365 |   |  | $ | 10.00   |   |
| $11.50– $12.00    |  |               | 26,000    |                 |  | $                                | 11.58 |            |  | 7.84 years           |  |   | 13,000    |   |  | $ | 11.58   |   |
| $12.50                  |  |               | 22,000    |                 |  | $                                | 12.50 |            |  | 8.08years            |  |   | 5,500     |   |  | $ | 12.50   |   |
|                         |

As ofMarch  31,  2006, there was $2.7  million of totalunrecognized compensation cost related to non vested share-basedcompensation arrangements related to stock options and performanceshare units granted under the Incentive Plan. This cost is expected tobe recognized over a weighted-average period of 2.02years.

9.    Subsequent events

The Company iscontinuing to work to preserve shareholder value and respond to therating actions taken by A.M. Best. A special committee of theCompany’s Board of Directors has engaged Friedman, Billings,Ramsey & Co., Inc. and J.P. Morgan Securities Inc., as financialadvisors. They are assisting the Company in evaluating strategicalternatives, including the potential sale of some or all of theCompany’s businesses, the run off of certain product lines ofthe business or a combination of alternatives. The Company’sfinancial advisors will also help us evaluate the use of potentialexcess capital to repay debt or to return value to the Company’sshareholders. During this process, the special committee and the Boardhave met a number of times to consider the potential strategicalternatives available to the Company, and the Company has beencontacted by several parties and has had due diligence discussions witha number of those parties. There can be no assurance that any of theseinitiatives will not negatively impact the Company's results ofoperations or will be successful in improving the Company'sposition and preserving shareholder value.

After evaluatingavailable alternatives, the Board of Directors may conclude that noother alternatives would be in the best interests of theCompany’s shareholders and that the best alternative is to placethe Company’s remaining insurance businesses in run off andeventually wind up the Company’s insurance operations over someperiod of time, which is not currently determinable.

The Companyis also analyzing its business lines, their positioning and internaloperations. We believe that the Company currently has sufficient assetsto pay its foreseen liabilities as they become due, and the Companycontinues to earn investment income on its investment portfolio tosupport its general and administrative expenses. We maintain a globalplatform in the United States, Bermuda and Europe. The Company alsobelieves it has retained underwriting capabilities and experience inkey product lines.

At this stage in the Company's overallevaluation of strategic alternatives, the Company has determined tocontinue certain of its businesses. Currently, the Company continues tooffer certain program business lines as well as professional liabilityand fidelity insurance lines in the United States, Lloyd'sbusiness through the Company’s Lloyd's syndicate in theA.M. Best ‘‘A’’ rated Lloyd's marketin Europe and its environmental consulting services through ESC in theUnited States. The Company is not writing new business in itsprofessional liability, fidelity, environmental and marine and aviationinsurance product lines or in its reinsurance and structured productlines. The Company is no longer 

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS(Expressed in thousands of U.S. dollars except for shareamounts, or as otherwisestated)

seeking new business in its surety insuranceline and will cease seeking new business in its marine and aviationreinsurance, casualty reinsurance and trade credit and political riskinsurance lines during the second quarter of 2006.

During thesecond and third quarters of 2006, the Company expects to recognizeadditional severance costs and reductions in general and administrativeexpenses as the Company aligns its infrastructure to the selectedstrategic option.

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|              |                                                                                      |
|--------------|--------------------------------------------------------------------------------------|
| Item2.  | MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS. |

The following discussion and analysis of ourresults of operations, financial condition and liquidity and capitalresources should be read in conjunction with our unaudited condensedconsolidated financial statements and related notes for the threemonths ended March 31, 2006 and the risk factors under Part II —Item 1A — Risk Factors contained in this Form 10-Q and theaudited consolidated financial statements and related notes for theyear ended December  31,  2005, as well as‘‘Management's Discussion and Analysis of FinancialCondition and Results of Operations,’’ including thediscussions of critical accounting policies and estimates, quantitativeand qualitative disclosures about market risk and risk factors,contained in the Form 10-K for the year ended December31,  2005, filed by the Company with the SEC on March31,  2006 (‘‘Form10-K’’).

Safe Harbor Disclosure

The PrivateSecurities Litigation Reform Act of 1995 provides a‘‘safe harbor’’ for forward-lookingstatements. Any written or oral statements made by or on our behalf mayinclude forward-looking statements. 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, includedin this report are forward-looking statements.

Allforward-looking statements address matters that involve risks anduncertainties. There are important factors that could cause our actualresults to differ materially from those indicated in these statements.We believe that these factors include but are not limited to thefollowing:

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | A.M. Best downgraded ourfinancial strength rating to ‘‘B++’’ (verygood) and placed our rating under review with negative implications inMarch  2006. We are experiencing a significant loss of businessand business opportunities from the recent downgrade and qualificationof our financial strength rating. Our current financial strength ratingof ‘‘B++’’ (very good), under review withnegative implications has had, and will continue to have, a significantadverse effect on our ability to conduct our business in our currentproduct lines. In addition, certain of our insurance and many of ourreinsurance contracts contain termination rights, which have beentriggered by the A.M. Best rating downgrade. Some of the insurance andreinsurance contracts also require us to post additional security as aresult of the downgrade. Furthermore, many of our other insurancecontracts and certain of our reinsurance contracts provide forcancellation at the option of the policyholder regardless of ourfinancial strength rating. A downgrade in our rating below‘‘B++’’ (very good) will cause a default inour credit facility and trigger termination provisions or require theposting of additional security in many of our other insurance andreinsurance contracts. The obligations under the credit facility arecurrently fully secured by investments and cash. If a default occursunder the credit agreement, our lenders may require us to cashcollateralize a portion or all of the outstanding letters of creditissued under the facility, which may be accomplished through thesubstitution or liquidation of collateral. Among other things, thelenders would also have the right to cancel outstanding letters ofcredit issued under the facility and we would be limited in releasingcollateral without the lenders'consent; |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                         |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | we believe that A.M. Bestcontinues to reevaluate its capital adequacy models and other factorsit uses in its evaluation of our business. A.M. Best may furtherdowngrade our ratings. Accordingly, there can be no assurance as towhat additional rating actions A.M. Best may take in the future orwhether A.M. Best will further downgrade our ratings or will remove anyqualification of our ratings; |

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|  |              |                                                                                                                                                                                                                                                                          |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | based on ourdiscussions with the program manager of our residential builders'and contractors' program, or HBW program, the program manager hasstarted, and we expect that it will continue, to divert a substantialportion of its business to other carriers during2006; |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | as a result of the downgrade ofour financial strength ratings by A.M. Best, we have been closelyanalyzing our business lines, positioning in the market and internaloperations and are taking steps to preserve shareholder value andimprove our position, including the exploration of strategicalternatives. The implementation of any changes based on such analysisor of any strategic alternatives involves substantial uncertainties andrisks that may result in restructuring charges and unforeseen expensesand costs. There can be no assurance that any of these initiatives willnot negatively impact our results of operations or will be successfulin improving our position and preserving shareholdervalue; |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                    |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | certain lines of business that wehave underwritten, including marine, technical risk and aviationreinsurance and environmental insurance, have large aggregate exposuresto natural and man-made disasters such as hurricane, typhoon,windstorm, flood, earthquake, acts of war, acts of terrorism andpolitical instability and our results may continue to be volatile as aresult; |

|  |              |                                            |
|--|--------------|--------------------------------------------|
|  | •  | our ability to pay dividends isrestricted; |

|  |              |                                                                                                                                                                                                                                                                                                         |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | our business is dependentupon insurance and reinsurance brokers who use ratings as an importantfactor in evaluating the financial strength and quality of insurers. Asa result of our financial strength ratings downgrade, several of ourimportant brokers have removed us from their approvedlisting; |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | our current estimates of ourexposure to ultimate claim costs associated with Hurricanes Katrina,Rita and Wilma are based on available information, claims notificationsreceived to date, industry loss estimates, output from industry models,a review of affected contracts and discussions with brokers andclients. The actual amount of losses from Hurricanes Katrina, Rita andWilma may vary significantly from our estimates based on such data,which could have a material adverse effect on our financial conditionor our results of operations; |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | ourability to take steps to preserve shareholder value and improve ourposition, including the exploration of strategic alternatives and ourability to continue to operate those business lines that have not beendiscontinued is dependent on our ability to retain our executives andkey employees. Our inability to retain, attract and integrate membersof our management team, key employees and other personnel couldsignificantly and negatively affect our remaining business and thepreservation of shareholder value; |

|  |              |                                                                                                           |
|--|--------------|-----------------------------------------------------------------------------------------------------------|
|  | •  | ifactual claims exceed our loss reserves, our financial results could besignificantly adversely affected; |

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|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | thefailure of any of the loss limitation methods we employ could have amaterial adverse effect on our financial condition or our results ofoperations; |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | based on our currentestimate of losses related to Hurricanes Katrina and Rita, we haveexhausted our reinsurance and retrocessional protection with respect toHurricane Katrina and our marine reinsurance with respect to HurricaneRita. If our Hurricane Katrina losses prove to be greater thancurrently anticipated, we have no further reinsurance andretrocessional coverage available for that windstorm. In addition, ifour marine reinsurance losses for Hurricane Rita prove greater thancurrently anticipated, we will have no further retrocessional coverageavailable for marine reinsurance losses for that windstorm.Furthermore, if there are further catastrophic events relating to ourunderwriting exposures, our retrocessional coverage for these eventsmay be limited or we may have no coverage atall; |

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|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | the failure toremedy any weakness found in our evaluations of controls required bySection 404 of the Sarbanes-Oxley Act of 2002, including the materialweaknesses identified in our annual report on Form 10-K, may result inour financial statements being materially inaccurate, may restrict ouraccess to the capital markets and may cause the share price of ourcommon and preferred shares to be adverselyaffected; |

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

|  |              |                                        |
|--|--------------|----------------------------------------|
|  | •  | risksrelating to potential litigation; |

|  |              |                               |
|--|--------------|-------------------------------|
|  | •  | ourlimited operating history; |

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|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | our remaininginsurance and reinsurance business is not diversified among classes ofrisk or sources of origination. The exit from our property reinsuranceand technical risk property insurance line and the casualty reinsurancecommutations and the reduction in our business resulting from ratingaction taken by A.M. Best, have further reduced our diversification inour product lines and will continue to cause increased concentrationsacross certain of our riskclasses; |

|  |              |                                                                                 |
|--|--------------|---------------------------------------------------------------------------------|
|  | •  | changes in regulation or taxlaws applicable to us, our brokers or ourcustomers; |

|  |              |                                                                                                            |
|--|--------------|------------------------------------------------------------------------------------------------------------|
|  | •  | risks relating to ourreliance on program managers, third-party administrators and othersupporting vendors; |

|  |              |                                                                                                                                                                                                                                                                  |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | other risks ofdoing business with program managers, including the risk we might bebound to policyholder obligations beyond our underwriting intent, andrisks relating to our program managers and agents decision not tocontinue or renew their programs withus; |

|  |              |                                                 |
|--|--------------|-------------------------------------------------|
|  | •  | changes in accounting policies orpractices; and |

|  |              |                                                                                                                               |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------|
|  | •  | changes in generaleconomic conditions, including inflation, foreign currency exchangerates, interest rates and other factors. |

If one or more of theseor other risks or uncertainties materialize, or if our underlyingassumptions prove to be incorrect, actual results may vary materiallyfrom our projections. Additionally, the list of factors above is notexhaustive and should be read with the other cautionary statements thatare included in our Form 10-K and in this report under‘‘Item 1A. Risk Factors’’ and that areotherwise described from time to time in our U.S. Securities andExchange Commission reports filed after this report. Anyforward-looking statements you read in this report reflect our currentviews with respect to future events and are subject to these and otherrisks, uncertainties and assumptions relating to, among other things,our operations, results of operations, growth strategy and liquidity.All subsequent written and oral forward-looking statements attributableto us or individuals acting on our behalf are expressly qualified intheir entirety by this paragraph. You should specifically consider thefactors identified in this report that could cause actual results todiffer from those discussed in the forward-looking statements beforemaking an investment decision. We undertake no obligation to publiclyupdate or review any forward-looking statement, whether as a result ofnew information, future events or otherwise.

Market data andforecasts used in this report have been obtained from independentindustry sources as well as from research reports prepared for otherpurposes. We have not independently verified the data obtained fromthese sources and we cannot assure you of the accuracy or completenessof the data. Forecasts and other forward-looking information obtainedfrom these sources are subject to the same qualifications anduncertainties applicable to the other forward-looking statements inthisreport.

Overview

General

QuantaHoldings was incorporated on May  23,  2003 as a Bermudaholding company formed to provide specialty lines insurance,reinsurance, risk assessment and risk technical services on a global

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basis through its affiliated companies. Wecommenced substantive operations on September  3,  2003when we obtained our initial capital and purchased ESC, our predecessorfor accounting purposes.

Through our operating subsidiaries inBermuda, the U.S. and Europe, we focus on writing coverage forspecialized classes of risks through teams of experienced andtechnically qualified underwriters. Specialty lines of business areoften unusual or difficult to place and do not fit the underwritingcriteria of standard commercial product providers. We have used ourBermuda operations primarily to insure U.S. risks from Bermuda on anon-admitted basis and also, from time to time, to underwrite someEuropean risks. During 2005, we also wrote specialty products in theUnited States on an admitted basis through our subsidiary, QuantaIndemnity, which is a U.S. licensed insurer with licenses in 44 statesand is an accredited reinsurer in Washington, D.C. Further, during 2005we wrote specialty insurance from the United States on an excess andsurplus lines basis and U.S. reinsurance on a non-admitted basisthrough our subsidiary, Quanta Specialty Lines. Since the fourthquarter of 2004, we underwrote European Union sourced specialtybusiness through Quanta Europe, our Irish subsidiary located in Dublin,Ireland, which is the headquarters of our European business. We arealso underwriting through our wholly-owned Lloyd's syndicate,which we call Syndicate 4000. Since February  2005, we areserving our London-based clients for European insurance and reinsurancebusiness through our Quanta Europe branch in London.

We acquiredEnvironmental Strategies Corporation, known as ESC, on September3,  2003. ESC is our predecessor company for accounting andfinancial reporting purposes. ESC provides diversified environmentalrisk management services to assist customers in environmentalremediation, regulatory analyses, technical support for environmentalclaims, merger and acquisition due diligence, environmental audits andrisk assessments, and engineering and information management services.ESC also provides risk assessment and technical services support to ourenvironmental underwriters. ESC's operations have been adverselyaffected because our environmental insurance product line and our otherinsurance and reinsurance product lines that use ESC's consultingservices are no longer able to continue to write most coverages or havelost almost all of their business opportunities due to the recent A.M.Best downgrade of our financial strength ratings. In addition to theseconsulting services, we provide liability assumption programs throughQuanta Technical Services and its subsidiaries under which thesesubsidiaries assume specified liabilities associated with environmentalconditions, which may be insured or guaranteed by us or an insurancesubsidiary. Under these programs, our technical services team providesconsulting and performs the required remediation services throughsubcontractors. Our liability assumption programs during the threemonths ended March  31,  2006 included our Buffalo, NewYork and Axis, Alabama programs. The estimated remaining liabilitiesfor these programs are approximately $4.4  million, as ofMarch  31,  2006. We are currently evaluating whether, orto what extent, we will continue to offer this liability assumptionprogram following the ratings downgrade described below. Presently, weanticipate that it will be difficult to continue to provide theseprograms.

A.M. Best Rating Actions, StrategicAlternatives and Evaluation

As a result of the expectedlosses from Hurricanes Katrina, Rita and Wilma in 2005(‘‘2005 hurricanes’’), on October5,  2005, A.M. Best placed the‘‘A−’’ (excellent) financialstrength rating assigned to Quanta Reinsurance Ltd.("Quanta Bermuda") and its subsidiaries andQuanta Europe Ltd. ("Quanta Europe"), underreview with negative implications. In response, during the fourthquarter of 2005, we worked closely with A.M. Best on a plan designed tomaintain our ‘‘A−’’ rating, whichincluded the retrocession of substantially all the in-force business,as of October  1,  2005, in our technical risk property andproperty reinsurance lines of business (other than our programbusiness) by a portfolio transfer to a third-party reinsurer (the‘‘Property Transaction’’), the commutationof two of our casualty reinsurance treaties back to the insurancecompany which had reinsured it with us and the completion of theofferings of our common shares and series A preferred shares in thefourth quarter of 2005.

On December  14,  2005, weissued 13,136,841 common shares at $4.75 per share and 3,000,000 sharesof our series A preferred shares at $25.00 per share with a liquidationpreference of $25.00 per share. The gross proceeds to the Company were$137.4  million before the payment of underwriting 

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fees, of which $62.4  million was fromthe sale of common shares and $75.0  million was from the sale ofpreferred shares. In addition, on December  29,  2005, theunderwriters exercised a portion of their over-allotment option toacquire additional series A preferred shares at the offering price of$25.00. This resulted in the sale, on January  11,  2006 of130,525 shares of our series A preferred shares for gross proceeds of$3.3  million.

On December  21,  2005, A.M.Best affirmed the financial strength rating of‘‘A−’’ (excellent) of Quanta Bermudaand its subsidiaries, and ascribed a negative outlook to the rating.A.M. Best defines a negative outlook as indicating that a company isexperiencing unfavorable financial/market trends, relative to itscurrent rating level and, if continued, the company has a goodpossibility of having its rating downgraded. In connection with A.M.Best's December  2005 affirmation of our ratings andcontinued review with negative outlook, A.M. Best cited significantchallenges and uncertainties associated with the successful executionof management's revised business plans, management'sability to diversify and grow our business profitably, and the risk forupward development of Hurricanes Katrina, Rita and Wilmalosses.

On March  2,  2006, A.M. Best announced thatit had downgraded the financial strength rating assigned to QuantaBermuda and its subsidiaries and Quanta Europe, to‘‘B++’’ (very good), under review withnegative implications. The A.M. Best ‘‘A’’(excellent) rated Lloyd's market, including our Lloyd'ssyndicate, was not subject to the rating downgrade. We believe thatadverse developments during the fourth quarter of 2005 relating to the2005 hurricane losses and our other reserve increases were significantcontributors to the decision by A.M. Best. In order to maintain ourrating, we believe that we will be required to demonstrate acceptableresults and change our business model appropriately. This, however,will be very difficult to accomplish under a‘‘B++’’ rating. In addition, we believe wewill need to successfully implement a more favorable cost structure andreduce the amount of risk that we assume on a single loss event orcatastrophic event based on initiatives that we are implementing. Wealso believe that A.M. Best will continue to evaluate our availablecapital and the probable loss exposures associated with our businesslines to ensure our capital is in compliance with A.M. Best'sstandards relative to our rating. We intend to continue to work withA.M. Best to understand the different requirements it has for ourbusiness in order to maintain or improve our financial strength ratingand remove any qualification to our rating. However, the downgrade andqualification of our rating with negative implications hassignificantly adversely affected, and we expect it will continue tosignificantly adversely affect, our business, our opportunities towrite new and renewal business and our ability to retain key employees.A.M. Best may further downgrade our financial strength ratings. We canmake no assurances as to what rating actions A.M. Best may take now orin the future or whether A.M. Best will further downgrade our rating orremove any qualification to our rating. A ratings downgrade by A.M.Best below ‘‘B++’’ would constitute adefault under our credit facility and under certain other agreementsand trigger termination provisions or require the posting of additionalsecurity in many of our other insurance and reinsurance contracts. Asof March  31,  2006, $225.6  million of letters ofcredit were outstanding under this facility. No revolving creditborrowings or amounts drawn under the letters of credit wereoutstanding as of March  31,  2006. The obligations underthe credit facility are currently fully secured by our investments andcash. If a default occurs under the credit agreement, our lenders mayrequire us to cash collateralize a portion or all of the outstandingletters of credit issued under the facility, which may be accomplishedthrough the substitution or liquidation of collateral. Among otherthings, the lenders would also have the right to cancel outstandingletters of credit issued under the facility and we would be limited inreleasing collateral without the lenders' consent.

Weexpect the downgrade of our rating and qualification of our rating withnegative implications to continue to have a significant adverse effecton our business. We have been removed from the approved listing ofseveral of our important brokers, including Aon Corporation and MarshInc. The downgrade of our financial rating or the continuedqualification of our current rating continues to cause concern aboutour viability among brokers and other marketing sources, resulting in amovement of business away from us to other carriers. We believe therecent downgrade of our financial rating is also adversely affectingour Lloyd's operations.

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Certain of our insurance and many of ourreinsurance contracts contain termination rights triggered by the A.M.Best rating downgrade. Many of our other insurance contracts andcertain of our reinsurance contracts provide for cancellation at theoption of the policyholder regardless of our financial strength rating.A cancellation typically results in the termination of the policy andour ongoing obligations and the return of premiums to our client thatfrequently approximates our unearned premium reserve as of the date ofthe cancellation. Whether a client would exercise such rights woulddepend, among other things, on the reasons for the downgrade, theextent of the downgrade, the prevailing market conditions, whether wehave posted security in respect of our obligations and the pricing andavailability of replacement coverage. We cannot predict in advance howmany of our clients will actually exercise such rights or the effectsuch cancellations will have on our financial condition or futureprospects. However, depending on the number of contracts involved, suchan effect could be materially adverse. As of April  30,2006, we had received notice of cancellation on approximately5.7% of our in-force policies, calculated using originalcontract gross premiums written related to those cancelled policies asa percentage of total gross premiums written during 2005. Grossunearned premiums relating to these cancellations that we have returnedor expect to return to our clients total approximately $15.6million, which represents approximately 4.9% of our grossunearned premium at March 31, 2006. We expect that we will receiveadditional cancellations. In addition, in instances where we no longerwish to be exposed to certain risks and to reduce the amount of capitalthat is required to engage in our business, we may approach clientswith an offer to cancel and commute certain reinsurance contracts orinsurance contracts on terms to be negotiated. If these commutationstake place, the policy and our ongoing obligations would be terminated.In addition, we would return premiums to those clients that frequentlyapproximate our unearned premium reserve as of the date ofcancellation. In those instances where we have collateralized ourobligations under those policies, the termination would also result inthe release of the collateral we had provided.

Many of our otherinsurance contracts and certain of our reinsurance contracts providefor cancellation at the option of the policyholder regardless of ourfinancial strength rating, including those placed by the programmanager of our HBW program. HBW gross premiums written and net premiumswritten during the three months ended March  31,  2006totaled approximately $43.7  million and approximately$24.7  million. Based on our discussions with the programmanager, we also understand that it will divert a substantial portionof the HBW program business to other carriers during 2006. Weunderstand that some new carriers have begun writing casualty businessin some states and that those carriers are in the process of filing andobtaining approval of rate and policy forms with regulatory authoritiesin other states. Other carriers are still in the process of negotiatingthe terms and conditions of a transaction with the HBW program manager.Until the new carriers are able to obtain the approvals they are stillseeking or have finalized their negotiations with the HBW programmanager, we are continuing to write casualty business for the programmanager. We expect that a substantial amount of the HBW programbusiness may be diverted to other carriers by December31,  2006. Consequently, we currently estimate that the gross andnet premiums written under the HBW program during 2006 will be lessthan 35% of the gross and net premiums written during 2005. Weexpect that the premiums written under our HBW program during 2007 willbe significantly less than 2006 as the HBW program manager is able tomove that business to new carriers.

We are working diligently toimplement key steps designed to preserve shareholder value and respondto the rating actions taken by A.M. Best. A special committee of ourBoard of Directors has engaged Friedman, Billings, Ramsey & Co.,Inc. and J.P. Morgan Securities Inc., as financial advisors. They areassisting us in evaluating strategic alternatives, including thepotential sale of some or all of our businesses, the run off of certainproduct lines or the business or a combination of alternatives. Ourfinancial advisors will also help us evaluate the use of potentialexcess capital to repay debt or to return value to our shareholders.During this process, the special committee and the Board have met anumber of times to consider the potential strategic alternativesavailable to us, and we have been contacted by several parties and havehad due diligence discussions with a number of those parties.

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There can be no assurance that any of theseinitiatives will not negatively impact our results of operations orwill be successful in improving our position and preserving shareholdervalue.

After evaluating available alternatives, the Board ofDirectors may conclude that no other alternatives would be in the bestinterests of our shareholders and that the best alternative is to placeour remaining insurance businesses in run off and eventually wind upour insurance operations over some period of time, which is notcurrently determinable.

We are also analyzing our businesslines, their positioning and internal operations. We believe that wecurrently have sufficient assets to pay our foreseen liabilities asthey become due, and we continue to earn investment income on ourinvestment portfolio to support our general and administrativeexpenses. We maintain a global platform in the United States, Bermudaand Europe.

At this stage in our overall evaluation of strategicalternatives, we have determined to retain certain of our businesses.Currently, we continue to offer certain program business lines as wellas professional liability and fidelity insurance lines in the UnitedStates, our Lloyd's business through our Lloyd's syndicatein the A.M. Best ‘‘A’’ rated Lloyd'smarket in Europe and our environmental consulting services through ESCin the United States. We are not writing new business in ourprofessional liability, fidelity, environmental and marine and aviationinsurance product lines or in our reinsurance and structured productlines. We are also no longer seeking new business in our suretyinsurance line and we will cease seeking new business in our marine andaviation reinsurance, casualty reinsurance and trade credit andpolitical risk insurance lines during the second quarter of 2006.

Prior to the recent A.M. Best action, we had begun taking steps toreduce our costs, including the reduction of personnel following theexit of our technical risk property and property reinsurance lines, andreducing certain infrastructure costs, such as the reduction ofconsulting costs, the reduction of our office space and consolidationof our personnel in Bermuda. We have accelerated steps to reduceinfrastructure costs and personnel expenses and have incurred severancecosts during the first quarter of 2006 of approximately $5.2million. During the second and third quarters, we expect to recognizeadditional severance costs and reductions in general and administrativeexpenses as we align our infrastructure to the selected strategicoption.

We generated approximately $62.7  million and$142.9  million of net premiums written after premiums ceded onpurchased reinsurance protection during the three months endedMarch  31,  2006 and 2005. The downgrade in our ratings hashad, and we believe will continue to have, a significant adverse affecton our business and has been, and we believe will continue to be, theprimary driver of the reduction in our premiums written. Furthermore,our premiums ceded include $19.0  million of ceded premiumwritten related to the Property Transaction referred to above. Wegenerated $79.6  million and $91.5  million of net premiumsearned during the three months ended March  31,  2006 and2005. During the three months ended March  31,  2006, wealso purchased additional retrocessional protection in our marine,technical risk and aviation reinsurance product line, which is intendedto help limit our net loss exposures to future catastrophe windstormevents. This purchase resulted in approximately $2.2  million ofpremium ceded during the three months ended March  31,2006. However, based on our current estimate of losses related toHurricane Katrina, we have exhausted our reinsurance and retrocessionalprotection with respect to that hurricane. If our Hurricane Katrinalosses prove to be greater than currently anticipated, we will have nofurther reinsurance and retrocessional coverage available for thatwindstorm.

As a result of our downgrade, our net premiums writtenfor our insurance lines of business have started to significantlydecline in March  2006. We believe the adverse impact of ourdowngrade on our net premiums written for our insurance lines ofbusiness will become more evident during the second quarter andremainder of 2006. In our insurance segment, net premiums written were$54.7  million and $54.8  million during the three monthsended March  31,  2006 and 2005. In our specialtyreinsurance segment, net premiums written were $8.0  million and$88.0  million during the three months ended March31,  2006 and 2005. The decrease is due mainly to our exit fromthe property reinsurance market, and, as a result of the downgrade inour ratings, the reduction in marine reinsurance writings as well aspolicy cancellations in that business line and the decrease in ourcasualty reinsurance line during the first quarter of 2006. Because ofthe decrease of our reinsurance 

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segment business, our specialty insurancesegment became a more significant contributor to our overall businessand represented approximately 87.3% of our total net premiumswritten in the three months ended March  31,  2006,compared to 38.3% in the three months ended March31,  2005. As a result of the reduced net written premiums,increased ceded premiums and policy cancellations, our net earnedpremiums and underwriting profits have decreased, and we expect thistrend to continue.

We believe that our portfolio is currentlynot diversified either among classes of risks or source of origination.For example, during the three months ended March  31,2006, our HBW program accounted for approximately 51.8% of ourspecialty insurance segment gross premiums written. In addition, theHBW program and the other insurance programs we write, accounted for53.7% of our specialty insurance segment gross premiums writtenin the three months ended March  31,  2006. OurLloyd's business accounted for 24.9% of our specialtyinsurance segment gross premiums written. In addition, our specialtyreinsurance segment generated approximately 50.5% and39.1% of its gross premiums written through two brokers. Theexit from our property reinsurance and technical risk propertyinsurance line and the casualty reinsurance commutations, have furtherreduced our diversification in our product lines and will cause theconcentrations across certain of our risk classes to increase. Further,we expect that concentrations in certain risk classes will increase aswe cease seeking new business in the business lines discussedabove.

During the three months ended March  31,2006, we recognized losses of $4.5  million related to tornadoes,and we recognized adverse development in our reserves of $0.2million related to Hurricanes Katrina, Rita and Wilma. We did not incurany additional losses during the three months ended March31,  2006 related to the damage caused by an oil pipeline inCalifornia which ruptured during a mudslide in the first quarter of2005. However, we could continue to incur losses from these as well asother historical events, including from policies that have beencancelled. Additionally, our outstanding policies remain subject torisk of new losses from future catastrophes and other events.

Wehave determined that $740.8  million of investment securities,with unrealized losses of approximately $6.1  million wereother-than-temporarily impaired as of March  31,  2006. Therealization of these losses represents the maximum amount of potentiallosses in our investment securities if we were to sell all of thesesecurities as of March 31, 2006 and are primarily attributable tochanges in interest rates and not changes in credit quality. As aresult of our decision, the affected investments were reduced to theirestimated fair value, which becomes their new cost basis. Therecognition of the losses has no effect on our shareholders'equity, the market value of our investments, our cash flows or ourliquidity. The evaluation for other-than-temporary impairments requiresthe application of significant judgment, including our intent to holdthe investment for a period of time sufficient to allow for possiblerecovery. We believe we have sufficient assets to pay our currentlyforeseen insurance liabilities as they become due, and we have noimmediate intent to liquidate the investment securities affected by ourdecision. However, due to the general uncertainties surrounding ourbusiness resulting from A.M. Best's downgrade of our financialstrength ratings and our decision to explore strategic alternatives, weconcluded that there are no absolute assurances that we will have theability to hold the affected investments for a sufficient period oftime. It is possible that the impairment factors evaluated bymanagement and fair values will change in subsequent periods, resultingin additional material impairment charges.

A number of insurancecompanies have been subpoenaed by 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, the Colorado Department of Insurance andLloyd's. From January  1,  2004 to September30,  2004 we were party to placement service agreements, known asPSAs and market service agreements, known as MSAs, with Aon Corporationand Marsh Inc. and have paid a total of $31,000 under these agreementsas of March  31,  2006. We have accrued approximately$1.0  million in addition to the amount we have already paidunder 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.

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SegmentInformation

Due to the downgrade of our financial strengthratings by A.M. Best in March  2006, we are currently closelyanalyzing our business lines, positioning in the market and internaloperations and identifying steps we should take to preserve shareholdervalue and improve our position. After completing this analysis, we mayimplement significant changes in the manner in which we havehistorically conducted our business. A special committee of our Boardof Directors, with the assistance of financial advisors, is alsoevaluating strategic alternatives, including the potential sale of someor all of our businesses, the run off of certain product lines or thebusiness or a combination of alternatives. For the fiscal periodspresented in this report, we organized our business on a matrix of fiveproduct lines and three geographies. Our two traditional product lineswere specialty insurance and specialty reinsurance. We also hadprograms and structured products lines. The products offered to ourclients were written either as traditional insurance or reinsurancepolicies or were provided as a program, a structured product or acombination of a traditional policy with a program or a structuredproduct. Our fifth product line was our technical services line.However, for financial reporting purposes, some of our product linesare aggregated for purposes of the reportable segment disclosureincluded below:

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Specialtyinsurance.    Our specialty insurance segment includes ourtraditional, structured and program specialty insurance products. Ourtraditional specialty insurance products included in our specialtyinsurance segment results include technical risk property, professionalliability, environmental liability, fidelity and crime, surety, tradecredit and political risk and marine and aviation. Our specialtyinsurance segment writes business both on a direct basis with insuredclients or by reinsuring policies that are issued on our behalf bythird-party insurers and reinsurers, and includes our Lloyd'ssyndicate, which was created in December  2004. During the yearended December  31,  2005, we changed the composition ofour reportable segments by aggregating the Lloyd's operatingsegment with the specialty insurance reportable segment. OurLloyd's syndicate writes traditional specialty insurance productsincluding professional liability (professional indemnity anddirectors' and officers' coverage), fidelity and crime(financial institutions) and specie and fine art. Our specialtyinsurance programs include the HBW program. After the end of the thirdquarter of 2005, we discontinued the writing of new and most renewalbusiness in our technical risk property line of business. Currently, weare not writing new business in our U.S. professional liability,fidelity, environmental and marine and aviation specialty insuranceproduct lines and our structured products line. We are no longerseeking new business in our surety line and we will cease seeking newbusiness in our trade credit and political risk insurance lines duringthe second quarter of 2006. |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Specialtyreinsurance.    Our specialty reinsurance segment includes ourtraditional, structured and program specialty reinsurance products. Ourspecialty reinsurance products included in our specialty reinsurancesegment results include property, casualty and marine and aviationproducts. We currently do not write reinsurance on a program basis.After the end of the third quarter of 2005, we discontinued the writingof new and most renewal business in our property reinsurance ofbusiness and commuted a large portion of our casualty reinsuranceportfolio. We have determined to cease seeking new business in ourmarine and aviation and casualty reinsurance business lines during thesecond quarter of 2006. |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Technicalservices.    Our technical services segment providesdiversified environmental investigation, remediation and engineeringservices, assessment services, other technical and informationmanagement services primarily in the environmental area in the U.S. Ourtechnical services segment also provides technical and informationmanagement services to our specialty insurance and reinsurancesegments. |

The determination of these reportable segments reflectshow we manage and monitor the performance of our insurance andreinsurance operations. We expect that the composition of thesesegments will change as our Board of Directors pursues strategicoptions available to us. We refer to the specialty insurance andspecialty reinsurance segments as our underwriting segments. We referto 

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our risk consulting and managementoperations as our technical services segment. We evaluate each segmentbased on its underwriting or technical services results, as applicable,including items of revenue and expense that are associated with, anddirectly related to, each segment. A summary of our financialinformation by product line is set forth in Part I—Item2—’’Management's Discussion and Analysis ofFinancial Condition and Results of Operations’’ containedherein.

We allocate corporate general and administrative expensesto each segment based upon each product line's allocated capitalfor the current reporting period. We allocate capital to each of ourproduct lines through the estimated value-at-risk method, which usesstatistical 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.

The geographies in which we conduct ourbusiness are the United States, Bermuda and Europe. The location of therisks that are the subject of our products may be anywhere in theworld.

Main Drivers of ourResults

Revenues

We derive the majorityof our revenues from three principal sources: premiums from policieswritten by our underwriting segments, investment income from ourinvestment portfolios, and technical services revenues.

Werecord premiums written at the time that there is sufficient evidenceof agreement to the significant terms of the contract but no earlierthan the effective date of the policy. The amount of our insurance andreinsurance premiums written and earned depends on the number and typeof policies we write, the amount of reinsurance protection we provide,as well as prevailing market prices. Furthermore, the amount of netpremiums earned depends upon the type of contracts we write, thecontractual periods of the contracts we write, the inception date ofthe contracts, the expired portions of the contract periods and thetype of purchased reinsurance protection. Because of all these factors,the amount of premiums written and ceded may not result in acorrelative level of profitability.

Our investment incomedepends on the average invested assets in our investment portfolios andthe yield that we earn on those invested assets. Our investment yieldis a function of market interest rates and the credit quality andmaturity period of our invested assets. Our investment portfolioconsists principally of fixed income securities, short-term liquidityfunds, cash, and cash equivalents. In addition, we realize capitalgains or losses on sales of investments as a result of changing marketconditions, including changes in market interest rates and changes inthe credit quality of our invested assets. We also recognize capitallosses on investments as a result of other than temporary impairmentcharges. Under U.S. GAAP, our available-for-sale investments arecarried at fair market value with unrealized gains and losses on theinvestments included on our balance sheet in accumulated othercomprehensive income (loss) net of income taxes as a separate componentof shareholders' equity. Our trading investments that relate todeposits associated with non-risk bearing contracts are recorded atestimated fair value with the change in fair value included in netrealized gains and losses on investments in the consolidated statementof operations and comprehensive loss. The objective of our currentinvestment strategy is to preserve investment principal, maintainliquidity and to manage duration risk between investment assets andinsurance liabilities, while maximizing investment returns through adiversified portfolio. Our investment returns are benchmarked againstcertain specified indices. However, the volatility in claim paymentsand the interest rate environment can significantly affect the returnswe generate on our investment portfolios.

We also have revenuesgenerated by our technical services segment, which operates primarilyin the environmental area, from technical and risk management servicesprovided under various short-term service contracts and for servicesperformed by subcontractors engaged on behalf of clients. We alsogenerate revenues from the remediation of environmental obligationsthat we have assumed. The amount of technical services and remediationfees and subcontractor revenues is a function of political and economicconditions and the impact these conditions have on clients'discretionary spending on environmental projects.

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Expenses

Ourexpenses primarily consist of net loss and loss expenses, general andadministrative expenses, acquisition expenses and direct technicalservices costs.

Net loss and loss expenses, which are net ofloss and loss expenses recovered under our ceded reinsurance contracts,depend on the number and type of insurance and reinsurance contracts wewrite and reflect our best estimate of ultimate losses and lossexpenses we expect to incur on each contract written using variousactuarial analyses. Actual losses and loss expenses will depend onactual costs to settle insurance and reinsurance claims. Our ability toaccurately estimate expected ultimate loss and loss expense at the timeof pricing each insurance and reinsurance contract and the occurrenceof unexpected high loss severity catastrophe events are criticalfactors in determining our profitability.

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.

Acquisition expenses, whichare net of expenses recovered under our ceded reinsurance contracts,consist principally of commissions, fees, brokerage and tax expensesthat are directly related to 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.

We also incurexpenses directly related to and arising from our technical servicesand environmental 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 remediationactivities.

Financial Ratios

Thefinancial ratios we use include the net loss and loss expense ratio,the acquisition expense ratio and the general and administrativeexpense ratio. Our net loss and loss expense ratio is calculated as netlosses and loss expenses incurred divided by net premiums earned.Because our underwriting portfolios continue to change significantly,we expect that our net loss ratios may continue to be volatile. Ouracquisition expense ratio is calculated by dividing acquisitionexpenses by net premiums earned. Our net loss and loss expense ratioand acquisition expense ratio provide a measure of the currentprofitability of the earned portions of our written insurance andreinsurance contracts. Our general and administrative expense ratio iscalculated by dividing underwriting related general and administrativeexpenses by net premiums earned and indicates the level of indirectcosts that we incur in acquiring and writing insurance and reinsurancebusiness. During 2005, we changed the denominator to be used in thecalculation of our general and administrative expense ratio to netpremiums earned, instead of net premiums written. Our combined ratio isthe aggregate of our loss and loss expense, acquisition expense andgeneral and administrative expense ratios. We believe that thesefinancial ratios appropriately reflect the profitability of ourunderwriting segments. A combined ratio of less than 100%indicates an underwriting profit and over 100%, an underwritingloss. Because we have a limited operating history, our combined ratiomay be subject to significant volatility and may not be indicative offuture profitability.

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Results ofOperations

The following is a discussion of QuantaHoldings' consolidated results of operations for the three monthsended March  31,  2006 and 2005.

Three monthsended March  31,  2006 and 2005 

Results ofoperations for the three months ended March  31,  2006 and2005 were asfollows:

|                                                  |  |                                  |          |                                  |  |        |          |         |  |  |
|--------------------------------------------------|--|----------------------------------|----------|----------------------------------|--|--------|----------|---------|--|--|
|                                             |  | Threemonths ended March 31, 2006 |          | Three months ended March31, 2005 |
|                                             |  | ($ inthousands)                  |
| Revenues                                         |  |                             |     |                             |  |   |     |    |
| Grosspremiumswritten                             |  | $                                | 114,869  |                             |  | $      | 172,726  |    |
| Netpremiumswritten                               |  | $                                | 62,714   |                             |  | $      | 142,877  |    |
| Netpremiumsearned                                |  | $                                | 79,568   |                             |  | $      | 91,486   |    |
| Technicalservices revenues                       |  |                             | 7,741    |                             |  |   | 7,263    |    |
| Netinvestment income                             |  |                             | 10,776   |                             |  |   | 5,225    |    |
| Netrealized losses oninvestments                 |  |                             | (8,320   | )                           |  |   | (483     | )  |
| Netforeign exchangelosses                        |  |                             | (319     | )                           |  |   | (112     | )  |
| Otherincome                                      |  |                             | 1,037    |                             |  |   | 1,573    |    |
| Totalrevenues                                    |  |                             | 90,483   |                             |  |   | 104,952  |    |
| Expenses                                         |  |                             |     |                             |  |   |     |    |
| Netlosses and lossexpenses                       |  |                             | (54,382  | )                           |  |   | (57,496  | )  |
| Acquisitionexpenses                              |  |                             | (13,933  | )                           |  |   | (20,477  | )  |
| Directtechnical servicescosts                    |  |                             | (5,000   | )                           |  |   | (4,861   | )  |
| General andadministrativeexpenses                |  |                             | (30,023  | )                           |  |   | (20,871  | )  |
| Interestexpense                                  |  |                             | (1,262   | )                           |  |   | (826     | )  |
| Depreciationand amortization of intangibleassets |  |                             | (1,070   | )                           |  |   | (842     | )  |
| Totalexpenses                                    |  |                             | (105,670 | )                           |  |   | (105,373 | )  |
| Lossbefore incometaxes                           |  |                             | (15,187  | )                           |  |   | (421     | )  |
| Incometaxes                                      |  |                             | (32      | )                           |  |   | (223     | )  |
| Netloss                                          |  |                             | (15,219  | )                           |  |   | (644     | )  |
| Dividendson preferredshares                      |  |                             | (1,916   | )                           |  |   | —  |    |
| Netloss available to commonshareholders          |  | $                                | (17,135  | )                           |  | $      | (644     | )  |
|                                                  |

Revenues.

Substantiallyall of our revenues were generated by our underwriting subsidiaries inthe U.S., Bermuda and Europe. Technical services revenues were derivedfrom the operations of ESC, QLT Buffalo LLC and QLT of Alabama,LLC.

Premiums.    Gross premiums written were$114.9  million for the three months ended March31,  2006, a decrease of $57.8  million, or 33.5%,compared to $172.7  million for the three months endedMarch  31,  2005. The decrease in our gross premiumswritten was largely due to our decision, during the fourth quarter of2005, to discontinue writing new and most renewal business in ourtechnical risk property and property reinsurance lines of business(other than our program business) which accounted for approximately$46.9  million, or 27.2%, of our gross premium writtenduring the three months ended March  31,  2005 and to thesignificant adverse effects on our business arising from A.M.Best's ratings downgrade.

Premiums ceded were $52.2million for the three months ended March  31,  2006 anincrease of $22.4  million, or 74.7%, compared to$29.8  million for the three months ended March  31,2005. The increase in premiums ceded primarily reflects the portfoliotransfer to a third party reinsurer under 

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the Property Transaction which resulted in anadditional $19.0  million of premiums ceded during the threemonths ended March  31,  2006.

Net premiums earnedwere $79.6  million for the three months ended March31,  2006, a decrease of $11.9  million, or 13.0%,compared to $91.5  million for the three months endedMarch  31,  2005. The decrease in our premiums earned waslargely due to the portfolio transfer of $19.1  million of earnedpremium to the third party reinsurer under the Property Transactionand, to a lesser extent, the effects of the recent downgrade. Thisreduction in net earned premiums were offset by the earning of premiumon contracts of insurance and reinsurance written in 2005. Our netpremiums written are typically earned over the risk periods of theunderlying insurance policies which are generally twelve months. Netpremiums written that are not yet earned and are deferred as unearnedpremium reserves, net of deferred reinsurance premiums, totaled$208.0  million at March  31,  2006 and will beearned and recognized in our results of operations in future periods.Due to A.M. Best's ratings downgrade and additional policycancellations and the Property Transaction, we expect that our netpremiums earned will continue to decrease significantly.

Technical services revenues.  Technical servicesrevenues were $7.7  million for the three months endedMarch  31,  2006 an increase of $0.4  million, or6.6%, compared to $7.3  million for the three months endedMarch  31,  2005. This increase in technical servicesrevenues is primarily attributable to an increase in remediationrevenues associated with our liability assumption program in Buffalo,New York, which we expect to continue. However, as a result of therating action and the actions being taken in our environmentalinsurance line, we expect that our technical services revenues willdecrease in future periods.

Net investment income and netrealized (losses) gains.    Net investment income and netrealized (losses) gains totaled $2.5  million for the threemonths ended March  31,  2006, a decrease of $2.2million, or 48.2%, compared to $4.7  million for the threemonths ended March  31,  2005. The decrease is primarilydue to an increase in net realized losses of $7.8  million, ofwhich $6.1  million is attributable to other than temporaryimpairment losses recognized during the three months ended March31,  2006, partially offset by an increase in net investmentincome of $5.6  million attributable to an increase in ourinvested assets and increases in market interest rates.

Netinvestment income was $10.8  million for the three months endedMarch  31,  2006 and was derived primarily from interestearned on fixed maturity and short term investments, partially offsetby investment management fees and amortization of discounts on fixedmaturity investments. Our average annualized effective yield(calculated by dividing net investment income by the average amortizedcost of invested assets, net of amounts payable or receivable forinvestments purchased or sold) was approximately 4.4% for thethree months ended March  31,  2006 compared to 3.2%for the three months ended March  31,  2005, reflectingincreases in market interest rates. Net realized losses of $8.3million were generated primarily from our other than temporaryimpairment charge of $6.1  million and also from the sale ofinvestments which were in an unrealized loss position as we sought tomanage our total investment returns and the duration of our investmentportfolios.

As of March  31,  2006, the averageduration of our investment portfolio was approximately 2.8 years withan average credit rating of approximately"AA+".

Otherincome.    Other income was $1.0  million for the threemonths ended March  31,  2006 as compared to $1.6million for the three months ended March  31,  2005. Otherincome includes the amortization of deferred revenue relating toassumed environmental liability programs of $0.1  million andamounts recognized on non-traditional insurance and reinsurancecontracts of $0.8  million.

Expenses.

Netlosses and loss expenses.    Net losses and loss expenses were$54.4  million for the three months ended March  31,2006, a decrease of $3.1  million, or 5.4%, compared to$57.5  million for the three months ended March  31,2005. Net losses and loss expenses are a function of our net premiumsearned and our expected ultimate losses and loss expenses for reportedand unreported claims on contracts of insurance and reinsuranceunderwritten. The decrease in net losses and loss expenses is

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due to the decrease in our net premiumsearned and losses ceded to the third party reinsurer under the PropertyTransaction. Included in net loss and loss expenses are $4.9million of losses recorded during the three months ended March31,  2005 related to damages from a ruptured oil pipeline inCalifornia which was covered by an insurance contract issued by ourenvironmental liability product line. Included in net loss and lossexpenses during the three months ended March  31,  2006 is$4.5  million of losses incurred during the three months endedMarch  31,  2006 related to a claim under our PWIB programfrom tornado losses occurring in March  2006. The decreases innet losses and loss expenses is further offset by increases in ourselected loss ratios in certain product lines, as described below.

Included in our expected ultimate losses during the three monthsended March  31,  2006 is adverse development on the lossestimates on contracts of reinsurance and insurance insuring claimsarising from Hurricanes Katrina, Rita and Wilma of $0.2  million.Our estimate of our exposure to ultimate claim costs associated withthese hurricanes is primarily based on currently available information,claims notifications received to date, industry loss estimates, outputfrom industry models, a review of affected contracts and discussionwith cedents and brokers. The actual amount of losses from thehurricanes may vary significantly from the estimate.

Our expectedultimate losses during the three months ended March  31,2006 do not include any additional estimated gross and net lossestimates related to damage caused by an oil pipeline in Californiawhich ruptured during a mudslide in the first quarter of 2005. Thereremains the possibility of further negative development on this loss inthe future, particularly if the timing of the completion of theremediation plan for the spill is further delayed. In addition to thehurricanes, the tornado and the oil pipeline losses, as of March31,  2006, we have received a limited amount of large reportedlosses. However, we participate in lines of business where claims maynot be reported for some period of time after those claims areincurred.

Our total net loss ratio (calculated by dividing netlosses and loss expenses by net premiums earned) was 68.3% forthe three months ended March  31,  2006, an increase of5.5% compared to a total net loss ratio of 62.8% for thethree months ended March  31,  2005. The increase in thetotal net loss ratio is primarily due to higher selected loss ratiosfor our HBW program, Lloyd's, professional and environmentalproduct lines, compared to the three months ended March31,  2005, that we determined to use during our December31,  2005 year end closing process.

Acquisitionexpenses.    Acquisition expenses were $13.9  million forthe three months ended March  31,  2006, a decrease of$6.6  million, or 32.0%, compared to $20.5  millionfor the three months ended March  31,  2005. The decreasein acquisition expenses is primarily due to the decrease in the numberof insurance and reinsurance contracts we entered into and theassociated net premiums earned.

Our acquisition expense ratio forthe three months ended March  31,  2006 was 17.5%, adecrease of 4.9% compared to our acquisition expense ratio of22.4% for the three months ended March  31,  2005.The decrease is due to four factors. First, during 2006, our earnedpremium was more heavily weighted towards specialty insurance, whichcarries lower acquisition costs than specialty reinsurance. Second, weare paying less fronting costs on our specialty insurance lines becausewe are licensed in more states and no longer need to utilize frontingcompanies to the same extent in order to write our business. Third, ourceding commission income that we are recovering on our specialtyinsurance segment's reinsurance treaties has increased as aresult of the restructuring of those treaties during the second quarterof 2005. Finally, we paid less commission in our HBW program becausethe contracts contain sliding scale commission provisions that varywith changes in the selected loss ratio. Deferred acquisition costsinclude, as of March  31,  2006, $28.7  million ofacquisition expenses on written contracts of insurance and reinsurancethat will be amortized in future periods as the premiums written towhich they relate are earned.

Direct technical servicescosts.    Direct technical services costs were $5.0million for the three months ended March  31,  2006, anincrease of $0.1  million, or 2.9% compared to $4.9million for the three months ended March  31,  2005, andwere comprised of subcontractor and direct labor expenses.

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Direct technical services costs, as apercentage of technical services revenues were approximately64.6% for the three months ended March  31,  2006compared to 66.9% for the three months ended March31,  2005.

General and administrativeexpenses.    General and administrative expenses were$30.0  million for the three months ended March  31,2006, an increase of $9.1  million, or 43.9%, compared to$20.9  million for the three months ended March  31,2005. General and administrative expenses were comprised of$19.2  million of personnel related expenses (including$5.2  million of severance costs) and $10.8  million ofother general and administrative expenses during the three months endedMarch  31,  2006 compared to $13.3  million ofpersonnel related expenses and $7.6  million of other expensesduring the three months ended March  31,  2005. Theincrease in general and administrative expenses is due primarily to ourseverance costs and increases in auditing fees and fees associated withongoing efforts relating to Sarbanes-Oxley Section 404 compliance.General and administrative expenses related to our underwriting segmentwas $27.4  million for the three months ended March31,  2006, which included $0.3  million of expenses chargedby our technical services segment for technical and informationmanagement services, and excluded $2.9  million of expensesrelated to our technical services segment.

Our general andadministrative expense ratio was 37.7% for the three monthsended March  31,  2006 compared to 22.8% for thethree months ended March  31,  2005. The increase was dueto our severance costs, the higher number of employees and also to theimpact of lower net earned premiums. In 2005, we changed thedenominator in the calculation of our general and administrativeexpense ratio to net premiums earned, instead of net premiumswritten.

Interest expense.    Interest expense was$1.3  million for the three months ended March  31,2006, an increase of $0.5  million, or 52.8%, compared to$0.8  million for the three months ended March  31,2005 and relates to the interest expense on our junior subordinateddebentures. The increase in the interest expense is due to the increasein the average balance of our junior subordinated debentures for thethree months ended March  31,  2006 compared to the threemonths ended March  31,  2005, following the issuance of$20.6  million securities in February2005.

Depreciation and amortization of intangibleassets.    Depreciation and amortization of intangible assetswas $1.1  million for the three months ended March31,  2006, an increase of $0.3  million, or 27.1%,compared to $0.8  million for the three months ended March31,  2005 and consisted of amortization of intangible assetsrelated to the acquisition of ESC and depreciation of fixed assets. Theincrease in depreciation and amortization is due to the development ofinformation technology systems and the purchase of additional fixedassets throughout 2005.

Dividend expense.    Dividendexpense was $1.9  million for the three months ended March31,  2006, compared to zero for the three months endedMarch  31,  2005 and represents the dividend paid on ourseries A preferred shares, that were issued in December  2005 andJanuary  2006.

We have not recorded any net deferred incometax benefits or assets relating to tax operating losses generated byour subsidiaries since our results of operations include a 100%valuation allowance against net deferred tax assets. For the threemonths ended March  31,  2006, the net valuation allowanceincreased by approximately $2.2  million, to $27.0million.

Results bySegments

Underwriting

We principallyprovide insurance and reinsurance protection for risks that are oftenunusual or difficult to place, that do not fit the underwritingcriteria of standard commercial product carriers and that requireextensive technical underwriting and assessment resources in order tobe profitably underwritten. In measuring the performance of ourspecialty insurance and specialty reinsurance segments, we considereach segment's net underwriting income and a number of financialratios. Net underwriting income is the sum of net premiums earned lessnet losses and loss expenses, acquisition expenses and direct andallocated general and administrative expenses. The financial ratios weuse 

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include the net loss and loss expense ratio,the acquisition expense ratio and the general and administrativeexpense ratio. Our net loss and loss expense ratio is calculated as netlosses and loss expenses incurred divided by net premiums earned. Ouracquisition expense ratio is calculated by dividing acquisitionexpenses by net premiums earned. Our net loss and loss expense ratioand acquisition expense ratio provide a measure of the currentprofitability of the earned portions of our written insurance andreinsurance contracts. Our general and administrative expense ratio iscalculated by dividing underwriting related general and administrativeexpenses by net premiums earned and indicates the level of indirectcosts that we incur in acquiring and writing insurance and reinsurancebusiness. During 2005, we changed the denominator to be used in thecalculation of our general and administrative expense ratio to netpremiums earned, instead of net premiums written. Our combined ratio isthe aggregate of our loss and loss expense, acquisition expense andgeneral and administrative expense ratios. We believe that thesefinancial ratios appropriately reflect the profitability of ourunderwriting segments. A combined ratio of less than 100%indicates an underwriting profit and over 100%, an underwritingloss. Because we have a limited operating history, our combined ratiomay be subject to significant volatility and may not be indicative offuture profitability.

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

During theyear ended December  31,  2005, we changed the compositionof our reportable segments to aggregate the Lloyd's operatingsegment with our specialty insurance reportable segment. We aggregatedthese segments to reflect that we operate these insurance businesses asone and that the Lloyd's business is very similar to theinsurance business we write in the United States. Our Lloyd'soperations were previously reported as a separate segment.

Thefollowing is a discussion of our net underwriting results andprofitability measures by segment for the three months endedMarch  31,  2006 and 2005.

Three monthsended March  31,  2006 and 2005 

The followingtable summarizes our net underwriting results and profitabilitymeasures for our segments for the three months ended March31,  2006 and 2005.

Specialtyinsurance

|                                        |  |                                  |         |                                  |  |        |         |         |  |        |         |         |  |  |
|----------------------------------------|--|----------------------------------|---------|----------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                   |  | Threemonths ended March 31, 2006 |         | Three months ended March31, 2005 |  | Change |
|                                   |  | ($ inthousands)                  |
| Gross premiumswritten                  |  | $                                | 84,343  |                             |  | $      | 83,319  |    |  | $      | 1,024   |    |
| Premiumsceded                          |  |                             | (29,599 | )                           |  |   | (28,552 | )  |  |   | (1,047  | )  |
| Netpremiumswritten                     |  | $                                | 54,744  |                             |  | $      | 54,767  |    |  | $      | (23     | )  |
| Netpremiumsearned                      |  | $                                | 58,039  |                             |  | $      | 37,849  |    |  | $      | 20,190  |    |
| Otherincome                            |  |                             | 130     |                             |  |   | 254     |    |  |   | (124    | )  |
| Netlosses and lossexpenses             |  |                             | (38,731 | )                           |  |   | (27,848 | )  |  |   | (10,883 | )  |
| Acquisitionexpenses                    |  |                             | (8,366  | )                           |  |   | (6,673  | )  |  |   | (1,693  | )  |
| Generaland administrativeexpenses(1)   |  |                             | (20,448 | )                           |  |   | (14,025 | )  |  |   | (6,423  | )  |
| Netunderwritingloss                    |  | $                                | (9,376  | )                           |  | $      | (10,443 | )  |  | $      | 1,067   |    |
| Ratios:                                |  |                             |    |                             |
| Lossand loss expenseratio              |  |                             | 66.7    | %                           |  |   | 73.6    | %  |  |   | 6.9     | %  |
| Acquisitionexpenseratio                |  |                             | 14.4    | %                           |  |   | 17.6    | %  |  |   | 3.2     | %  |
| Generaland administrative expenseratio |  |                             | 35.2    | %                           |  |   | 37.1    | %  |  |   | 1.9     | %  |
| Combinedratio                          |  |                             | 116.3   | %                           |  |   | 128.3   | %  |  |   | 12.0    | %  |
|                                        |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                    |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Includes$0.3  million and $0.8  million of expenses charged by ourtechnical services segment for technical and information managementservices for the three months ended March  31,  2006 and2005. |

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Premiums.    Gross and netpremiums written were $84.3  million and $54.7  million forthe three months ended March  31,  2006 compared to$83.3  million and $54.8  million for the three monthsended March  31,  2005. Included in our specialty insurancesegment's gross premiums written is the contribution of$19.3  million, or 22.8% of the specialty insurancesegment's gross premiums written, from our Lloyd'ssyndicate, which commenced in December  2004. Following A.M.Best's ratings downgrade, our gross and net premiums written willsignificantly decrease in future periods.

The table below showsgross and net premiums written by product line for the three monthsended March  31,  2006 and 2005 whether written on atraditional insurance, programs or structured basis.

|                                  |  |                                  |        |                                  |  |                      |        |                    |  |        |         |        |  |        |         |        |  |  |
|----------------------------------|--|----------------------------------|--------|----------------------------------|--|----------------------|--------|--------------------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                             |  | Threemonths ended March 31, 2006 |        | Three months endedMarch 31, 2005 |
|                             |  | ($ inthousands)                  |
|                             |  | Grosspremiumswritten             |        | Netpremiumswritten               |  | Grosspremiumswritten |        | Netpremiumswritten |
| Technical riskproperty(1)        |  | $                                | 49,114 |                             |  | $                    | 29,864 |               |  | $      | 43,887  |   |  | $      | 27,918  |   |
| Professionalliability(2)         |  |                             | 23,247 |                             |  |                 | 17,503 |               |  |   | 25,211  |   |  |   | 18,136  |   |
| Environmentalliability(4)        |  |                             | 6,215  |                             |  |                 | 3,717  |               |  |   | 5,842   |   |  |   | 3,517   |   |
| Surety(5)                        |  |                             | 2,111  |                             |  |                 | 1,296  |               |  |   | 2,871   |   |  |   | 2,121   |   |
| Specieand fineart(3)             |  |                             | 1,366  |                             |  |                 | 1,205  |               |  |   | — |   |  |   | — |   |
| Fidelityandcrime                 |  |                             | 1,274  |                             |  |                 | 632    |               |  |   | 3,892   |   |  |   | 1,681   |   |
| Tradecredit and politicalrisk(4) |  |                             | 1,060  |                             |  |                 | 580    |               |  |   | 1,616   |   |  |   | 1,394   |   |
| Other                            |  |                             | (44    | )                           |  |                 | (53    | )             |  |   | — |   |  |   | — |   |
| Total                            |  | $                                | 84,343 |                             |  | $                    | 54,744 |               |  | $      | 83,319  |   |  | $      | 54,767  |   |
|                                  |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                          |
|-----|------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Thegross and net premiums written generated by our HBW program is writtenin our technical risk property product line, as describedbelow. |

|     |                                                                                                                                                                                                                                                               |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The grossand net premiums written generated by our Lloyd's syndicate isincluded in the professional liability product line, and was$17.9  million and $13.6  million and $16.3  millionand $12.7  million for the three months ended March31,  2006 and 2005. |

|     |                                                                                                                                                                                                                                                                           |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Specie and fine art iswritten by our Lloyd’s Syndicate, resulting in total gross andnet premiums written for our Lloyd’s Syndicate of $19.3million and $14.8  million and $16.3  million and$12.7  million for the three months ended March  31,2006 and2005. |

|     |                                                                              |
|-----|------------------------------------------------------------------------------|
| (4) | Will nolonger be seeking new business starting in the second quarter of2006. |

|     |                                                                |
|-----|----------------------------------------------------------------|
| (5) | No longerseeking new business since the first quarter of 2006. |

Duringthe three months ended March  31,  2006, we continued towrite, in our technical risk property product line, the HBW program,which accounted for approximately $24.7  million, or82.7%, of the technical risk property line of business and45.1% of total specialty insurance segment net premiums writtenin the three months ended March  31,  2006. The HBW programaccounted for $26.2  million, or 93.9%, of the technicalrisk property product line and 47.8% of the total specialtyinsurance segment net premiums written for the three months endedMarch  31,  2005. We are no longer writing business in ourtechnical risk property line other than the programs that are part ofthat line. The policies in the HBW program are underwritten by athird-party agent which follows our underwriting guidelines. We believethat this agent is an established specialist in this technical field.Our HBW gross premiums written during the three months endedMarch  31,  2006 are summarized in the table below byspecialty risk class.

|           |  |               |      |        |  |  |
|-----------|--|---------------|------|--------|--|--|
|      |  | ($inmillions) |
| Casualty  |  | $             | 36.7 |   |
| Warranty* |  |          | 4.7  |   |
| Property  |  |          | 2.3  |   |
| Total     |  | $             | 43.7 |   |
|           |

|  |
|--|
|  |  |
|  |

|   |                                    |
|---|------------------------------------|
| * | Warrantyis written as reinsurance. |

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Approximately 53.7% of ourspecialty insurance segment gross premiums written of $84.3million were generated through our program business, of which51.8% was through our HBW program. The remaining 46.3% ofour specialty insurance segment gross premiums written were generatedthrough a number of brokers, none of which accounted for more than10% of our total specialty insurance segment gross premiumswritten.

Currently, we are writing only a limited number of newcontracts in most of our traditional specialty insurance product lines,which have also been adversely affected by the A.M. Best downgrade. Weare also currently seeing significant deterioration in our HBW programbusiness and our business written at Lloyd’s and we expect thesetrends to continue.

Premiums ceded were $29.6  millionduring the three months ended March  31,  2006, an increaseof $1.0  million, or 3.7%, compared to $28.6million for the three months ended March  31,  2005. Theincrease in premiums ceded reflects an increase in the retrocession ofthe casualty specialty risk class related to our HBW program comparedto the three months ended March  31,  2005, and isattributable to a lesser extent to the development of the reinsuranceprogram for our specialty insurance segment product lines, which wasrestructured during the year ended December  31,2005.

Net premiums earned during the three months endedMarch  31,  2006 were $58.0  million, an increase of$20.2  million, or 53.3%, compared to $37.8  millionfor the three months ended March  31,  2005, representingamortization of premiums written and ceded during the years endedDecember  31,  2004 and 2005 and the three months endedMarch  31,  2006. The increase in our net premiums earnedwas largely due to historical growth in our insurance product linesincluding the contribution of $16.5  million, or 28.4%, ofour premiums earned, from of our Lloyd's syndicate, whichcommenced in December  2004, and was offset by the effect of theA.M. Best's ratings downgrade. Gross premiums written and cededpremiums are earned over the period of each insured risk. The terms ofour insurance contracts range from between one and ten years with themajority of our contracts being for a one year period.

Otherincome.    Other income was $0.1million for the three months ended March  31,  2006 andrelated to income, including fees, recognized on non-traditionalinsurance contracts.

Net losses and lossexpenses.    Net losses and loss expenses were $38.7million for the three months ended March  31,  2006, anincrease of $10.9  million compared to $27.8  million forthe three months ended March  31,  2005. Net losses andloss expenses are a function of our net premiums earned and ourexpected ultimate losses and loss expenses for reported and unreportedclaims on contracts of insurance and reinsurance underwritten. Theincrease in net losses and loss expenses is primarily due to theincrease in our net premiums earned. Included in net loss and lossexpenses are $4.9  million of losses recorded during the threemonths ended March  31,  2005 related to damages from aruptured oil pipeline in California which was covered by an insurancecontract issued by our environmental liability product line. Includedin net loss and loss expenses during the three months endedMarch  31,  2006 is $4.5  million of specific lossesincurred during the three months ended March  31,  2006related to a claim under our PWIB program from tornado losses occurringin March  2006.

Included in our expected ultimate lossesduring the three months ended March  31,  2006 is favorabledevelopment on the loss estimates on contracts of insurance insuringclaims arising from Hurricanes Katrina, Rita and Wilma of $0.1million. Our estimate of our exposure to ultimate claim costsassociated with these hurricanes is primarily based on currentlyavailable information, claims notifications received to date, industryloss estimates, output from industry models, a review of affectedcontracts and discussion with cedents and brokers. The actual amount oflosses from the hurricanes may vary significantly from theestimate.

Our expected ultimate losses during the three monthsended March  31,  2006 do not include any additionalestimated gross and net loss estimates related to damage caused by anoil pipeline in California which ruptured during a mudslide in thefirst quarter of 2005, for which the damage is covered by an insurancecontract issued by our environmental liability product line. Thereremains the possibility of further negative development on this loss inthe future, particularly if the timing of the 

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completion of the remediation plan for thespill is further delayed. In addition to the hurricanes, the tornadoand the oil pipeline loss, as of March  31,  2006, we havereceived a limited amount of large reported losses. However, weparticipate in lines of business where claims may not be reported forsome period of time after those claims are incurred.

Ourspecialty insurance segment net loss ratio was 66.7% for thethree months ended March  31,  2006 a decrease of6.9% compared to a net loss ratio of 73.6% for the threemonths ended March  31,  2005. The decrease in thespecialty insurance segment net loss ratio is primarily due to theimpact of the tornado losses during the three months ended March31,  2006 having a lesser relative impact compared to theenvironmental loss as a percentage of the net earned premium during thethree months ended March  31,  2005 and the result ofrestructuring our reinsurance of our insurance business during thesecond quarter of 2005. This decrease is offset by higher selected lossratios for our HBW program, the professional insurance written in ourLloyd’s syndicate and our environmental insurance in the threemonths ended March  31,  2006 as compared to loss ratiosapplicable to those lines in the three months ended March31,  2005.

Acquisition expenses.    Acquisitionexpenses were $8.4  million for the three months endedMarch  31,  2006 an increase of $1.7  million, or25.4%, compared to $6.7  million for the three monthsended March  31,  2005. The increase in acquisitionexpenses was due to the increase in the number of insurance contractswe entered into and the associated net premiums earned. Theseacquisition expenses primarily represented brokerage fees, commissionfees and premium tax expenses and were net of ceding commissions earnedon purchased reinsurance treaties.

Our acquisition expense ratiowas 14.4% for the three months ended March  31,2006, a decrease of 3.2% compared to 17.6% for the threemonths ended March  31,  2005. The reduction in ouracquisition expense and our acquisition expense ratio in the specialtyinsurance segment is primarily due to three factors. First, we arepaying less fronting costs because we are licensed in more states andno longer need to utilize fronting companies to the same extent inorder to write our insurance business. Second, our ceding commissionincome that we are recovering on our specialty insurancesegment's reinsurance treaties has increased as a result of therestructuring of those treaties during the second quarter of 2005.Third, we paid less commission in our HBW program during the threemonths ended March  31,  2006 compared to the three monthsended March  31,  2005 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,  2006, $17.7  million of acquisitionexpenses on written contracts of insurance that will be amortized infuture periods as the premiums written to which they relate areearned.

General and administrative expenses.    Directand allocated indirect general and administrative expenses totaled$20.4  million for the three months ended March  31,2006 an increase of $6.4  million, or 45.8%, compared to$14.0  million for the three months ended March  31,2005. The increase in our general and administrative expense was due toseverance costs and the additional number of employees hired throughout2005, especially in Europe. The increase is also attributed toincreases in auditing fees and fees associated with ongoing effortsrelating to Sarbanes-Oxley Section 404 compliance allocated to ourspecialty insurance segment. Our general and administrative expenseratio decreased to 35.2% for the three months ended March31,  2006, compared to 37.1% for the three months endedMarch  31,  2005 due to the impact of the increase in ourspecialty insurance segment's net premiums earned more thanoffsetting the impact of the increase in our general and administrativeexpenses.

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Specialtyreinsurance

|                                        |  |                                  |         |                                  |  |        |         |         |  |        |         |          |  |  |
|----------------------------------------|--|----------------------------------|---------|----------------------------------|--|--------|---------|---------|--|--------|---------|----------|--|--|
|                                   |  | Threemonths ended March 31, 2006 |         | Three months ended March31, 2005 |  | Change |
|                                   |  | ($ inthousands)                  |
| Gross premiumswritten                  |  | $                                | 30,526  |                             |  | $      | 89,407  |    |  | $      | (58,881 | )   |
| Premiumsceded                          |  |                             | (22,556 | )                           |  |   | (1,297  | )  |  |   | (21,259 | )   |
| Netpremiumswritten                     |  | $                                | 7,970   |                             |  | $      | 88,110  |    |  | $      | (80,140 | )   |
| Netpremiumsearned                      |  | $                                | 21,529  |                             |  | $      | 53,637  |    |  | $      | (32,108 | )   |
| Otherincome                            |  |                             | 874     |                             |  |   | 790     |    |  |   | 84      |     |
| Net lossesand lossexpenses             |  |                             | (15,761 | )                           |  |   | (29,648 | )  |  |   | 13,887  |     |
| Acquisitionexpenses                    |  |                             | (5,567  | )                           |  |   | (13,804 | )  |  |   | 8,237   |     |
| Generaland administrativeexpenses      |  |                             | (6,957  | )                           |  |   | (5,156  | )  |  |   | (1,801  | )   |
| Netunderwritingloss                    |  | $                                | (5,882  | )                           |  | $      | 5,819   |    |  | $      | (11,701 | )   |
| Ratios:                                |  |                             |    |                             |  |   |    |    |
| Lossand loss expenseratio              |  |                             | 73.2    | %                           |  |   | 55.3    | %  |  |   | (17.9   | )%  |
| Acquisitionexpenseratio                |  |                             | 25.9    | %                           |  |   | 25.7    | %  |  |   | (0.2    | )%  |
| Generaland administrative expenseratio |  |                             | 32.3    | %                           |  |   | 9.6     | %  |  |   | (22.7   | )%  |
| Combinedratio                          |  |                             | 131.4   | %                           |  |   | 90.6    | %  |  |   | (40.8   | )%  |
|                                        |

Premiums.    Grossand net premiums written were $30.5  million and $8.0million for the three months ended March  31,  2006compared to $89.4  million and $88.1  million of gross andnet premiums for the three months ended March  31,  2005.The decrease in our specialty reinsurance segment's net premiumswritten reflects the decrease in our property, casualty and marine,technical risk and aviation reinsurance business lines as a result ofour decision to discontinue the writing of new and renewal business inour property reinsurance business line, the adverse effects of A.M.Best's ratings downgrade, the commutation of two treaties in ourcasualty reinsurance business line and the cancellation of marine,technical risk and aviation reinsurance contracts in March  2006resulting in the return of gross premiums written of $7.5million following A.M. Best's ratings downgrade.

The tablebelow shows gross and net premiums written by product line whetherwritten on a traditional reinsurance, programs or structuredbasis:

|                                   |  |                                  |        |                                  |  |                      |        |                   |  |        |        |        |  |        |        |        |  |  |
|-----------------------------------|--|----------------------------------|--------|----------------------------------|--|----------------------|--------|-------------------|--|--------|--------|--------|--|--------|--------|--------|--|--|
|                              |  | Threemonths ended March 31, 2006 |        | Three months endedMarch 31, 2005 |
|                              |  | ($ inthousands)                  |
|                              |  | Grosspremiumswritten             |        | Netpremiumswritten               |  | Grosspremiumswritten |        | Netwrittenpremium |
| Property                          |  | $                                | 19,957 |                             |  | $                    | 198    |              |  | $      | 44,439 |   |  | $      | 44,439 |   |
| Casualty                          |  |                             | 12,289 |                             |  |                 | 12,289 |              |  |   | 29,104 |   |  |   | 29,104 |   |
| Marine,technical risk andaviation |  |                             | (1,720 | )                           |  |                 | (4,517 | )            |  |   | 15,864 |   |  |   | 14,567 |   |
| Total                             |  | $                                | 30,526 |                             |  | $                    | 7,970  |              |  | $      | 89,407 |   |  | $      | 88,110 |   |
|                                   |

Ourcasualty reinsurance gross premiums written during the three monthsended March  31,  2006 are summarized in the table below byrisk class.

|                      |  |        |       |         |  |  |
|----------------------|--|--------|-------|---------|--|--|
| Workers'compensation |  |   | 60.3  | %  |
| Commercialumbrella   |  |   | 20.5  | %  |
| Generalliability     |  |   | 13.4  | %  |
| Other                |  |   | 5.8   | %  |
| Total                |  |   | 100.0 | %  |
|                      |

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Our casualty reinsurance gross premiumswritten included in our other casualty category, were spread across 14different risk classes, none of which accounted for more than10% of our casualty reinsurance premiums written for the threemonths ended March  31,  2006.

Our marine, technicalrisk and aviation reinsurance gross premiums written, excluding theimpact of $7.5  million of returned gross premium written relatedto reinsurance contracts that were written during 2005 and cancelled in2006, following the Company's downgrade by A.M. Best, during thethree months ended March  31,  2006 were comprised of oceanmarine risks only.

Approximately 50.5% and 39.1%of our specialty reinsurance segment gross premiums written of$30.5  million were generated through Guy Carpenter &Company, Inc. and Benfield Group.

Ceded premiums were$22.6  million during the three months ended March31,  2006 compared to $1.3  million for the three monthsended March  31,  2005. The increase of $21.3million in our ceded premiums written includes approximately$19.8  million related to our property reinsurance line ofbusiness ceded to the third party reinsurer under the PropertyTransaction. The remainder is attributable to the purchase, during thethree months ended March  31,  2006, of additionalretrocession protection, including reinstatement premiums, for ourspecialty reinsurance marine, technical risk and aviation product line.We obtained the retrocession protection to help limit our net lossexposures to natural catastrophe events. These retrocession treatiesprovide us with protection on an excess of loss, quota share treaty andfacultative basis for policies written in our reinsurance product linesof business. Ceded premiums are earned over the period of each insuredrisk.

Net premiums earned of $21.5  million for the threemonths ended March  31,  2006 have decreased by$32.1  million compared to the three months ended March31,  2005. The decrease reflects the impact of the decision todiscontinue the writing of new and renewal business in our propertyreinsurance line of business, the commutation of two treaties in ourcasualty reinsurance line of business and the purchase of additionalretrocessional protection and the impact of writing lower net premiumsas a result of the A.M. Best ratings downgrade. Gross premiums writtenin our specialty reinsurance segment are being earned over the periodsof reinsured or underlying insured risks which are typically oneyear.

Other income.    Other income was $0.9million for the three months ended March  31,  2006compared to $0.8  million for the three months ended March31,  2005, and related to income, including fees, recognized onnon-traditional reinsurance contracts.

Net losses and lossexpenses.    Net losses and loss expenses were $15.8million for the three months ended 31, 2006 a decrease of $13.9million, or 46.8%, compared to $29.6  million for thethree months ended 31, 2005. The decrease in net losses and lossexpenses incurred was due to our decision to discontinue the writing ofnew and renewal business in our property reinsurance line of business,the commutation of two treaties in our casualty reinsurance line ofbusiness, the decrease in the number of contracts we entered into as aresult of the A.M. Best's ratings downgrade and the purchase ofadditional retrocessional protection. Net losses and loss expenses werea function of our net premiums earned and our expected ultimate lossesand loss expenses for reported and unreported claims on contracts ofreinsurance underwritten.

Included in our expected ultimatelosses during the three months ended March  31,  2006 isadverse development on the loss estimates on contracts of reinsuranceinsuring claims arising from the 2005 hurricanes of $0.3million. Our estimate of our exposure to ultimate claim costsassociated with these hurricanes is primarily based on currentlyavailable information, claims notifications received to date, industryloss estimates, output from industry models, a review of affectedcontracts and discussion with cedents and brokers. The actual amount oflosses from the hurricanes may vary significantly from the estimate.Other than the hurricane losses, as of March  31,  2006, wehave received a limited amount of large reported losses in ourspecialty reinsurance segment. However, we participate in lines ofbusiness where claims may not be reported for some period of time afterthose claims are incurred.

Our specialty reinsurance segment netloss ratio was 73.2% for the three months ended March31,  2006 compared to 55.3% for the three months endedMarch  31,  2005. The increase in the 

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specialty reinsurance segment net loss ratiois mainly due to the increase in our ceded earned premium, related toadditional retrocessional protection purchased in our marine, technicalrisk and aviation product line compared to the three months endedMarch  31,  2005, which reduces our net earned premium.Substantially all of this ceded premium related to contracts ofreinsurance purchased on an excess of loss basis, to provide us withprotection in the event of severe or catastrophic events.

Acquisition expenses.    Acquisition expenses were$5.6  million for the three months ended March  31,2006 a decrease of $8.2  million, or 59.7%, compared to$13.8  million for the three months ended March  31,2005. The decrease in acquisition expenses was due to the decrease inthe number of reinsurance contracts we entered into and the associatednet premiums earned. These acquisition expenses primarily representedbrokerage and ceding commissions.

Our acquisition expense ratiowas 25.9% for the three months ended March  31,2006, which is comparable to 25.7% for the three months endedMarch  31,  2005.

General and administrativeexpenses.    Direct and allocated indirect general andadministrative expenses totaled $7.0  million for the threemonths ended March  31,  2006 an increase of $1.8million, or 35.4% compared to $5.2  million for the threemonths ended March  31,  2005. The increase is primarilyattributable to the allocation of employee related general andadministrative expenses incurred by the Company. The increase is alsodue to increases in auditing fees and fees associated with ongoingefforts relating to Sarbanes-Oxley Section 404 compliance allocated toour specialty reinsurance segment. Our general and administrativeexpense ratio was 32.3% for the three months ended March31,  2006 compared to 9.6% for the three months endedMarch  31,  2005.

Technicalservices

|                                   |  |                                  |        |                                  |  |        |        |         |  |        |      |         |  |  |
|-----------------------------------|--|----------------------------------|--------|----------------------------------|--|--------|--------|---------|--|--------|------|---------|--|--|
|                              |  | Threemonths ended March 31, 2006 |        | Three months ended March31, 2005 |  | Change |
|                              |  | ($ inthousands)                  |
| Technical servicesrevenues        |  | $                                | 8,145  |                             |  | $      | 8,112  |    |  | $      | 33   |    |
| Otherincome                       |  |                             | 120    |                             |  |   | 10     |    |  |   | 110  |    |
| Directtechnical servicescosts     |  |                             | (5,000 | )                           |  |   | (4,861 | )  |  |   | (139 | )  |
| Generaland administrativeexpenses |  |                             | (2,912 | )                           |  |   | (2,539 | )  |  |   | (373 | )  |
| Nettechnical servicesincome       |  | $                                | 353    |                             |  | $      | 722    |    |  | $      | (369 | )  |
|                                   |

Technicalservices revenues.    Technical services revenues were$8.1  million for the three months ended March  31,2006, compared to $8.1  million for the three months endedMarch  31,  2005.

Other income.    Otherincome totaled $0.1  million for the three months endedMarch  31,  2006, an increase of $0.1  million,compared to zero for the three months ended March  31,2005. The increase was primarily generated from our liabilityassumption program in Buffalo, New York. This income primarilyrepresents the amount of consideration received for the assumption ofremediation liabilities in excess of the expected environmentalremediation liability which is initially deferred in the consolidatedbalance sheet and subsequently recognized in earnings over theremediation period using the cost recovery or percentage of completionmethod.

Direct technical services costs.    Directtechnical services costs were $5.0  million for the three monthsended March  31,  2006, an increase of $0.1  million,compared to $4.9  million for the three months ended March31,  2005. Direct technical services costs, as a percentage ofrevenue was 61.4% for the three months ended March31,  2006 compared to 59.9% for the three months endedMarch  31,  2005, reflecting an increase in the usage ofsubcontractors for environmental projects in 2006 as compared to2005.

General and administrative expenses.    Directand indirect allocated general and administrative expenses were$2.9  million for the three months ended March  31,2006, an increase of $0.4  million, or 14.7% compared to$2.5  million for the three months ended March  31,2005. The increase is attributable to increased personnel costs andhigher overhead allocation arising from the development of ourinfrastructure and Sarbanes-Oxley Section 404 complianceefforts.

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FinancialCondition and Liquidity

Quanta Holdings is organized as aBermuda holding company, and as such, has no direct operations of itsown. Our assets consist of investments in our subsidiaries throughwhich we conduct substantially all of our insurance, reinsurance andtechnical services operations. As of March  31,  2006, wehad operations in the U.S., Bermuda, Ireland and the U.K., includingSyndicate 4000.

As a holding company, we will have continuingfunding needs for general corporate expenses, the payment of principaland interest on current and future borrowings, dividends on ourpreferred shares, taxes, and the payment of other obligations. Funds tomeet these obligations will come primarily from dividends, interest andother statutorily permissible payments from our operating subsidiaries.The ability of our operating subsidiaries to make payments to QuantaHoldings is limited by the applicable laws and regulations of thedomiciles in which the subsidiaries operate. These laws and regulationssubject our subsidiaries to significant restrictions and require, amongother things, that some of our subsidiaries maintain minimum solvencyrequirements and limit the amount of dividends that these subsidiariescan pay to us. Rating agency considerations also limit our ability totransfer capital allocated among our insurance operating subsidiaries.Additionally, there are significant restrictions regarding our abilityto remove the funds deposited to support our underwriting capacity ofour Lloyd's syndicate. As a result, there are restrictions on ourability to transfer substantially all of the investment balances of ourinsurance subsidiaries to Quanta Holdings.

We are also subjectto constraints under the Companies Act 1981 of Bermuda(‘‘Companies Act’’) that affect our abilityto pay dividends on our shares. We may not declare or pay a dividend ormake a distribution if we have reasonable grounds for believing that weare, or will after the payment be, unable to pay our liabilities asthey become due or if the realizable value of our assets will therebybe less than the aggregate of our liabilities and our issued sharecapital and share premium accounts. As a result of our losses, forBermuda company law purposes, the realizable value of our assets may nolonger exceed the aggregate of our liabilities and our issued sharecapital and share premium accounts. In order for Quanta Holdings tohave the flexibility to pay dividends to shareholders, we have filed adefinitive proxy statement including a proposal for approval by theholders of our common shares at the 2006 annual general meeting toreduce the share premium account by $656.9  million and allocatethat sum to our contributed surplus account.

We estimate that wecurrently have investments of approximately $998.6  million,including cash and cash equivalent balances of approximately$166.1  million. We estimate that our cash and cash equivalentsand investment balances include approximately $254.3  millionthat is pledged as collateral for letters of credit, approximately$171.9  million held in trust funds for the benefit of cedingcompanies and to fund our obligations associated with the assumption ofan environmental remediation liability, $160.5  million that isheld by Lloyd's to support our underwriting activities,$51.0  million held in trust funds that are related to ourdeposit liabilities and $29.6  million that is on deposit with,or has been pledged to, U.S. state insurance departments. After givingeffect to these assets pledged or placed in trust, we estimate that wepresently have net unrestricted investments of $331.2  million,including net cash and cash equivalents of approximately $77.9million. Of the $331.2 million, approximately $311.7 million representsnet unrestricted investments held by our operating subsidiaries whichare subject to significant legal, regulatory and compliancerequirements.

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 business, the applicable regulatory requirements, and therecommendations of the insurance regulatory authorities and ratingagencies. We believe our operating subsidiaries have sufficient assetsto pay their respective currently foreseen insurance liabilities asthey become due.

Some of our insurance and many of ourreinsurance contracts contain termination rights that are triggered bythe A.M. Best rating downgrade. Some of these insurance and reinsurancecontracts also require us to post additional security. Further, adowngrade in our rating below ‘‘B++’’ (verygood) will trigger termination provisions or require the posting ofadditional security in certain of our other insurance and reinsurancecontracts. As a result, we may be required to post additional securityeither through the issuance of letters of credit or the placement ofsecurities in trust under the terms of 

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those insurance or reinsurance contracts. Inaddition, many of our insurance contracts and certain of ourreinsurance contracts provide for cancellation at the option of thepolicyholder regardless of our financial strength rating. Accordingly,we may also elect to post security under these other contracts in orderto maintain that business.

We estimate that we currently havenet cash and cash equivalent balances and other investments ofapproximately $331.2  million that are available to post assecurity or place in trust. We currently believe that we havesufficient assets to pay our foreseen liabilities as they become dueand meet our foreseen collateral requirements within our insurancesubsidiaries. However, we cannot draw letters of credit or borrow underour credit agreement if we have incurred a material adverse effect orif a default exists under the agreement. A downgrade in our ratingbelow ‘‘B++’’ (very good) will cause adefault in our credit facility. The obligations under the creditfacility are currently fully secured by investments and cash. If adefault occurs under the credit agreement, our lenders may require usto cash collateralize a portion or all of the outstanding letters ofcredit issued under the facility, which may be accomplished through thesubstitution or liquidation of collateral. Among other things, thelenders would also have the right to cancel outstanding letters ofcredit issued under the facility and we would be limited in releasingcollateral without the lenders' consent. If we fail to maintainor enter into adequate letter of credit facilities on a timely basis,we would be required to place securities in trust or similararrangements, which would be more difficult and costly to establish andadminister.

Financial condition

OurBoard of Directors established our investment policies and createdguidelines for hiring external investment managers. Managementimplements our investment strategy with the assistance of the externalmanagers. Our investment guidelines specify minimum criteria on theoverall credit quality, liquidity and risk-return characteristics ofour investment portfolio and include limitations on the size ofparticular holdings, as well as restrictions on investments indifferent asset classes. The Board of Directors monitors our overallinvestment returns and reviews compliance with our investmentguidelines.

Our investment strategy seeks to preserve principaland maintain liquidity while trying to maximize total return through ahigh quality, diversified portfolio. Investment decision making isguided mainly by the nature and timing of our expected liabilitypayouts, management's forecast of our cash flows and thepossibility that we will have unexpected cash demands, for example, tosatisfy claims due to catastrophic losses. Our investment portfoliocurrently consists mainly of highly rated and liquid fixed incomesecurities. However, to the extent our insurance liabilities arecorrelated with an asset class outside our minimum criteria, ourinvestment guidelines will allow a deviation from those minimumcriteria provided such deviations reduce overall risk.

We havedetermined that $740.8  million of investment securities, withunrealized losses of approximately $6.1  million wereother-than-temporarily impaired as of March  31,  2006. Therealization of these losses represents the maximum amount of potentiallosses in our investment securities if we were to sell all of thesesecurities as of March 31, 2006 and are primarily attributable tochanges in interest rates and not changes in credit quality. As aresult of our decision, the affected investments were reduced to theirestimated fair value, which becomes their new cost basis. Therecognition of the losses has no effect on our shareholders'equity, the market value of our investments, our cash flows or ourliquidity. The evaluation for other-than-temporary impairments requiresthe application of significant judgment, including our intent to holdthe investment for a period of time sufficient to allow for possiblerecovery. We believe we have sufficient assets to pay our currentlyforeseen insurance liabilities as they become due, and we have noimmediate intent to liquidate the investments securities affected byour decision. However, due to the general uncertainties surrounding ourbusiness resulting from A.M. Best's March  2006 downgradeof our financial strength ratings and our decision to explore strategicalternatives, we concluded that there are no absolute assurances thatwe will have the ability to hold the affected investments for asufficient period of time. It is possible that the impairment factorsevaluated by management and fair values will change in subsequentperiods, resulting in additional material impairmentcharges.

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Our investment guidelines requirecompliance with applicable local regulations and laws. Without Boardapproval, we will not purchase financial futures, forwards, options,swaps and other derivatives, except for instruments that are purchasedas part of our business, for purposes of hedging capital market risks(including those within our structured products transactions), or asreplication transactions, which are defined as a set of derivative,insurance and/or securities transactions that when combined produce theequivalent economic results of an investment meeting our investmentguidelines. While we expect that the majority of our investmentholdings will be denominated in U.S. dollars, we may make investmentsin other currency denominations depending upon the currencies in whichloss reserves are maintained, or as may be required by regulation orlaw.

Our available-for-sale investments, excluding tradinginvestments related to deposit liabilities, totaled $785.2million as of March  31,  2006 compared to $699.1million at December  31,  2005. The market value of ourtotal investment portfolio was $823.1  million, of which$777.6  million related to available-for-sale fixed maturityinvestments, $7.6  million related to available for saleshort-term investments and $37.9  million to trading investmentsrelated to deposit liabilities. The majority of our investmentportfolio consists of fixed maturity investments which are managed bythe following external investment advisors: Pacific InvestmentManagement Company LLC, JP Morgan Investment Management Inc. andDeutsche Asset Management. Custodians of our externally managedinvestment portfolios are JP Morgan Chase Bank N.A., Citibank N.A. andComerica Incorporated.

Our investment guidelines require thatthe average credit quality of the investment portfolio is typicallyAa3/AA− and that no more than 5% of the investmentportfolio's market value shall be invested in securities ratedbelow Baa3/BBB−. As of March  31,  2006, 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$204.9  million as of March  31,  2006 compared to$260.9  million at December  31,  2005. The increasein our available-for-sale investments and cash and cash equivalents isprimarily due to the collection of premiums receivable during the threemonths ended March  31,  2006, partially offset by claimsnotifications and associated loss payments we have made up to andincluding March  31,  2006.

Our insurance andreinsurance premiums receivable balances totaled $147.0  millionas of March  31,  2006 compared to $146.8  million atDecember  31,  2005. The increase in premiums receivablereflects net premiums written across the specialty insurance segmentduring the three months ended March  31,  2006, offset byour decision to discontinue writing new and renewal business in ourproperty reinsurance and technical risk property lines of businessduring the fourth quarter of 2005. Included in our premiums receivableare approximately $96.5  million of written premium installmentsthat are not yet currently due under the terms of the related insuranceand reinsurance contracts. As of March  31,  2006, based onour review of the remaining balance of $50.5  million, whichrepresents premiums installments that are currently due, we believethere are no individually significant balances that are delinquent oruncollectible.

Our deferred acquisition costs and unearnedpremiums, net of deferred reinsurance premiums, totaled $28.7million and $208.0  million, respectively, as of March31,  2006 compared to $33.1  million and $224.5million as of December  31,  2005. The decrease in ourdeferred acquisition costs and in unearned premiums, net of deferredreinsurance, during the three months ended March  31,  2006are due to lower premiums written, following the discontinuance ofwriting new and most renewal business in our property reinsurance andtechnical risk property insurance product lines and the impacts to ourbusiness arising from A.M. Best's ratings downgrade. Theseamounts represent premiums and acquisition expenses on writtencontracts of insurance and reinsurance that will be recognized inearnings in future periods. Substantially all of these amounts will berecognized over the next 12 months.

Our reserves for losses andloss adjustment expenses, net of reinsurance recoverable, totaled$393.9  million as March  31,  2006 compared to$343.6  million as of December  31,  2005. Theincrease in our net loss and loss expense reserves reflects our netlosses and loss expenses incurred during the three months endedMarch  31,  2006, including the losses of $4.5million resulting from tornadoes that impacted our technical risk lineof business. The increase was also driven by the number of insurance

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contracts we entered into and the associatednet premiums earned, as well as greater reinsurance recoveries relativeto our payment of losses during the period. Our estimate of our unpaidexposure to ultimate claim costs associated with these losses is basedon currently available information, claim notifications received todate, industry loss estimates, output from industry models, a review ofaffected contracts and discussion with clients, cedants and brokers.The actual amount of future loss payments relating to these loss eventsmay vary significantly from this estimate. The balance of reserves forlosses and loss adjustment expenses as of March 31, 2006 includes ourestimate of gross unpaid loss expenses totaling $156.3 million relatingto Hurricanes Katrina, Rita and Wilma and $5.5 million relating to theenvironmental claim that we incurred during the year ended December 31,2005. During the three months ended March  31,  2006 wehave received a limited amount of other reported losses. However, weparticipate in lines of business where claims may not be reported forsome period of time after those claims are incurred.

Our estimateof our reserves for losses and loss adjustment expenses as ofMarch  31,  2006 of $393.9  million is net ofreinsurance recoverable of $198.3  million. The increase in ourreinsurance recoverable balance reflects our losses and loss expensesrecoverable from reinsurers during the three months ended March31,  2006. The balance as of March  31,  2006 alsoincludes our estimate of unpaid loss expenses recoverable totaling$80.1  million relating to Hurricanes Katrina, Rita and Wilma and$2.9  million relating to the environmental claim that weincurred during the year ended December  31,  2005. Ourestimate of our reinsurance recoverable balance associated with theselosses is based on currently available information, claim notificationsreceived to date, industry loss estimates, output from industry models,a detailed review of affected ceded reinsurance contracts and anassessment of the credit risk to which the Company is subject. Theactual amount of future loss receipts relating to these loss events mayvary significantly from this estimate. The average credit rating of theCompany's reinsurers as of March  31,  2006 is‘‘A’’ (excellent) by A.M. Best. As ofMarch  31,  2006, the losses and loss adjustment expensesrecoverable from reinsurers balance in the consolidated balance sheetincluded approximately 24% due from Everest Reinsurance Ltd., areinsurer rated ‘‘A+’’ (superior) by A.M.Best, and approximately 15% due from various Lloyd'ssyndicates, which are rated ‘‘A’’(excellent) by A.M. Best. No other reinsurers accounted for more than10% of the losses and loss adjustment expense recoverablebalance as of March  31,  2006. Less than 4.2% ofthe Company's loss and loss adjustment expenses recoverable fromreinsurers are due from reinsurers that are rated below‘‘A−’’ (excellent). As ofMarch  31,  2006, of our gross reserves for losses and lossadjustment expenses of $592.3  million, $184.5  millionrelated to case reserves for reported losses and loss expenses and$407.8  million related to reserves for losses and loss expensesincurred but not reported. As of March  31,  2006, of ourreserves for losses and loss adjustment expenses, net of reinsurancerecoverable of $393.9  million, $101.4  million related tocase reserves for reported losses and loss expenses and $292.5million related to reserves for losses and loss expenses incurred butnot reported.

The following table lists our largest reinsurersmeasured by the amount of losses and loss adjustment expensesrecoverable at March  31,  2006 and the reinsurers'financial strength rating from A.M. Best:

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|                                         |  |                                              |        |                 |  |          |        |        |  |  |
|-----------------------------------------|--|----------------------------------------------|--------|-----------------|--|----------|--------|--------|--|--|
|                                    |  | Lossesand LossAdjustment ExpensesRecoverable |        | A.M. BestRating |
|                                    |  | ($ inmillions)                               |        |            |
| Reinsurer                               |  |                                         |   |            |  |     |   |   |
| EverestReinsuranceCompany               |  | $                                            | 48.2   |            |  | A+       |
| Lloyd's                                 |  |                                         | 30.9   |            |  | A        |
| ArchReinsurance                         |  |                                         | 19.3   |            |  | A− |
| XLCapital Ltd.                          |  |                                         | 11.3   |            |  | A+       |
| Allianz Marine& Aviation            |  |                                         | 10.7   |            |  | A− |
| NewReinsurance Company                  |  |                                         | 10.0   |            |  | A+       |
| GlacierReinsurance AG                   |  |                                         | 8.4    |            |  | A− |
| The ToaReinsurance Company, Ltd.(Tokyo) |  |                                         | 8.1    |            |  | A        |
| Aspen Insurance                         |  |                                         | 7.5    |            |  | A        |
| Transatlantic ReinsuranceCompany        |  |                                         | 7.2    |            |  | A+       |
| Odyssey AmericaReinsurance              |  |                                         | 7.1    |            |  | A        |
| MaxRe               |  |                                         | 6.7    |            |  | A− |
| OtherReinsurers Rated A− orBetter |  |                                         | 15.1   |            |  | A− |
| All OtherReinsurers                     |  |                                         | 7.8    |            |  | Various  |
| Total                                   |  | $                                            | 198.3  |            |  |     |
|                                         |

Ourshareholders' equity was $367.1  million as of March31,  2006 compared to $384.2  million as of December31,  2005, reflecting a decrease of $17.1  million that wasprimarily the result of a net loss available to ordinary shareholdersof $17.1  million for the three months ended March31,  2006 and by a net change in unrealized losses on ourinvestment portfolios of $0.2  million, partially offset by astock-compensation expense credited to additional paid-in capital of$0.4  million. As of March  31,  2006, we haveprovided a 100% cumulative valuation allowance against ourdeferred tax assets in the amount of $27.0  million. Thesedeferred tax assets were generated primarily from net operating losses.As a start-up company with limited operating history, the realizationof these deferred tax assets is neither assured nor accuratelydeterminable.

The following table shows our capitalization as ofMarch  31,  2006 and December  31,  2005 (inthousands):

|                                                                                                                                                                                          |  |                     |          |                        |  |        |          |         |  |  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|---------------------|----------|------------------------|--|--------|----------|---------|--|--|
|                                                                                                                                                                                     |  | Asof March 31, 2006 |          | As of December 31,2005 |
| Debtoutstanding:                                                                                                                                                                         |  |                |     |                   |  |   |     |    |
| Revolving creditfacility(1)                                                                                                                                                              |  | $                   | —  |                   |  | $      | —  |    |
| Juniorsubordinateddebentures                                                                                                                                                             |  |                | 61,857   |                   |  |   | 61,857   |    |
| Redeemablepreferred shares:                                                                                                                                                              |  |                |     |                   |  |   |     |    |
| Redeemablepreferred shares ($0.01 par value; 25,000,000 shares authorized;3,130,525 issued and outstanding at March  31,  2006 and3,000,000 issued and outstanding at December  31,2005) |  |                | 74,998   |                   |  |   | 71,838   |    |
| Shareholders'equity:                                                                                                                                                                     |  |                |     |                   |  |   |     |    |
| Common shares ($0.01par value; 200,000,000 common shares authorized; 69,946,861 issued andoutstanding at March  31,  2006 and December31,  2005)                                         |  |                | 699      |                   |  |   | 699      |    |
| Additionalpaid-incapital                                                                                                                                                                 |  |                | 582,298  |                   |  |   | 581,929  |    |
| Accumulateddeficit                                                                                                                                                                       |  |                | (216,145 | )                 |  |   | (199,010 | )  |
| Accumulatedother comprehensiveincome                                                                                                                                                     |  |                | 213      |                   |  |   | 546      |    |
| Totalshareholders'equity                                                                                                                                                                 |  | $                   | 367,065  |                   |  | $      | 384,164  |    |
| Totalcapitalization                                                                                                                                                                      |  | $                   | 503,920  |                   |  | $      | 517,859  |    |
| Totaldebt to total capital ratio(2)                                                                                                                                                      |  |                | 27       | %                 |  |   | 26       | %  |
|                                                                                                                                                                                          |

|  |
|--|
|  |  |
|  |

|  |     |                                                                                                                                                                                                                                       |
|--|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (1) | Consistsof a $250  million secured letter of credit and revolving creditfacility dated July  11,  2005. Up to $25.0  millionmay be borrowed under the facility on a revolving basis for generalcorporate purposes and working capital |

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|  |  |                                                                                                                                                                                                                                 |
|--|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | requirements. As of March  31,2006, $225.6  million of letters of credit were outstanding underthis facility. No revolving credit borrowings or amounts drawn underthe letters of credit were outstanding as of March  31,2006. |

|  |     |                                                                                                                                                                                                                                                                |
|--|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (2) | The debt to totalcapital ratio is calculated as the sum of the revolving creditfacility, junior subordinated debentures and redeemable preferredshares, or Total Debt, divided by the sum of Total Debt and TotalShareholders' Equity, or TotalCapitalization. |

|  |     |                                                                                                                                          |
|--|-----|------------------------------------------------------------------------------------------------------------------------------------------|
|  | (3) | This tabledoes not give effect to warrants and options exercisable for 5,598,283and 5,595,213 common shares at March  31,  2006 and2005. |

On January  11,  2006, Quanta Holdings,pursuant to an Underwriting Agreement dated December  14,2005 with FBR and BB&T Capital Markets (the‘‘Underwriters’’), sold 130,52510.25% Series A Preferred Shares following the exercise of theover-allotment option that was granted to them on December14,  2005. The gross proceeds to the Company were $3.3million. The series A preferred shares are reflected as redeemablepreferred shares on our balance sheet as of March  31,2006.

Upon liquidation, dissolution or winding-up, the holdersof our series A preferred shares will be entitled to receive from ourassets legally available for distribution to shareholders a liquidationpreference of $25 per share, plus declared but unpaid dividends andadditional amounts, if any, to the date fixed for distribution.Dividends on our series A preferred shares will be payable on anon-cumulative basis only when, as and if declared by our Board ofDirectors, quarterly in arrears on the fifteenth day of March, June,September and December of each year, commencing on March15,  2006. Dividends declared on our series A preferred shareswill be payable at a rate equal to 10.25% of the liquidationpreference per annum (equivalent to $2.5625 per share).

On andafter December  15,  2010, we may redeem our series Apreferred shares, in whole or in part, at any time, at the redemptionprice set forth in the Certificate of Designation relating to preferredshares, plus declared but unpaid dividends and additional amounts, ifany, to the date of redemption. We may not redeem our series Apreferred shares before December  15,  2010 except that wemay redeem our series A preferred shares before that date pursuant tocertain tax redemption provisions described in the Certificate ofDesignation. If we experience a change of control, we may be requiredto make offers to redeem our series A preferred shares at a price of$25.25 per share, plus declared but unpaid dividends and additionalamounts, if any, to the date of redemption and on the terms describedin the Certificate of Designation. Our series A preferred shares haveno stated maturity and are not subject to any sinking fund and are notconvertible into any of our other securities orproperty.

Liquidity

OperatingCashflow; Cash and Cash Equivalents

We generated net operatingcash flow of approximately $17.4  million during the three monthsended March  31,  2006, primarily related to premiums andinvestment income received and offset by losses and loss expenses aswell as general and administrative expenses paid. In addition, we alsogenerated net proceeds from the issuance of our preferred shares of$3.2  million. During the same period, we invested net cash of$77.8  million in our investment assets. Our cash flows fromoperations for the three months ended March  31,  2006provided us with sufficient liquidity to meet operating cashrequirements during that period.

We estimate that we currentlyhave investments of approximately $998.6  million, including cashand cash equivalent balances of approximately $166.1  million. Weestimate that our cash and cash equivalents and investment balancesinclude approximately $254.3  million that is pledged ascollateral for letters of credit, approximately $171.9  millionheld in trust funds for the benefit of ceding companies and to fund ourobligations associated with the assumption of an environmentalremediation liability, $160.5  million that is held byLloyd's to support our underwriting activities, $51.0million held in trust funds that are related to our deposit liabilitiesand $29.6  million that is on deposit with, or has been pledgedto, U.S. state insurance departments. After giving effect to theseassets pledged or placed in trust, we estimate that we presently havenet unrestricted investments of $331.2  million, including netcash and cash equivalents of approximately $77.9  million. Webelieve our 

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operating subsidiaries currently havesufficient assets to pay their respective foreseen liabilities as theybecome due. We also believe that subject to meeting significant legal,regulatory and compliance requirements, our operating subsidiaries candistribute sufficient funds to Quanta Holdings to enable QuantaHoldings to pay its currently foreseen liabilities as they becomedue.

Sources of cash

Our sources of cash consistprimarily of existing cash and cash equivalents, premiums written,proceeds from sales and redemptions of investment assets, capital ordebt issuances, investment income, reinsurance recoveries, and, to alesser extent, our secured bank credit facility and collections ofreceivables for technical services rendered to third parties. As aresult of our recent ratings downgrade by A.M. Best, the resulting lossof business and business opportunities, our decision to currently ceasewriting new business in many of our product lines and pendingtermination of our agreement with the program manager of the HBWprogram, cash flows associated with the receipt of premiums willdecrease substantially in 2006.

On December  29,2005, the underwriters exercised their over-allotment option to acquirean additional 130,525 series A preferred shares at the offering priceof $25.00 per share. This resulted in gross proceeds of $3.3million which were received and recorded on January  11,2006. The proceeds are being used for general corporatepurposes.

On July  11,  2005, Quanta Holdings andcertain designated insurance subsidiaries entered into an amended andrestated credit agreement, dated July  11,  2005, providingfor a secured bank letter of credit facility and a revolving creditfacility with a syndicate of lenders in the amount of $250million. Up to $25  million may be borrowed under the facility ona revolving basis for general corporate purposes and working capitalrequirements. The facility is secured by specified investments of theborrowers. As of March  31,  2006, we have approximately$225.6  million of secured letters of credit issued andoutstanding under the facility. We have not made any borrowings underthe revolving credit facility. The obligations under the creditfacility are currently fully secured by investments and cash. Theavailability to a borrower is based on the amount of eligibleinvestments pledged by that borrower. 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. Inaddition, we cannot draw letters of credit or borrow under the creditagreement if we have incurred a material adverse effect or if a defaultexists under the agreement.

The credit agreement has certainfinancial covenants, including a leverage ratio (consolidatedindebtedness to consolidated total capital) of not greater than 0.35 to1, a minimum consolidated net worth of at least $301  millionwhich shall be increased immediately following the last day of eachfiscal quarter by an amount equal to 50% of the net income ofthe Company and its subsidiaries 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. A ratingsdowngrade below B++ would also create an event of default under thecredit agreement. If a default occurs under the credit agreement, ourlenders may require us to cash collateralize a portion or all of theoutstanding letters of credit issued under the facility, which may beaccomplished through the substitution or liquidation of collateral.Among other things, the lenders would also have the right to canceloutstanding letters of credit issued under the facility and we would belimited in releasing collateral without the lenders' consent.Quanta Holdings has unconditionally and irrevocably guaranteed all ofthe obligations of its subsidiaries to the lenders. The facilityterminates on July  11,  2008.

Uses of cashand liquidity

We estimate that we currently have investments ofapproximately $998.6  million, including cash and cash equivalentbalances of approximately $166.1  million. We estimate that ourcash and cash equivalents and investment balances include approximately$254.3  million that is pledged as collateral 

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for letters of credit, approximately$171.9  million held in trust funds for the benefit of cedingcompanies and to fund our obligations associated with the assumption ofan environmental remediation liability, $160.5  million that isheld by Lloyd's to support our underwriting activities,$51.0  million held in trust funds that are related to ourdeposit liabilities and $29.6  million that is on deposit with,or has been pledged to, U.S. state insurance departments. After givingeffect to these assets pledged or placed in trust, we estimate that wepresently have net investments of $331.2  million, including netcash and cash equivalents of approximately $77.9  million.Substantially all of our capital has been distributed among our ratedoperating subsidiaries based on our assessment of the levels of capitalthat we believe are prudent to support our business, the applicableregulatory requirements, and the recommendations of the insuranceregulatory authorities and rating agencies.

Some of our insuranceand many of our reinsurance contracts contain termination rights thatare triggered by the A.M. Best rating downgrade. Some of theseinsurance and reinsurance contracts also require us to post additionalsecurity. As a result, we may be required to post additional securityeither through the issuance of letters of credit or the placement ofsecurities in trust under the terms of those insurance or reinsurancecontracts. We may also elect to post security under other insurancecontracts in order to maintain that business. We estimate that wecurrently have net cash and cash equivalent and investment balances ofapproximately $331.2  million that are available to post assecurity or place in trust.

If A.M. Best downgrades ourfinancial strength ratings below our current rating of‘‘B++,’’ we will be in default under ourcredit agreement. We cannot draw letters of credit or borrow under ourexisting credit agreement if we have incurred a material adverse effector if a default exists under the agreement. If we fail to maintain orenter into adequate letter of credit facilities on a timely basis, wemay be unable to provide necessary security to cedent companies underour existing retrocessional and reinsurance contracts that have theright to require the posting of additional security by reason of thedowngrade of our A.M. Best rating. We cannot assure you that we will beable to increase the commitment under our existing bank credit facilityor obtain additional credit facilities at terms acceptable to us. Ourinability to maintain or enter into adequate credit facilities wouldhave a material adverse effect on our results of operations. Theobligations under the credit facility are currently fully secured. If adefault occurs under the credit agreement, our lenders may require usto cash collateralize a portion or all of the outstanding letters ofcredit issued under the facility, which may be accomplished through thesubstitution or liquidation of collateral. Among other things, thelenders would also have the right to cancel outstanding letters ofcredit issued under the facility and we would be limited in releasingcollateral without the lenders' consent. If we fail to maintainor enter into adequate letter of credit facilities on a timely basis,we would be required to place securities in trust or similararrangements, which would be more difficult and costly to establish andadminister.

In the near term, our other principal cashrequirements are expected to be investments in operating subsidiaries,losses and loss adjustment expenses and other policy holder benefits,brokerage and commissions, expenses to develop and implement ourbusiness strategy, including potential severance payments, otheroperating expenses, premiums ceded, capital expenditures, the servicingof borrowing arrangements (including the Debentures), dividend paymentson our series A preferred shares, and taxes. The potential for a largeclaim under one of our insurance or reinsurance contracts means that wemay need to make substantial and unpredictable payments withinrelatively short periods of time. As a result of the recent downgradeof our financial strength ratings by A.M. Best, we are closelyanalyzing our business lines, positioning in the market and internaloperations and identifying steps we should take to preserve shareholdervalue and improve our position, including the exploration of strategicalternatives. We may incur substantial costs, including severancepayments, in connection with the implementation of any changes based onsuch analysis. These initiatives and their implementation also involvesignificant uncertainties and risks that may result in restructuringcharges and unforeseen expenses and costs associated with exiting linesof business and complications or delays, including, among othersthings, the risk of failure. During the first quarter of 2006, we haveincurred severance charges of $5.2  million. Additionally, inorder to retain the services of our chief financial officer, JonathanJ.R. Dodd, and a number of other key employees, we have entered intoretention agreements with these employees that provide for specifiedseverance payments in the event 

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of termination without cause or following achange of control. In the event of payout to all employees covered bythese retention agreements, our cash requirements would include a totalpayment of approximately $9.9  million to all suchemployees.

We paid additional gross claims of $18.3million during the three months ended March  31,  2006relating to the environmental claim and the hurricane events of 2005and 2004. We expect that our cash requirements for the payment of theseand other claims will be significant in future periods as we receiveand settle claims, including those relating to these specific claimsand in particular, claims related to the hurricanes that occurred in2005.

Following our recent ratings downgrade by A.M. Best,Lloyd's has agreed with us that in order to benefit the continuedunderwriting of Syndicate 4000 in the Lloyd's of London marketduring the 2007 underwriting year, Syndicate 4000 would be betterserved by a diversification of its capital base with one or morethird-party capital sources, if we would be able to secure suchcapital. In particular, we believe Syndicate 4000 may receive anincreased submission flow if its capital base is diversified throughone or more third-party capital sources. Capital for the 2007underwriting year, including any capital from a third-party source,must be in place by November  30,  2006. If we obtaincapital provided by any third-party source, we would either add it toour existing funds or we may be able to remove some of the funds wehave deposited to support our underwriting capacity of ourLloyd's syndicate. However, we can make no assurances that wewill be successful in obtaining any third-party source of capital tosupport our Lloyd's syndicate.

We incurred capitalexpenditures of $0.1  million during the three months endedMarch  31,  2006. As we are currently closely analyzing ourbusiness lines and our position, and exploring strategic alternatives,we are unable at this time to quantify the amount of future capitalexpenditures we may incur.

In addition to these cashrequirements, under the purchase agreement with ESC, we have paid, onApril  12,  2006, ESC's former shareholders anearn-out payment of $5.0  million. We may also have substantialliabilities to clients, third parties and government authorities forproperty damage, personal injuries, breach of contract or breach ofwarranty claims, fines and penalties and regulatory action that couldadversely affect our business arising from the assessment, analysis andassumption of environmental liabilities, and the management,remediation, and engineering of environmental conditions constitute asignificant portion of our technical services business. From time totime, we have offered a liability assumption program under which aspecial-purpose entity assumes specified liabilities associated withenvironmental conditions for which we provide technical services, whichmay be insured or guaranteed by us. These businesses involvesignificant risks, including the possibility that we may havesubstantial liabilities to clients, third parties and governmentalauthorities for property damage, personal injuries, breach of contractor breach of warranty claims, fines and penalties and regulatory actionthat could adversely affect our business.

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 to us.Additionally, we seek to capitalize our insurance operations in excessof the minimum regulatory requirements so that we may maintain ourcurrent financial ratings from A.M. Best. These regulatory and ratingagency requirements restrict the amount of capital we are able todistribute to Quanta Holdings and other insurance subsidiaries. Forfurther discussion, see ‘‘— Adequacy ofRegulatory and Rating Capital.’’ Substantially all of ourcapital has been distributed among our rated operating subsidiariesbased on our assessment of the levels of capital that we believe areprudent to support our expected levels of business, the applicableregulatory requirements, and the recommendations of the insuranceregulatory authorities and rating agencies.

We have determinedthat $740.8  million of investment securities, with unrealizedlosses of approximately $6.1  million were other-than-temporarilyimpaired as of March  31,  2006. The realization of theselosses represents the maximum amount of potential losses in ourinvestment securities if we 

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were to sell all of these securities as ofMarch 31, 2006 and are primarily attributable to changes in interestrates and not changes in credit quality. As a result of our decision,the affected investments were reduced to their estimated fair value,which becomes their new cost basis. The recognition of the losses hasno affect on our shareholders' equity, the market value of ourinvestments, our cash flows or our liquidity. The evaluation forother-than-temporary impairments requires the application ofsignificant judgment, including our intent to hold the investment for aperiod of time sufficient to allow for possible recovery. We believe wehave sufficient assets to pay our currently foreseen insuranceliabilities as they become due, and we have no immediate intent toliquidate the investments securities affected by our decision. However,due to the general uncertainties surrounding our business resultingfrom A.M. Best's downgrade of our financial strength ratings andour decision to explore strategic alternatives, we concluded that thereare no absolute assurances that we will have the ability to hold theaffected investments for a sufficient period of time. It is possiblethat the investment securities' fair values could change insubsequent periods, resulting in additional material impairmentcharges.

While we have had sufficient liquidity to pay the losseswe experienced in the past hurricane season, in the future, we may needto raise capital through debt or equity or other securities to furtherexpand our business strategy or enter new lines of business. The amountand timing of any capital raise will depend on many factors, includingour ability 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, our business, results ofoperations and financial condition may be adverselyaffected.

Dividends and Redemptions

As a holdingcompany, we depend on future dividends and other permitted paymentsfrom our subsidiaries to pay any dividends to our common and preferredshareholders. Our subsidiaries' ability to pay dividends, as wellas our ability to pay dividends, is subject to regulatory, contractual,rating agency and other constraints. Furthermore, the terms of ourletter of credit and revolving credit facility prohibit us fromrepurchasing shares and paying dividends on our common shares withoutthe consent of our lenders. We have obtained a consent under ourcurrent letter of credit and revolving credit facility for the paymentof dividends on our series A preferred shares. However, the facilityprohibits us from paying dividends on our series A preferred shares solong as there is a default under that agreement. Future creditagreements or other agreements relating to our indebtedness may alsocontain provisions prohibiting or limiting the payment of dividends onour shares under certain circumstances. If we experience a change ofcontrol, we may be required to make offers to redeem our series Apreferred shares at a price of $25.25 per share, plus declared butunpaid dividends and additional amounts, if any, to the date ofredemption and on the terms described in the Certificate ofDesignation. Our series A preferred shares have no stated maturity andare not subject to any sinking fund and are not convertible into any ofour other securities or property.

We are also subject to Bermudaregulatory constraints that affect our ability to pay dividends on ourshares, redeem our series A preferred shares and make other payments.Under the Companies Act, even though we are solvent and able to pay ourliabilities as they become due, we may not declare or pay a dividend ormake a distribution if we have reasonable grounds for believing that weare, or will after the payment be, unable to pay our liabilities asthey become due or if the realizable value of our assets will therebybe less than the aggregate of our liabilities and our issued sharecapital and share premium accounts. Under the Companies Act, when acompany issues shares, the aggregate paid in par value of the issuedshares comprises the company's share capital account. Whenshares are issued at a ‘‘premium’’, thatis, where the actual sum paid for a share exceeds the par value of theshare, the amount paid in excess of the par value must be allocated toand maintained in a capital 

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account called the ‘‘sharepremium account.’’ As of March  31,  2006,Quanta Holdings has approximately $656.9  million in its sharepremium account. Quanta Holdings has a high share premium account dueto the significant difference between the $0.01 par value of our commonshares and series A preferred shares and the amounts paid for thoseshares in recent and historical offerings of the Company. The CompaniesAct requires shareholder approval prior to any reduction of our sharecapital or share premium accounts. Bermuda law also provides that wemaintain a contributed surplus account, to which we must allocate,among other things, shareholder capital which is unrelated to any sharesubscription.

We believe that we currently have sufficientassets to pay our foreseen liabilities as they become due. As a resultof our losses, for Bermuda company law purposes, the realizable valueof our assets may no longer exceed the aggregate of our liabilities andour issued share capital and share premium accounts. If this deficiencyexists, we would be prohibited by Bermuda company law from payingdividends or making distributions to our shareholders, including ourholders of series A preferred shares. In order for Quanta Holdings tohave the flexibility to pay dividends to shareholders, we have filed adefinitive proxy statement including a proposal to our commonshareholders for the approval of a reduction of $656.9  millionfrom the share premium account and reallocation of that sum to ourcontributed surplus account. If our common shareholders do not approveany such proposal, we may be restricted by Bermuda company law fromdeclaring or paying dividends to our holders of series A preferredshares and other shareholders. We cannot make any assurances that wewill have the ability to declare and pay dividends under Bermuda law toour shareholders in the future. In addition, even if our shareholdersapprove this proposal and we are permitted by law to declare and paydividends, we cannot assure you that future losses or other eventscould not impair our ability to pay dividends to ourshareholders.

While our financial advisors are helping us toevaluate the use of potential excess capital to return value to ourshareholders, in addition to the restrictions described above relatingto our operating subsidiaries, we may be limited in the amount of anydividends that could be paid on, or the amount of any redemption of,our shares. Under Bermuda law, we may not declare or pay a dividend orredeem our shares (including our series A preferred shares) at any timeif we have reasonable grounds for believing that we are, or after thepayment or redemption would be, unable to pay our liabilities as theybecome due. We also may not declare or pay a dividend or redeem ourshares (including our series A preferred shares) except out of thecapital paid up thereon, out of our issued share capital and sharepremium accounts or, in the case of a redemption, out of the proceedsof a new issue of shares made for the purpose of the redemption. Oursecured letter of credit and revolving credit facility also containprovisions prohibiting the payment of dividends on common shares orredemption of our shares, as well as the payment of dividends on ourseries A preferred shares if a default exists under thefacility.

For additional discussion concerning risks relating toour dividend policy and our holding company structure and its effect onour ability to receive and pay dividends, see ‘‘FinancialCondition and Liquidity’’ above. See also note 1 to ourDecember  31,  2005 consolidated financial statementsincluded in our Form 10-K.

Commitments

We havecontractual obligations relating to our reserves for losses and lossexpenses and commitments under the trust preferred securities,preferred shares and non-cancelable operating leases for property andoffice equipment described above under‘‘Liquidity’’ as of March  31,2006 as follows:

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|                                         |  |                                       |         |                 |  |           |         |           |  |                 |         |        |  |        |         |        |  |        |         |           |  |  |
|-----------------------------------------|--|---------------------------------------|---------|-----------------|--|-----------|---------|-----------|--|-----------------|---------|--------|--|--------|---------|--------|--|--------|---------|-----------|--|--|
|                                    |  | Paymentsdue by period ($ inthousands) |
| Contractualobligations($000's)          |  | Total                                 |         | Lessthan 1 year |  | 1-3 years |         | 3-5 years |  | Morethan 5years |
| Reserve for losses and lossexpenses     |  | $                                     | 592,252 |            |  | $         | 282,097 |      |  | $               | 144,384 |   |  | $      | 83,812  |   |  | $      | 81,959  |      |
| Intereston long-term debtobligations(1) |  |                                  | 153,005 |            |  |      | 5,088   |      |  |            | 10,175  |   |  |   | 10,175  |   |  |   | 127,567 |      |
| Long-termdebtobligations                |  |                                  | 61,857  |            |  |      | — |      |  |            | — |   |  |   | — |   |  |   | 61,857  |      |
| Operatingleaseobligations               |  |                                  | 41,119  |            |  |      | 5,471   |      |  |            | 8,062   |   |  |   | 6,443   |   |  |   | 21,143  |      |
| Dividendson preferredshares             |  |                                  | 37,769  |            |  |      | 8,022   |      |  |            | 16,044  |   |  |   | 13,703  |   |  |   |         | (2)  |
| Total                                   |  | $                                     | 886,002 |            |  | $         | 300,678 |      |  | $               | 178,665 |   |  | $      | 114,133 |   |  | $      | 292,526 |      |
|                                         |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                           |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Theinterest on the long-term debt obligation is based on a spread aboveLIBOR. We have reflected the interest due based upon the currentinterest rate at March  31,  2006 on the facility. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Dividends on our 10.25% series Apreferred shares is based on a dividend of $2.5625 per share. We havenot estimated dividends payable on our series A preferred shares asthey are perpetual and have no fixed mandatory redemption date unless achange of control occurs or we are able to redeem the preferred shares.We do not have the right to redeem our series A preferred shares untilon or after December  15,  2010. Assuming 3,130,525 sharesof our series A preferred shares are outstanding during any applicableperiod, we would be required to pay dividends, on an annual basis, ofan aggregate of approximately $8.0  million. |

Ourreserve for losses and loss expenses consists of case reserves andIBNR. In assessing the adequacy of these reserves, it must be notedthat the actual costs of settling claims is uncertain as it dependsupon future events. Many of these events will be out of our control andcould potentially affect the ultimate liability and timing of anypotential payment. There is necessarily a range of possible outcomesand the eventual outcome will certainly differ from the projectionscurrently made. This uncertainty is heightened by the short time inwhich we have operated, thereby providing limited company-specificclaims loss emergence patterns. Consequently, we must use industrybenchmarks, on a line by line basis, in deriving IBNR which, despitemanagement's and our independent actuary's care inselecting them, will differ from actual experience.

Similarly, wehave limited loss payout pattern information specific to ourexperience, therefore we have used industry data, on a line by linebasis, to estimate our expected payments. Consequently, despitemanagement's care in selecting them, the actual payment of ourreserve for losses and loss expenses will differ from estimatedpayouts.

Off-Balance Sheet Arrangements

Other than ourtrust preferred securities offerings through the Quanta CapitalStatutory Trust I and Quanta Capital Statutory Trust II (together‘‘Quanta Trust I and II’’), as ofMarch  31,  2006, we have not entered into any off-balancesheet arrangements with special purpose entities or variable interestentities. We did not consolidate Quanta Trust I and II, the issuer ofthe trust preferred securities and a variable interest entity, since weare not the primary beneficiary of Quanta Trust I or II. As ofMarch  31,  2006, we have recorded the $61.9  millionof Debentures, which were issued to Quanta Trust I and II, on ourconsolidated balance sheet. The net proceeds of $58.4  millionfrom the sale of the Debentures to Quanta Trust I and II were used forworking capital purposes and our business. Distributions will bepayable at a variable per annum rate of interest, reset quarterly,equal to LIBOR plus 385 basis points by the Company to Quanta Trust Iand equal to LIBOR plus 350 basis points by the Company to Quanta TrustII as described above under‘‘Commitments.’’ The Debentures areredeemable at the Company's option at par beginning March15,  2010.

Adequacy of Regulatory and RatingCapital

While insurance regulation differs by location, eachjurisdiction requires that minimum levels of capital be maintained inorder to write new insurance business. Factors that affect capitalrequirements generally include premium volume, the extent and nature ofloss and loss expense reserves, the type and form of insurance andreinsurance business underwritten and the availability of reinsuranceprotection from adequately rated retrocessionaires on terms that areacceptable to us.

In all of the jurisdictions in which we operateinsurers and reinsurers are required to maintain certain minimum levelsof capital and risk-based capital, the calculation of which includesnumerous 

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factors as specified by the respectiveinsurance regulatory authorities and the related insurance regulations.We capitalize our insurance operations in excess of the minimumregulatory requirements in order to enable us to write more businessand to be more selective in the business we underwrite. Accordingly,allocation of capital sufficient to achieve business objectives is acritical aspect of any insurance organization, particularly aninsurance operation with a limited operating history such asours.

On March  2,  2006, A.M. Best announced that ithad downgraded the financial strength rating assigned to Quanta Bermudaand its subsidiaries and Quanta Europe, to‘‘B++’’ (very good), under review withnegative implications. The A.M. Best ‘‘A’’(excellent) rated Lloyd's market, including our Lloyd'ssyndicate, was not subject to the rating downgrade. On March2,  2006, A.M. Best announced that it had downgraded thefinancial strength rating assigned to Quanta Bermuda and itssubsidiaries and Quanta Europe, to ‘‘B++’’(very good), and placed those companies under review with negativeimplications. The recent downgrade of our financial ratings has had asignificant adverse effect on our ability to conduct our business inour current product lines and on our ability to execute our businessstrategy. For further discussion of these recent developments, see‘‘Overview. A.M. Best Rating Actions, StrategicAlternatives and Evaluation’’ above. A.M. Best mayfurther downgrade our ratings. There is no assurance as to what ratingactions A.M. Best may take now or in the future or whether A.M. Bestwill further downgrade our rating or will remove any qualification ofour rating.

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 OurOperating Subsidiaries

Our Bermuda, United Kingdom, and Irishoperating subsidiaries are not licensed, accredited or otherwiseapproved as reinsurers anywhere in the United States. Many U.S.jurisdictions do not permit insurance companies to take credit on theirU.S. statutory financial statements for reinsurance to cover unpaidliabilities, such as loss and loss adjustment expense and unearnedpremium reserves, obtained from unlicensed or non-admitted insurerswithout 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 weentered into a secured bank credit facility with a syndicate of lendersthat allows us to provide to our insured clients up to $250million in letters of credit as security under the terms of insuranceand reinsurance contracts. The availability to a borrower is based onthe 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. Wecurrently have approximately $215.5 million of secured letters ofcredit issued and outstanding under the facility.

As ofMarch  31,  2006, we have approximately $258.2million that is pledged as collateral for letters of credit,approximately $175.0  million held in trust funds for the benefitof ceding companies and to fund our obligations associated with theassumption of an environmental remediation liability, $154.9million that is held by Lloyd's to support our underwritingactivities, $51.2  million held in trust funds that are relatedto our deposit liabilities and $29.7  million that is on depositwith, or has been pledged to, U.S. state insurance departments.

Some of our insurance and many of our reinsurance contracts containtermination rights that are triggered by the A.M. Best ratingdowngrade. Some of these insurance and reinsurance contracts alsorequire us to post additional security. As a result, we may be requiredto post additional security either through the issuance of letters ofcredit or the placement of securities in trust under the terms of thoseinsurance or reinsurance contracts. We may also elect to post securityunder other insurance contracts in order to maintain that business. Wecurrently have net cash and cash equivalent balances of approximately$77.9  million that are available to post as security or place intrust.

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We cannot draw letters of credit orborrow under our existing credit agreement if we have incurred amaterial adverse effect or if a default exists under the agreement. Ifwe fail to maintain or enter into adequate letter of credit facilitieson a timely basis, we may be unable to provide necessary security tocedent companies under our existing retrocessional and reinsurancecontracts that have the right to require the posting of additionalsecurity by reason of the downgrade of our A.M. Best rating. We cannotassure you that we will be able to increase the commitment under ourexisting bank credit facility or obtain additional credit facilities atterms acceptable to us. Our inability to maintain or enter intoadequate credit facilities would have a material adverse effect on ourresults of operations.

Ratings

Ratings by independentagencies are an important factor in establishing the competitiveposition of insurance and reinsurance companies and are important toour ability to market and sell our products. Rating organizationscontinually review the financial positions of insurers. S&Pmaintains a letter scale rating system ranging from‘‘AAA’’ (Extremely Strong) to‘‘R’’ (under regulatory supervision). A.M.Best maintains 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.

On March  2,  2006, A.M. Best announced that ithad downgraded the financial strength rating assigned to Quanta Bermudaand its subsidiaries and Quanta Europe, to‘‘B++’’ (very good), and placed thosecompanies under review with negative implications. The recent downgradeof our financial ratings has had a significant adverse effect on ourability to conduct our business in our current product lines and on ourability to execute our business strategy. For further discussion ofthese recent developments, see ‘‘Overview. A.M. BestRating Actions, Strategic Alternatives and Evaluation’’above. A.M. Best may further downgrade our ratings. There is noassurance as to what rating actions A.M. Best may take now or in thefuture or whether A.M. Best will further downgrade our rating or willremove any qualification of our rating. A‘‘B++’’ (very good) rating is the fifthhighest of fifteen rating levels and indicates A.M. Best'sopinion of our financial strength and ability to meet ongoingobligations to our future policyholders. We have not been rated by anyrating agency other than A.M. Best.

Critical Accounting Policiesand Estimates

Our management makes certain judgments, estimatesand assumptions in the application of accounting policies used todetermine inherently subjective amounts reported in our condensedconsolidated financial statements. If management uses differentassumptions and estimates than it currently does, it could producematerially different estimates of the reported amounts. For a detaileddiscussion of our critical accounting policies, judgments, estimatesand assumptions management uses please refer to the Form 10-K for theyear ended December  31,  2005 as filed with the SEC onMarch  31,  2006. There have been no significant changes inthe application of our critical accounting policies and estimatessubsequent to December  31,2005.

Accounting for stock-basedcompensation

The Company has a long-term stock-based employeeincentive plan (the ‘‘Incentive Plan’’),which is described more fully in Note 8. Prior to January1,  2006, the Company accounted for the Incentive Plan under therecognition and measurement provisions of APB Opinion No. 25,Accounting for Stock Issued to Employees (‘‘APB25’’) and related Interpretations, as permitted by FASBStatement No. 123, Accounting for Stock-Based Compensation(‘‘SFAS 123’’). No stock-based employeecompensation cost was recognized in the Statement of Operations for theyears ended December  31,  2005 or 2004, as all optionsgranted under the Incentive Plan had an exercise price equal to themarket value of the underlying common stock on the date of grant.Effective January  1,  2006, the Company adopted the

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fair value recognition provisions of FASBStatement No. 123(R), Share-Based Payment (‘‘SFAS123(R)’’), using the modified-prospective-transitionmethod. Under that transition method, compensation cost recognized inthe first quarter of 2006 includes: (a) compensation cost for allshare-based payments granted prior to, but not yet vested as ofJanuary  1,  2006, based on the grant date fair valueestimated in accordance with the original provisions of SFAS 123, and(b) compensation cost for all share-based payments granted subsequentto January  1,  2006, based on the grant-date fair valueestimated in accordance with the provisions of SFAS 123(R). Results forprior periods have not been restated.

As a result of adoptingSFAS 123(R) on January  1,  2006, the Company's lossbefore income taxes and net loss for the three months endedMarch  31,  2006, are $0.4  million greater than ifit had continued to account for share-based compensation under APB 25.Basic and diluted earnings per share for the period ended March31,  2006 would have been $(0.24), which is the same result as ifthe Company had not adopted SFAS 123(R).

As of March31,  2006, there was $2.7  million of total unrecognizedcompensation cost related to non vested share-based compensationarrangements related to stock options and performance share unitsgranted under the Incentive Plan. This cost is expected to berecognized over a weighted-average period of 2.06 years.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK 

Market risk can be described as therisk of change in fair value of a financial instrument due to changesin interest rates, creditworthiness, foreign exchange rates or otherfactors. We are exposed to potential loss from these factors. Our mostsignificant financial instruments are our investment assets whichconsist primarily of fixed maturity securities and cash equivalentsthat are denominated in both U.S. and foreign currencies. Externalinvestment professionals manage our investment portfolios in accordancewith our investment guidelines. Our investment guidelines also permitour investment managers to use derivative instruments in very limitedcircumstances. We will seek to mitigate market risks by a number ofactions, as described below.

Derivative ValuationRisk

Our derivative policy permits the use of derivativesto manage our portfolio's duration, yield curve, currencyexposure, credit exposure, exposure to volatility and to take advantageof inefficiencies 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 portfolioguidelines.

Foreign Currency Risk and FunctionalCurrency

Our reporting currency is the U.S. dollar.Although we have not experienced any significant net exposures toforeign currency risk, we expect that in the future our exposure tomarket risk for changes in foreign exchange rates will be concentratedin our investment assets, investments in foreign subsidiaries, premiumsreceivable and insurance reserves arising from known or probable lossesthat are denominated in foreign currencies. We generally manage ourforeign currency risk by maintaining assets denominated in the samecurrency as our insurance liabilities resulting in a natural hedge orby entering into foreign currency forward derivative contracts in aneffort to hedge against movements in the value of foreign currenciesagainst the U.S. dollar. These contracts are not designated as specifichedges for financial reporting purposes and therefore realized andunrealized gains and losses on these 

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contracts are recorded in income in theperiod in which they occur. These contracts generally have maturitiesof three months or less. A foreign currency forward contract results inan obligation to purchase or sell a specified currency at a future dateand price specified at the time of the contract. Foreign currencyforward contracts will not eliminate fluctuations in the value of ourassets and liabilities denominated in foreign currencies but ratherallow us to establish a rate of exchange for a future point in time. Wehave not and do not expect to enter into such contracts with respect toa material amount of our assets or liabilities.

Our non-U.S.subsidiaries maintain both assets and liabilities in their functionalcurrencies, principally Euro and sterling. Assets and liabilitiesdenominated in foreign currencies are exposed to changes in currencyexchange rates. Exchange rate fluctuations in Euro and sterlingfunctional currencies against our U.S. dollar reporting currency arereported as a separate component of other comprehensive (loss) incomein shareholders' equity. Foreign exchange risk associated withnon-US dollar functional currencies of our foreign subsidiaries isreviewed as part of our risk management process and we employ foreigncurrency risk management strategies, as described above, to manage ourexposure. Exchange rate fluctuations against non-U.S. dollar functionalcurrencies may materially impact our consolidated statement ofoperations and financial position.

Our investment guidelineslimit the amount of our investment portfolio that may be denominated inforeign currencies to 20% (as measured by market value).Furthermore, our guidelines limit the amount of foreign currencydenominated investments that can be held without a corresponding hedgeagainst the foreign currency exposure to 5% (as measured bymarket value). As of March  31,  2006, our investmentportfolio included $0.9  million of our total net investedassets, of securities that were denominated in foreign currencies andwere purchased by our investment managers for the purpose of improvingoverall portfolio yield. These securities were rated AAA and weresubstantially hedged into U.S. dollars according to our investmentguidelines by entering into foreign currency forward contracts. AtMarch  31,  2006, the net fair market value of foreigncurrency forward contracts relating to foreign currency denominatedinvestments was negligible.

Interest RateRisk

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

Our strategy for managing interest rate risk includesmaintaining a high quality investment portfolio that is activelymanaged by our managers in accordance with our investment guidelines inorder to balance our exposure to interest rates with the requirement totailor the duration, yield, currency and liquidity characteristics tothe anticipated cash outflow characteristics of claim reserveliabilities. As of March  31,  2006, 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 $885.5  million would have been anestimated decrease in market value of approximately $26.4million, or 2.9%, and the impact on our net invested assets,including cash and cash equivalents, under management by third-partyinvestment managers of an immediate 100 basis point decrease in marketinterest rates would have been an estimated increase in market value ofapproximately $23.4  million, or 2.6%.

As ofMarch  31,  2006, our investment portfolio included AAArated mortgage-backed securities with a market value of $234.5million, or 28.4%, excluding trading investments related todeposit liabilities. As with other fixed income investments, the fairmarket value of these securities fluctuates depending on market andother general economic conditions and the interest rate environment.Changes in interest rates can also expose us to prepayment andextension risks on these investments. In periods of declining interestrates, the frequency of mortgage prepayments generally increase asmortgagees seek to refinance at a lower interest rate cost. Mortgageprepayments result in the early repayment of the underlying principalof mortgage-backed securities requiring 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 morethan 5% of our investment portfolio's market value shallbe invested in securities rated below BBB−/Baa3. We also limitour exposure 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 March31,  2006, the average credit quality of our investment portfoliowas AA+, and all fixed income securities held were investmentgrade.

We are also exposed to the credit risk of our insuranceand reinsurance brokers to whom we make claims payments for insuredsand our reinsureds, as well as to the credit risk of our reinsurers andretrocessionaires who assume business from us. As of March31,  2006, our loss and loss adjustment expenses recoverable fromreinsurers balance was $198.3  million. To mitigate the risk ofnonpayment of amounts due under these arrangements, we have establishedbusiness and financial standards for reinsurer and broker approval,incorporating ratings by major rating agencies and considering thefinancial condition of the counterparty and the current marketinformation. In addition, we monitor concentrations of credit riskarising from our reinsurers, regularly review our reinsurers'financial strength ratings and obtain letters of credit tocollateralize balances due.

We are also exposed to credit riskrelating to our premiums receivable balance. As of March31,  2006, our premiums receivable balance was $147.0million. We believe that credit risk exposure related to these balancesis mitigated 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 provide the right to 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 amaterial effect on our consolidated results of operations. The effectsof inflation 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.

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ITEM 4. CONTROLS ANDPROCEDURES 

Evaluation of Disclosure Controlsand Procedures

In connection with the preparation of thisquarterly report, we have carried out an evaluation under thesupervision of, and with the participation of, our management,including our Interim Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of ourdisclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) of the Exchange Act) as of March  31,  2006.

Limitations on the Effectiveness of Controls

There areinherent limitations to the effectiveness of any system of disclosurecontrols and procedures, including the possibility of human error andthe circumvention or overriding of the controls and procedures.Accordingly, even effective disclosure controls and procedures can onlyprovide reasonable assurance of achieving their control objectives. Ourevaluation identified material weaknesses in our internal control overfinancial reporting as discussed in ‘‘Management'sReport on Internal Control Over Financial Reporting’’contained in our Form 10-K for the year ended December31,  2005, all of which remain unremediated at the end of theperiod covered by this report. These deficiencies in internal controlover financial reporting may also constitute deficiencies in ourdisclosure controls and procedures.

Because of the materialweaknesses discussed in our Form 10-K, our Interim Chief ExecutiveOfficer and Chief Financial Officer have concluded our disclosurecontrols and procedures were not effective as of March31,  2006, to provide reasonable assurance that informationrequired to be disclosed by us in the reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported,within the time periods specified in the applicable rules and forms,and that such information is accumulated and communicated to ourmanagement, including our Interim Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regardingrequired disclosure.

Notwithstanding these material weaknessesdiscussed in our Form 10-K, management believes the financialstatements contained in this quarterly report are fairly presented inall material respects, in accordance with generally accepted accountingprinciples.

Changes in Internal Control Over FinancialReporting

In connection with the evaluation described above, weidentified no change in our internal control over financial reporting(as such term is defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act), that occurred during the three months ended March31,  2006, that has materially affected, or is reasonably likelyto materially affect, our internal control over financialreporting.

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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 1A.    RiskFactors

Information regarding risk factors appears in‘‘Management's Discussion and Analysis of FinancialCondition and Results of Operations — Safe HarborDisclosure,’’ in Part I — Item 2 of this Form 10-Qand in Part I — Item 1A, ‘‘RiskFactors,’’ of our Form 10-K for the year endedDecember  31,  2005. The information presented belowupdates, and should be read in conjunction with, the risk factors andinformation disclosed in our Form10-K and should also be read inconjunction with the information disclosed elsewhere in this report onForm 10-Q.

The downgrade of our ratings by A.M. Bestpermits clients to terminate their contracts with us. Many otherclients may terminate their contracts with us regardless of ourfinancial strength rating, including the program managers under ourprograms. Based on our discussions with the program manager of ourresidential builders' and contractors' program, or HBWprogram, we expect that the program manager will divert a substantialportion of its business to other carriers during2006.

Certain of our insurance and many of our reinsurancecontracts contain termination rights triggered by the A.M. Best ratingdowngrade. Furthermore, many of our other insurance contracts andcertain of our reinsurance contracts provide for cancellation at theoption of the policyholder regardless of our financial strength rating.A cancellation typically results in the termination of the policy andour ongoing obligations and the return of premiums to our client thatfrequently approximates our unearned premium reserve as of the date ofthe cancellation. Whether a client would exercise such rights woulddepend, among other things, on the reasons for the downgrade, theextent of the downgrade, the prevailing market conditions, whether wehave posted security in respect of our obligations and the pricing andavailability of replacement coverage. We cannot predict in advance howmany of our clients will actually exercise such rights or the effectsuch cancellations will have on our financial condition or futureprospects. However, depending on the number of contracts involved, suchan effect could be materially adverse. As of April  30,2006, we had received notice of cancellation on approximately5.7% of our in-force policies, calculated using originalcontract gross premiums written related to those cancelled policies asa percentage of total gross premiums written during 2005. As a result,we estimate that the gross and net premiums written under the HBWprogram during 2006 will be less than 35% of the gross and netpremiums written during 2005. Gross unearned premiums relating to thesecancellations that we have returned or expect to return to our clientstotal approximately $15.6  million. With respect to our HBWprogram, based on our discussions with the program manager, weunderstand that it will divert a substantial portion of the HBW programbusiness to other carriers during 2006. Some carriers have commencedwriting this business in certain states and are seeking approval inother states. We also understand that other carriers are innegotiations with the HBW program manager. We expect that we willreceive additional cancellations.

As a result ofthe recent downgrade of our financial strength rating by A.M. Best, weare closely analyzing our business lines, positioning in the market andinternal operations and identifying steps we should take to preserveshareholder value and improve our position, including the explorationof strategic alternatives. The implementation of any changes based onsuch analysis or of any strategic alternatives involves substantialuncertainties and risk, and our results of operations, business andfinancial strength rating may be materially and adversely impacted ifwe do not succeed in implementing suchinitiatives.    

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We are exploring strategic alternatives,including the potential sale of some or all of our business, the runoff of certain product lines or the business or a combination ofalternatives. In addition, as a result of the impact of the recentrating action by A.M. Best, we have implemented key steps designed topreserve shareholder value. We are analyzing our business lines, theirpositioning and internal operations. In connection with this analysis,we have identified those business lines to continue and those businesslines we intend to no longer seek new business pending a finaldetermination of the strategic alternatives by the Board of Directors.In this regard, we currently plan to retain our programs, professionalliability and fidelity businesses in the United States, ourLloyd's syndicate in Europe and our environmental consultingservices through ESC in the United States. We have determined to nolonger seek new business in our marine and aviation and casualtyreinsurance and our environmental, surety and trade credit insurancelines. These initiatives and their implementation involve significantuncertainties and risks that may result in restructuring charges andunforeseen expenses and costs associated with exiting lines of businessand complications or delays. If we do not succeed in implementing theabove initiatives on a timely basis, our results of operations,business and financial strength rating may be materially and adverselyimpacted. Even if we successfully implement any of these measures,there can be no assurance that any of these measures alone may improveour results of operations, preserve shareholder value or maintain orimprove our financial strength rating.

Without theapproval by our common shareholders of a proposal to reduce our sharepremium account and reallocate certain capital to our contributedsurplus account, we may be restricted by law from declaring or payingdividends to our shareholders, including the holders of our series Apreferred shares.

As a result of our losses, for Bermudacompany law purposes, the realizable value of our assets may no longerexceed the aggregate of our liabilities and our issued share capitaland share premium accounts. If this deficiency exists, we would beprohibited by Bermuda company law from paying dividends or makingdistributions to our shareholders, including the holders of our seriesA preferred shares. For further discussion of our share capital andshare premium accounts, see ‘‘Item 2. Management'sDiscussion and Analysis of Financial Condition and Results ofOperations — Financial Condition and Liquidity —Liquidity — Dividends and Redemptions.’’

Inorder for Quanta Holdings to have the flexibility to pay dividends toshareholders, we have included in our definitive proxy statement, aproposal to our shareholders to reduce the share premium account by$656.9  million and reallocate that sum to our contributedsurplus account, which we intend to submit for approval at the 2006annual general meeting. This reduction of our share premium account andreallocation to the contributed surplus account requires the approvalof our common shareholders to be effective. If our common shareholdersdo not approve any such proposal, we may be restricted by Bermudacompany law from declaring or paying dividends to the holders of ourseries A preferred shares and other shareholders. We cannot make anyassurances that we will have the ability to declare and pay dividendsunder Bermuda law to our shareholders in the future. In addition, evenif our common shareholders approve this proposal and we are permittedby law to declare and pay dividends, we cannot assure you that futurelosses or other events could not impair our ability to pay dividends toour shareholders.

Item6.    Exhibits

|      |  |                                                                                                                                                                                                                                                                       |  |  |  |  |
|------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| 10.1 |  | Separation Agreement and General Release,effective January  3,  2006, by and between Quanta CapitalHoldings Ltd. and Tobey J. Russ (incorporated by reference from Exhibit10.1 to the Company's Current Report on Form 8-K datedJanuary  9,2006).                     |
| 10.2 |  | Retention Agreement by andbetween Quanta Capital Holdings Ltd. and Jonathan J.R. Dodd, datedMarch  30,  2006 (incorporated by reference from Exhibit10.35 to the Company's Annual Report on Form 10-K for the yearended December  31,  2005 filed on March  31,2006). |
|      |

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|       |  |                                                                                                                                                                                                                    |  |  |  |  |
|-------|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| 10.3  |  | Form of RestrictedShare Agreement (incorporated by reference from Exhibit 10.1 to theCompany's Amendment No. 1 on Form 10-K/A to its Annual Report forthe year ended December  31,  2005 filed on April28,  2006). |
| 31.1* |  | Certification ofthe Principal 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 PrincipalFinancial 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 PrincipalExecutive 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 PrincipalFinancial Officer pursuant to 18 U.S.C Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of2002.                                                             |
|       |

|  |
|--|
|  |  |
|  |

|  |                                   |
|--|-----------------------------------|
|  | *   Filedherewith. |

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SIGNATURES

Pursuantto the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.

|                                         |  |                                                                                   |  |  |  |  |  |  |  |  |
|-----------------------------------------|--|-----------------------------------------------------------------------------------|--|--|--|--|--|--|--|--|
|                                    |  | QuantaCapital HoldingsLtd.                                                        |
| Date:    May 9,2006 |  | /s/ Robert LippincottIII                                                          |
|                                    |  | Robert LippincottIII(On behalf of the registrant and asPrincipalExecutiveOfficer) |
| Date:    May 9,2006 |  | /s/ Jonathan J.R.Dodd                                                             |
|                                    |  | Jonathan J.R.Dodd(Principal FinancialOfficer)                                     |
|                                         |

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Index toExhibits

|       |  |                                                                                                                                                                                                                                                                       |  |  |  |  |
|-------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| 10.1  |  | SeparationAgreement and General Release, effective January  3,  2006,by and between Quanta Capital Holdings Ltd. and Tobey J. Russ(incorporated by reference from Exhibit 10.1 to the Company'sCurrent Report on Form 8-K dated January  9,2006).                     |
| 10.2  |  | Retention Agreement by andbetween Quanta Capital Holdings Ltd. and Jonathan J.R. Dodd, datedMarch  30,  2006 (incorporated by reference from Exhibit10.35 to the Company's Annual Report on Form 10-K for the yearended December  31,  2005 filed on March  31,2006). |
| 10.3  |  | Form of Restricted ShareAgreement (incorporated by reference from Exhibit 10.1 to theCompany's Amendment No. 1 on Form 10-K/A to its Annual Report forthe year ended December  31,  2005 filed on April28,  2006).                                                    |
| 31.1* |  | Certification of thePrincipal 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 PrincipalFinancial 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 PrincipalExecutive 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 PrincipalFinancial Officer pursuant to 18 U.S.C Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of2002.                                                                                                                |
|       |

|  |
|--|
|  |  |
|  |

|  |                                   |
|--|-----------------------------------|
|  | *   Filedherewith. |

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