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 September30,  2006

|  |        |                                                                                        |
|--|--------|----------------------------------------------------------------------------------------|
|  |   | TRANSITION REPORTPURSUANT TO SECTION 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 its charter)

|                                                              |  |  |                                                     |
|--------------------------------------------------------------|--|--|-----------------------------------------------------|
| Bermuda                                                      |  |  | N/A                                                 |
| (Stateor other jurisdiction of incorporation ororganization) |  |  | (I.R.S. Employer IdentificationNo.)                 |
| 1Victoria Street, Second FloorHamiltonHM11Bermuda            |  |  | 441-294-6350                                        |
| (Address of principal executive officesand zip code)         |  |  | (Registrant's telephone number, includingarea code) |
|                                                              |

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. (Checkone).

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 ofNovember  8,  2006 there were 70,008,185 common shares,$0.01 par value per share,outstanding.

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QUANTACAPITAL HOLDINGS LTD.

INDEX TO FORM10-Q

|         |  |  |                                                                                                                                         |  |  |         |  |        |  |
|---------|--|--|-----------------------------------------------------------------------------------------------------------------------------------------|--|--|---------|--|--------|--|
|    |  |  |                                                                                                                                    |  |  | PageNo. |
| PARTI.  |  |  | FINANCIALINFORMATION                                                                                                                    |  |  |         |  |   |  |
| Item1   |  |  | FinancialStatements                                                                                                                     |  |  |         |  | 3      |  |
|    |  |  | Condensed ConsolidatedBalance Sheets at September 30, 2006 (unaudited) andDecember 31,2005                                              |  |  |         |  | 3      |  |
|    |  |  | Unaudited CondensedConsolidated Statements of Operations for the three and ninemonths ended September 30, 2006 and2005                  |  |  |         |  | 4      |  |
|    |  |  | Unaudited CondensedConsolidated Statements of Comprehensive Income (Loss) for the threeand nine months ended September 30, 2006 and2005 |  |  |         |  | 5      |  |
|    |  |  | Unaudited CondensedConsolidated Statements of Changes in Shareholders' Equity forthe nine months ended September 30, 2006 and2005       |  |  |         |  | 6      |  |
|    |  |  | Unaudited CondensedConsolidated Statements of Cash Flows for the nine monthsended September 30, 2006 and 2005                           |  |  |         |  | 7      |  |
|    |  |  | Notes to the Unaudited CondensedConsolidated FinancialStatements                                                                        |  |  |         |  | 8      |  |
| Item2   |  |  | Management's Discussion and Analysis of FinancialCondition and Results ofOperations                                                     |  |  |         |  | 30     |  |
| Item3   |  |  | Quantitative and Qualitative Disclosures about MarketRisk                                                                               |  |  |         |  | 80     |  |
| Item 4  |  |  | Controlsand Procedures                                                                                                                  |  |  |         |  | 83     |  |
| PARTII. |  |  | OTHERINFORMATION                                                                                                                        |  |  |         |  |   |  |
| Item1   |  |  | LegalProceedings                                                                                                                        |  |  |         |  | 84     |  |
| Item1A  |  |  | Risk Factors                                                                                                                            |  |  |         |  | 84     |  |
| Item6   |  |  | Exhibits                                                                                                                                |  |  |         |  | 84     |  |
|         |

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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)

|                                                                                                                                                                                                       |  |  |                  |   |           |                  |  |  |  |   |           |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|------------------|---|-----------|------------------|--|--|--|---|-----------|---|
|                                                                                                                                                                                                  |  |  | September30,2006 |   |           | December 31,2005 |
|                                                                                                                                                                                                  |  |  | (unaudited)      |   |           |             |
| Assets                                                                                                                                                                                                |  |  |                  |   |      |                  |  |  |  |   |      |   |
| Investmentsat fair value (amortized cost: September  30,  2006,$818,590; December  31,  2005,$736,425)                                                                                                |  |  |                  |   |      |                  |  |  |  |   |      |   |
| Available forsaleinvestments                                                                                                                                                                          |  |  |                  | $ | 789,870   |                  |  |  |  | $ | 699,121   |   |
| Tradinginvestments related to depositliabilities                                                                                                                                                      |  |  |                  |   | 37,376    |                  |  |  |  |   | 38,316    |   |
| Totalinvestments at fairvalue                                                                                                                                                                         |  |  |                  |   | 827,246   |                  |  |  |  |   | 737,437   |   |
| Cash and cashequivalents                                                                                                                                                                              |  |  |                  |   | 46,167    |                  |  |  |  |   | 178,135   |   |
| Restrictedcash and cashequivalents                                                                                                                                                                    |  |  |                  |   | 104,268   |                  |  |  |  |   | 82,843    |   |
| Accruedinvestmentincome                                                                                                                                                                               |  |  |                  |   | 5,378     |                  |  |  |  |   | 5,404     |   |
| Premiumsreceivable                                                                                                                                                                                    |  |  |                  |   | 39,077    |                  |  |  |  |   | 115,055   |   |
| Fundswithheld by cedants                                                                                                                                                                              |  |  |                  |   | 21,014    |                  |  |  |  |   | 24,279    |   |
| Losses and lossadjustment expensesrecoverable                                                                                                                                                         |  |  |                  |   | 218,999   |                  |  |  |  |   | 190,353   |   |
| Otheraccountsreceivable                                                                                                                                                                               |  |  |                  |   | —   |                  |  |  |  |   | 9,495     |   |
| Netreceivable for investments sold                                                                                                                                                                    |  |  |                  |   | —   |                  |  |  |  |   | 3,047     |   |
| Deferred acquisitioncosts, net                                                                                                                                                                        |  |  |                  |   | 13,232    |                  |  |  |  |   | 33,117    |   |
| Deferredreinsurancepremiums                                                                                                                                                                           |  |  |                  |   | 54,081    |                  |  |  |  |   | 112,096   |   |
| Property andequipment, net of accumulated depreciation of $5,806 (December 31,2005: $4,874)                                                                                                           |  |  |                  |   | 2,769     |                  |  |  |  |   | 5,034     |   |
| Goodwilland other intangibleassets                                                                                                                                                                    |  |  |                  |   | 8,900     |                  |  |  |  |   | 24,877    |   |
| Otherassets                                                                                                                                                                                           |  |  |                  |   | 45,112    |                  |  |  |  |   | 30,919    |   |
| Totalassets                                                                                                                                                                                           |  |  |                  | $ | 1,386,243 |                  |  |  |  | $ | 1,552,091 |   |
| Liabilities                                                                                                                                                                                           |  |  |                  |   |      |                  |  |  |  |   |      |   |
| Reservefor losses and lossexpenses                                                                                                                                                                    |  |  |                  | $ | 618,660   |                  |  |  |  | $ | 533,983   |   |
| Unearnedpremiums                                                                                                                                                                                      |  |  |                  |   | 159,622   |                  |  |  |  |   | 336,550   |   |
| Environmentalliabilitiesassumed                                                                                                                                                                       |  |  |                  |   | 3,501     |                  |  |  |  |   | 5,911     |   |
| Reinsurancebalancespayable                                                                                                                                                                            |  |  |                  |   | 44,593    |                  |  |  |  |   | 57,499    |   |
| Accountspayable and accruedexpenses                                                                                                                                                                   |  |  |                  |   | 41,816    |                  |  |  |  |   | 39,051    |   |
| Net payablefor investmentspurchased                                                                                                                                                                   |  |  |                  |   | 3,606     |                  |  |  |  |   | —   |   |
| Depositliabilities                                                                                                                                                                                    |  |  |                  |   | 38,241    |                  |  |  |  |   | 51,509    |   |
| Deferredincome and otherliabilities                                                                                                                                                                   |  |  |                  |   | 3,933     |                  |  |  |  |   | 9,729     |   |
| Juniorsubordinateddebentures                                                                                                                                                                          |  |  |                  |   | 61,857    |                  |  |  |  |   | 61,857    |   |
| Totalliabilities                                                                                                                                                                                      |  |  |                  | $ | 975,829   |                  |  |  |  | $ | 1,096,089 |   |
| Mandatorilyredeemable Preferred shares ($0.01 par value; 25,000,000shares authorized; 3,130,525 issued and outstanding at September30,  2006 and 3,000,000 issued and outstanding at December31,2005) |  |  |                  | $ | 74,998    |                  |  |  |  | $ | 71,838    |   |
| Commitmentsand contingencies (Note8)                                                                                                                                                                  |  |  |                  |   |      |                  |  |  |  |   |      |   |
| Shareholders'equity                                                                                                                                                                                   |  |  |                  |   |      |                  |  |  |  |   |      |   |
| Common shares($0.01 par value; 200,000,000 shares authorized; 69,981,925 issuedand outstanding at September  30,  2006 and 69,946,861issued and outstanding at December  31,2005)                     |  |  |                  |   | 700       |                  |  |  |  |   | 699       |   |
| Additional paid-incapital                                                                                                                                                                             |  |  |                  |   | 582,416   |                  |  |  |  |   | 581,929   |   |
| Accumulateddeficit                                                                                                                                                                                    |  |  |                  |   | (256,004  | )                |  |  |  |   | (199,010  | ) |
| Accumulatedother comprehensiveincome                                                                                                                                                                  |  |  |                  |   | 8,304     |                  |  |  |  |   | 546       |   |
| Totalshareholders'equity                                                                                                                                                                              |  |  |                  | $ | 335,416   |                  |  |  |  | $ | 384,164   |   |
| Totalliabilities, redeemable Preferred shares and shareholders'equity                                                                                                                                 |  |  |                  | $ | 1,386,243 |                  |  |  |  | $ | 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

(Expressed in thousands of U.S. dollars exceptfor share and per shareamounts)

|                                                                               |  |  |                           |   |            |                          |  |  |                  |   |            |                  |  |  |  |   |            |   |  |  |  |   |            |   |
|-------------------------------------------------------------------------------|--|--|---------------------------|---|------------|--------------------------|--|--|------------------|---|------------|------------------|--|--|--|---|------------|---|--|--|--|---|------------|---|
|                                                                          |  |  | Forthe three months ended |   |            | For the nine monthsended |
|                                                                          |  |  | September30,2006          |   |            | September 30,2005        |  |  | September30,2006 |   |            | September30,2005 |
| Revenues                                                                      |  |  |                           |   |       |                          |  |  |                  |   |       |                  |  |  |  |   |       |   |  |  |  |   |       |   |
| Grosspremiumswritten                                                          |  |  |                           | $ | (6,693     | )                        |  |  |                  | $ | 171,542    |                  |  |  |  | $ | 141,075    |   |  |  |  | $ | 512,816    |   |
| Netpremiumswritten                                                            |  |  |                           | $ | (5,417     | )                        |  |  |                  | $ | 115,965    |                  |  |  |  | $ | 67,442     |   |  |  |  | $ | 386,206    |   |
| Changein net unearnedpremiums                                                 |  |  |                           |   | 54,619     |                          |  |  |                  |   | (15,419    | )                |  |  |  |   | 121,733    |   |  |  |  |   | (89,166    | ) |
| Netpremiumsearned                                                             |  |  |                           |   | 49,202     |                          |  |  |                  |   | 100,546    |                  |  |  |  |   | 189,175    |   |  |  |  |   | 297,040    |   |
| Technicalservicesrevenues                                                     |  |  |                           |   | 752        |                          |  |  |                  |   | 8,623      |                  |  |  |  |   | 2,947      |   |  |  |  |   | 9,793      |   |
| Netinvestmentincome                                                           |  |  |                           |   | 12,821     |                          |  |  |                  |   | 6,991      |                  |  |  |  |   | 35,350     |   |  |  |  |   | 18,403     |   |
| Netrealized gains (losses) oninvestments                                      |  |  |                           |   | 906        |                          |  |  |                  |   | (1,168     | )                |  |  |  |   | (14,142    | ) |  |  |  |   | (789       | ) |
| Netforeign exchangelosses                                                     |  |  |                           |   | (257       | )                        |  |  |                  |   | (311       | )                |  |  |  |   | (1,951     | ) |  |  |  |   | (336       | ) |
| Otherincome                                                                   |  |  |                           |   | 1,174      |                          |  |  |                  |   | 1,893      |                  |  |  |  |   | 2,692      |   |  |  |  |   | 5,456      |   |
| Totalrevenues                                                                 |  |  |                           |   | 64,598     |                          |  |  |                  |   | 116,574    |                  |  |  |  |   | 214,071    |   |  |  |  |   | 329,567    |   |
| Expenses                                                                      |  |  |                           |   |       |                          |  |  |                  |   |       |                  |  |  |  |   |       |   |  |  |  |   |       |   |
| Netlosses and lossexpenses                                                    |  |  |                           |   | 30,153     |                          |  |  |                  |   | 121,132    |                  |  |  |  |   | 134,178    |   |  |  |  |   | 241,234    |   |
| Acquisitionexpenses                                                           |  |  |                           |   | 8,415      |                          |  |  |                  |   | 22,998     |                  |  |  |  |   | 32,608     |   |  |  |  |   | 62,718     |   |
| Generaland administrativeexpenses                                             |  |  |                           |   | 20,578     |                          |  |  |                  |   | 30,675     |                  |  |  |  |   | 84,048     |   |  |  |  |   | 74,146     |   |
| Interestexpense                                                               |  |  |                           |   | 1,430      |                          |  |  |                  |   | 1,200      |                  |  |  |  |   | 4,036      |   |  |  |  |   | 2,971      |   |
| Depreciationof fixed assets and amortization of intangibleassets              |  |  |                           |   | 715        |                          |  |  |                  |   | 839        |                  |  |  |  |   | 1,983      |   |  |  |  |   | 2,159      |   |
| Totalexpenses                                                                 |  |  |                           |   | 61,291     |                          |  |  |                  |   | 176,844    |                  |  |  |  |   | 256,853    |   |  |  |  |   | 383,228    |   |
| Income(loss) from continuing operations before incometaxes                    |  |  |                           |   | 3,307      |                          |  |  |                  |   | (60,270    | )                |  |  |  |   | (42,782    | ) |  |  |  |   | (53,661    | ) |
| Incometaxexpense                                                              |  |  |                           |   | —    |                          |  |  |                  |   | 28         |                  |  |  |  |   | 47         |   |  |  |  |   | 470        |   |
| Netincome (loss) from continuing operations                                   |  |  |                           |   | 3,307      |                          |  |  |                  |   | (60,298    | )                |  |  |  |   | (42,829    | ) |  |  |  |   | (54,131    | ) |
| Dividendson Preferred shares                                                  |  |  |                           |   | —    |                          |  |  |                  |   | —    |                  |  |  |  |   | (1,916     | ) |  |  |  |   | —    |   |
| Netincome (loss) from continuing operations available to ordinaryshareholders |  |  |                           |   | 3,307      |                          |  |  |                  |   | (60,298    | )                |  |  |  |   | (44,745    | ) |  |  |  |   | (54,131    | ) |
| Discontinuedoperations:                                                       |  |  |                           |   |       |                          |  |  |                  |   |       |                  |  |  |  |   |       |   |  |  |  |   |       |   |
| (Loss)income from operations of discontinuedoperations                        |  |  |                           |   | (936       | )                        |  |  |                  |   | 1,214      |                  |  |  |  |   | (12,953    | ) |  |  |  |   | 2,933      |   |
| Incomeon disposal of discontinued operations                                  |  |  |                           |   | 704        |                          |  |  |                  |   | —    |                  |  |  |  |   | 704        |   |  |  |  |   | —    |   |
| Net(loss) income from discontinuedoperations                                  |  |  |                           |   | (232       | )                        |  |  |                  |   | 1,214      |                  |  |  |  |   | (12,249    | ) |  |  |  |   | 2,933      |   |
| Netincome (loss) available to ordinaryshareholders                            |  |  |                           | $ | 3,075      |                          |  |  |                  | $ | (59,084    | )                |  |  |  | $ | (56,994    | ) |  |  |  | $ | (51,198    | ) |
| Weightedaverage common share and common share equivalents–              |  |  |                           |   |       |                          |  |  |                  |   |       |                  |  |  |  |   |       |   |
| basic                                                                         |  |  |                           |   | 69,981,925 |                          |  |  |                  |   | 56,810,020 |                  |  |  |  |   | 69,970,237 |   |  |  |  |   | 56,804,119 |   |
| diluted                                                                       |  |  |                           |   | 69,984,614 |                          |  |  |                  |   | 56,810,020 |                  |  |  |  |   | 69,970,237 |   |  |  |  |   | 56,804,119 |   |
| Basicincome (loss) from continuing operations pershare                        |  |  |                           | $ | 0.04       |                          |  |  |                  | $ | (1.06      | )                |  |  |  | $ | (0.64      | ) |  |  |  | $ | (0.95      | ) |
| Basic(loss) income from discontinued operations pershare                      |  |  |                           | $ | (0.01      | )                        |  |  |                  | $ | 0.02       |                  |  |  |  | $ | (0.18      | ) |  |  |  | $ | 0.05       |   |
| Basicincome from disposal of discontinued operations pershare                 |  |  |                           | $ | 0.01       |                          |  |  |                  | $ | —    |                  |  |  |  | $ | 0.01       |   |  |  |  | $ | —    |   |
| Basicincome (loss) pershare                                                   |  |  |                           | $ | 0.04       |                          |  |  |                  | $ | (1.04      | )                |  |  |  | $ | (0.81      | ) |  |  |  | $ | (0.90      | ) |
| Dilutedincome (loss) from continuing operations pershare                      |  |  |                           | $ | 0.04       |                          |  |  |                  | $ | (1.06      | )                |  |  |  | $ | (0.64      | ) |  |  |  | $ | (0.95      | ) |
| Diluted(loss) income from discontinued operations pershare                    |  |  |                           | $ | (0.01      | )                        |  |  |                  | $ | 0.02       |                  |  |  |  | $ | (0.18      | ) |  |  |  | $ | 0.05       |   |
| Dilutedincome from disposal of discontinued operationspershare                |  |  |                           | $ | 0.01       |                          |  |  |                  | $ | —    |                  |  |  |  | $ | 0.01       |   |  |  |  | $ | —    |   |
| Dilutedincome (loss) pershare                                                 |  |  |                           | $ | 0.04       |                          |  |  |                  | $ | (1.04      | )                |  |  |  | $ | (0.81      | ) |  |  |  | $ | (0.90      | ) |
|                                                                               |

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

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QUANTA CAPITAL HOLDINGS LTD.UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(LOSS)(Expressed in thousands of U.S. dollars except for shareand per shareamounts)

|                                                                                                                      |  |  |                           |   |        |                          |  |  |                  |   |         |                   |  |  |  |   |         |   |  |  |  |   |         |   |
|----------------------------------------------------------------------------------------------------------------------|--|--|---------------------------|---|--------|--------------------------|--|--|------------------|---|---------|-------------------|--|--|--|---|---------|---|--|--|--|---|---------|---|
|                                                                                                                 |  |  | Forthe three months ended |   |        | For the nine monthsended |
|                                                                                                                 |  |  | September30,2006          |   |        | September 30,2005        |  |  | September30,2006 |   |         | September 30,2005 |
| Netincome (loss) available to ordinaryshareholders                                                                   |  |  |                           | $ | 3,075  |                          |  |  |                  | $ | (59,084 | )                 |  |  |  | $ | (56,994 | ) |  |  |  | $ | (51,198 | ) |
| Othercomprehensive income(loss)                                                                                      |  |  |                           |   |   |                          |  |  |                  |   |    |                   |  |  |  |   |    |   |  |  |  |   |    |   |
| Netunrealized investment gains (losses) arising during the period, net ofincome taxes of $0                          |  |  |                           |   | 9,606  |                          |  |  |                  |   | (7,222  | )                 |  |  |  |   | (5,785  | ) |  |  |  |   | (8,557  | ) |
| Foreigncurrency translation adjustments, net of income taxes of$0                                                    |  |  |                           |   | (160   | )                        |  |  |                  |   | 94      |                   |  |  |  |   | (599    | ) |  |  |  |   | 185     |   |
| Reclassificationof net realized (gains) losses on investments included in net income(loss), net of income taxes of$0 |  |  |                           |   | (906   | )                        |  |  |                  |   | 1,168   |                   |  |  |  |   | 14,142  |   |  |  |  |   | 789     |   |
| Othercomprehensive income(loss)                                                                                      |  |  |                           |   | 8,540  |                          |  |  |                  |   | (5,960  | )                 |  |  |  |   | 7,758   |   |  |  |  |   | (7,583  | ) |
| Comprehensiveincome(loss)                                                                                            |  |  |                           | $ | 11,615 |                          |  |  |                  | $ | (65,044 | )                 |  |  |  | $ | (49,236 | ) |  |  |  | $ | (58,781 | ) |
|                                                                                                                      |

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 INSHAREHOLDERS' EQUITY(Expressed in thousands of U.S.dollars except for share and per shareamounts)

|                                                                           |  |  |                                          |   |          |                                         |  |  |  |   |          |   |
|---------------------------------------------------------------------------|--|--|------------------------------------------|---|----------|-----------------------------------------|--|--|--|---|----------|---|
|                                                                      |  |  | Forthe ninemonths endedSeptember 30,2006 |   |          | For theninemonths endedSeptember30,2005 |
| Share capital – Preferredshares of par value $0.01each              |  |  |                                          | $ | —  |                                         |  |  |  | $ | —  |   |
| Sharecapital – common shares of par value $0.01each                 |  |  |                                          |   |     |                                         |  |  |  |   |     |   |
| Balance at beginning ofperiod                                             |  |  |                                          |   | 699      |                                         |  |  |  |   | 568      |   |
| Issued duringperiod                                                       |  |  |                                          |   | 1        |                                         |  |  |  |   | —  |   |
| Balanceat end ofperiod                                                    |  |  |                                          |   | 700      |                                         |  |  |  |   | 568      |   |
| Additionalpaid-in capital                                                 |  |  |                                          |   |     |                                         |  |  |  |   |     |   |
| Balance atbeginning ofperiod                                              |  |  |                                          |   | 581,929  |                                         |  |  |  |   | 523,771  |   |
| Common sharesissued during period                                         |  |  |                                          |   | 81       |                                         |  |  |  |   | 72       |   |
| Non-cashstock compensation expense                                        |  |  |                                          |   | 406      |                                         |  |  |  |   | —  |   |
| Balanceat end ofperiod                                                    |  |  |                                          |   | 582,416  |                                         |  |  |  |   | 523,843  |   |
| Accumulateddeficit                                                        |  |  |                                          |   |     |                                         |  |  |  |   |     |   |
| Balance at beginningof period                                             |  |  |                                          |   | (199,010 | )                                       |  |  |  |   | (93,058  | ) |
| Netloss from continuing operations available to ordinary shareholders     |  |  |                                          |   | (42,829  | )                                       |  |  |  |   | (54,131  | ) |
| Net (loss) incomefrom discontinuedoperations                              |  |  |                                          |   | (12,249  | )                                       |  |  |  |   | 2,933    |   |
| Dividendson Preferredshares                                               |  |  |                                          |   | (1,916   | )                                       |  |  |  |   | —  |   |
| Balanceat end ofperiod                                                    |  |  |                                          |   | (256,004 | )                                       |  |  |  |   | (144,256 | ) |
| Accumulatedother comprehensive income(loss)                               |  |  |                                          |   |     |                                         |  |  |  |   |     |   |
| Balance at beginning ofperiod                                             |  |  |                                          |   | 546      |                                         |  |  |  |   | (372     | ) |
| Net change inunrealized gains (losses) on investments, net of incometaxes |  |  |                                          |   | 8,357    |                                         |  |  |  |   | (7,768   | ) |
| Foreign currencytranslationadjustments                                    |  |  |                                          |   | (599     | )                                       |  |  |  |   | 185      |   |
| Balanceat end ofperiod                                                    |  |  |                                          |   | 8,304    |                                         |  |  |  |   | (7,955   | ) |
| Totalshareholders'equity                                                  |  |  |                                          | $ | 335,416  |                                         |  |  |  | $ | 372,200  |   |
|                                                                           |

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 ninemonths endedSeptember 30,2006 |   |            | For theninemonths endedSeptember30,2005 |
| Cashflows from operatingactivities                                                                                   |  |  |                                          |   |       |                                         |  |  |  |   |       |   |
| Netloss                                                                                                              |  |  |                                          | $ | (42,829    | )                                       |  |  |  | $ | (54,131    | ) |
| Adjustmentsto reconcile net loss to net cash (used in) provided bycontinuingoperatingactivities                      |  |  |                                          |   |       |                                         |  |  |  |   |       |   |
| Depreciationof property andequipment                                                                                 |  |  |                                          |   | 1,811      |                                         |  |  |  |   | 2,159      |   |
| Amortizationof intangibleassets                                                                                      |  |  |                                          |   | 172        |                                         |  |  |  |   | —    |   |
| Amortizationof net discounts oninvestments                                                                           |  |  |                                          |   | (5,843     | )                                       |  |  |  |   | 901        |   |
| Netrealized losses oninvestments                                                                                     |  |  |                                          |   | 13,438     |                                         |  |  |  |   | 789        |   |
| Profiton disposal of fixedassets                                                                                     |  |  |                                          |   | (47        | )                                       |  |  |  |   | —    |   |
| Netchange in fair value of derivativeinstruments                                                                     |  |  |                                          |   | 696        |                                         |  |  |  |   | 496        |   |
| Non-cashstock compensationexpense                                                                                    |  |  |                                          |   | 488        |                                         |  |  |  |   | 72         |   |
| Changes inassets andliabilities:                                                                                     |  |  |                                          |   |       |                                         |  |  |  |   |       |   |
| Restrictedcash and cashequivalents                                                                                   |  |  |                                          |   | (21,425    | )                                       |  |  |  |   | (3,123     | ) |
| Accruedinvestmentincome                                                                                              |  |  |                                          |   | 26         |                                         |  |  |  |   | (408       | ) |
| Premiumsreceivable                                                                                                   |  |  |                                          |   | 83,481     |                                         |  |  |  |   | (13,686    | ) |
| Fundswithheld bycedants                                                                                              |  |  |                                          |   | 3,265      |                                         |  |  |  |   | (11,649    | ) |
| Lossesand loss adjustment expensesrecoverable                                                                        |  |  |                                          |   | (28,646    | )                                       |  |  |  |   | (139,315   | ) |
| Deferredacquisition costs,net                                                                                        |  |  |                                          |   | 19,885     |                                         |  |  |  |   | (8,105     | ) |
| Deferredreinsurancepremiums                                                                                          |  |  |                                          |   | 58,015     |                                         |  |  |  |   | (34,851    | ) |
| Otheraccountsreceivable                                                                                              |  |  |                                          |   | —    |                                         |  |  |  |   | 574        |   |
| Otherassets                                                                                                          |  |  |                                          |   | (30,043    | )                                       |  |  |  |   | (652       | ) |
| Reservefor losses and loss adjustmentexpenses                                                                        |  |  |                                          |   | 84,677     |                                         |  |  |  |   | 310,200    |   |
| Unearnedpremiums                                                                                                     |  |  |                                          |   | (176,928   | )                                       |  |  |  |   | 123,046    |   |
| Environmentalliabilitiesassumed                                                                                      |  |  |                                          |   | (2,410     | )                                       |  |  |  |   | 5,664      |   |
| Reinsurancebalancespayable                                                                                           |  |  |                                          |   | (12,906    | )                                       |  |  |  |   | 9,373      |   |
| Accountspayable and accruedexpenses                                                                                  |  |  |                                          |   | 13,248     |                                         |  |  |  |   | 8,539      |   |
| Depositliabilities                                                                                                   |  |  |                                          |   | (13,268    | )                                       |  |  |  |   | (112       | ) |
| Deferredincome and otherliabilities                                                                                  |  |  |                                          |   | (5,703     | )                                       |  |  |  |   | 9,199      |   |
| Netcash (used in) provided by continuing operatingactivities                                                         |  |  |                                          |   | (60,846    | )                                       |  |  |  |   | 204,980    |   |
| Cashflows from discontinuedoperations                                                                                |  |  |                                          |   |       |                                         |  |  |  |   |       |   |
| Net (loss)income from discontinuedoperations                                                                         |  |  |                                          |   | (12,249    | )                                       |  |  |  |   | 2,933      |   |
| Adjustmentsto reconcile net (loss) income from discontinued operations to net cashprovided by discontinuedoperations |  |  |                                          |   |       |                                         |  |  |  |   |       |   |
| Depreciationof property andequipment                                                                                 |  |  |                                          |   | 131        |                                         |  |  |  |   | 165        |   |
| Amortizationof intangibleassets                                                                                      |  |  |                                          |   | 516        |                                         |  |  |  |   | 555        |   |
| Impairment ofgoodwill                                                                                                |  |  |                                          |   | 12,561     |                                         |  |  |  |   | —    |   |
| Incomeon disposal of discontinued operations                                                                         |  |  |                                          |   | (704       | )                                       |  |  |  |   | —    |   |
| Changes inassets and liabilities of discontinuedoperations                                                           |  |  |                                          |   | 6,804      |                                         |  |  |  |   | (2,519     | ) |
| Purchaseof property andequipment                                                                                     |  |  |                                          |   | (70        | )                                       |  |  |  |   | (188       | ) |
| Netcash provided by discontinedoperations                                                                            |  |  |                                          |   | 6,989      |                                         |  |  |  |   | 946        |   |
| Netcash (used in) provided by operatingactivities                                                                    |  |  |                                          |   | (53,857    | )                                       |  |  |  |   | 205,926    |   |
| Cashflows used in investingactivities                                                                                |  |  |                                          |   |       |                                         |  |  |  |   |       |   |
| Proceeds from saleof fixed maturities and short-terminvestments                                                      |  |  |                                          |   | 2,335,047  |                                         |  |  |  |   | 1,023,526  |   |
| Purchasesof fixed maturities and short-terminvestments                                                               |  |  |                                          |   | (2,418,736 | )                                       |  |  |  |   | (1,179,661 | ) |
| Contingentconsideration paid on acquisition ofsubsidiary                                                             |  |  |                                          |   | (5,000     | )                                       |  |  |  |   | —    |   |
| Proceedsfrom disposal of discontinued operations, net of costs and net of cashdisposed of                            |  |  |                                          |   | 9,317      |                                         |  |  |  |   | —    |   |
| Proceedsfrom sale of property andequipment                                                                           |  |  |                                          |   | 232        |                                         |  |  |  |   | —    |   |
| Purchases ofproperty andequipment                                                                                    |  |  |                                          |   | (215       | )                                       |  |  |  |   | (2,926     | ) |
| Netcash used in investingactivities                                                                                  |  |  |                                          |   | (79,355    | )                                       |  |  |  |   | (159,061   | ) |
| 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                                                                       |  |  |                                          |   | (131,968   | )                                       |  |  |  |   | 66,456     |   |
| Cashand cash equivalents at beginning ofperiod                                                                       |  |  |                                          |   | 178,135    |                                         |  |  |  |   | 32,775     |   |
| Cashand cash equivalents at end ofperiod                                                                             |  |  |                                          | $ | 46,167     |                                         |  |  |  | $ | 99,231     |   |
|                                                                                                                      |

Theaccompanying notes are an integral part of these unaudited condensedconsolidated financialstatements

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, 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 formed toprovide specialty insurance, reinsurance, risk assessment and risktechnical services and products on a global basis. Quanta Holdingsoperates its Lloyd's syndicate in London and is actively runningoff its remaining business lines. The Company maintains offices inBermuda, the United Kingdom, Ireland and the United States.

OnDecember  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 3,000,000 10.25%Series A Preferred Shares. On January  11,  2006, theUnderwriters purchased an additional 130,525 10.25% Series APreferred Shares following the exercise of the over-allotment optionthat was granted to them on December  14,  2005.

OnDecember  20,  2005, Quanta Holdings sold 13,136,841 commonshares 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 with negativeimplications. The A.M. Best ‘‘A’’ (excellent)rated Lloyd's market, including the Company's Lloyd'ssyndicate, was not subject to the rating downgrade. The downgrade andqualification of the Company's rating with negative implicationssignificantly adversely affected the Company's business, itsopportunities to write new and renewal business and its ability toretain key employees.

On May  25,  2006, QuantaHoldings announced that in consultation with its financial advisors,the Board had decided to cease underwriting or seeking new business andto place most of its remaining specialty insurance and reinsurancelines into orderly run-off. That decision included the run-off of allof Quanta's remaining U.S. specialty lines, as well as itsBermuda reinsurance operations, and its Quanta Europe subsidiary. Theremaining U.S. specialty insurance lines placed into run-off consistedof the program business including the HBW program (defined below),professional liability, environmental, fidelity and crime, andstructured products. The decision follows previous exits from property,casualty and marine and aviation reinsurance, technical risk propertyinsurance, surety, trade credit and political risk insurance. TheCompany intends to wind up the insurance and reinsurance business thatit has placed into run-off over some period of time, which is notcurrently determinable.

On June  7,  2006, QuantaHoldings reported that A.M. Best had downgraded the Company'sfinancial strength rating, from ‘‘B++’’(very good) to ‘‘B’’ (fair). Following therating actions, A.M. Best has, at the request of the Company, withdrawnthe financial strength ratings of Quanta Holdingsand its operatingsubsidiaries, excluding its syndicate in the‘‘A’’ rated Lloyd's market.

The A.M. Best rating action caused a default under theCompany's credit facility, which we now refer to as the oldcredit facility. The lenders subsequently waived the default under theold credit facility until October  27,  2006 and on thatdate the Company entered into a new credit facility and extended theold credit factility so that it may transition all of the outstandingletters of credit, which secure the Company’s claims’paying obligations, from the old credit facility to the new creditfacility. The new credit facility and the changes to the old creditfacility are described in Note 11 below.

Following the A.M. Bestrating action and the decision to run-off a substantial portion of itsbusiness, and with effect on June  1,  2006, the BermudaMonetary Authority (the ‘‘BMA’’) amendedthe license of Quanta Re to require the approval of the BMA prior tomaking dividend payments and entering into large transactions.

OnJune  8,  2006, Quanta Holdings announced that it hadsigned non-binding Heads of Agreement with Chaucer Holdings PLC(‘‘Chaucer’’), the specialist Lloyd'sinsurer, and the senior 

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

underwriting team of Syndicate 4000 underwhich a new managing agency, Pembroke Managing Agency Limited(‘‘Pembroke’’), would be created so thatthe business of Syndicate 4000 could continue. On October25,  2006, the Company entered into definitive agreements for thecreation of Pembroke. Pembroke, which is expected to provide technicaland administrative support and oversight to Syndicate 4000, is a jointventure among Quanta Holdings, Chaucer and the Syndicate 4000underwriting team. Quanta Holdings believes that Pembroke will enableSyndicate 4000 to maintain and grow a long-term underwriting presencewithin Lloyd's without requiring direct technical oradministrative support from Quanta Holdings. The Company believes thatthis arrangement will preserve its capital invested in Lloyd'sand provide for the ability of an orderly withdrawal of this capitalover time through diversification by attracting capital from thirdparties to replace, or add to, the existing capital. The Company alsobelieves that this transaction enables the Syndicate to utilize thesignificant market capabilities of Chaucer and promote the long-termalignment of incentives with the underwriting management team. Underthe terms of the agreements, Quanta Holdings’ capital remainscommitted to Syndicate 4000 for underwriting years 2007 through 2009.Additionally, Chaucer and Quanta Holdings plan to work together closelyto continue to diversify the provision of capital to the Syndicate tosupport its presence and profitable growth in the Lloyd's market.Chaucer has agreed to provide the capital to support 10 percent of theSyndicate's underwriting in 2007 and to support underwriting in2008 and 2009.

On September  14,  2006, QuantaHoldings announced that following the review of a number of strategicalternatives, it will pursue an orderly, self-managed run-off of itsremaining insurance and reinsurance operations which, in the Board ofDirectors’ view, is the best means of preserving value forshareholders.

On September  18,  2006, QuantaHoldings announced that it completed the sale of EnvironmentalStrategies Consulting LLC (‘‘ESC’’) to WSPEnvironmental Holdings, Inc. (‘‘WSP’’) onSeptember  15,  2006. The sale resulted in proceeds of$11.5  million, after certain post-closing adjustments, in cashplus forgiveness of intercompany debt of approximately $1.0million. As further described in Note 4 below, the results ofoperations of ESC are reported as a discontinued operation.Consequently, prior period Statements of Operations and Statements ofCash Flows have been reclassified to reflect ESC as a discontinuedoperation.

Due to the Company's decision to place most ofits specialty insurance and reinsurance lines into orderly run-off, theCompany has concluded that it may no longer be able to hold itssecurities for a sufficient period of time to allow recovery.Accordingly, during the three and nine months ended September30,  2006, the Company has recorded $0.1  million and$11.1  million in other than temporary impairment losses. Therealization of these losses represents the maximum amount of potentiallosses in the Company's investment securities if it sold all ofthese securities at the time the impairments were recorded and isprimarily attributable to changes in interest rates and not changes incredit quality. As a result of this decision, the affected investmentswere reduced to their estimated fair value, which becomes their newcost basis. 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 nine months ended September  30,2006, the Company has incurred severance costs of approximately$14.8  million as a result of employee reductions following theCompany's decision to place most of its specialty insurance andreinsurance lines into orderly run-off.

Certain of theCompany's insurance and many of its reinsurance contracts containtermination rights triggered by the A.M. Best rating downgrades.Additionally, many of the Company's other insurance contracts andcertain of its reinsurance contracts provide for cancellation at theoption of the policyholder regardless of the Company's financialstrength rating. This cancellation right is also 

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

included in those contracts that are part ofthe Company's HBW program which is the Company'sresidential builders' and contractors' program thatprovides general liability, builders' risk and excess liabilityinsurance coverages and reinsurance warranty coverages for new homecontractors throughout the U.S. As of September  30,  2006,the Company had received notice of cancellation of approximately$74.6  million of gross premiums written.

Interimfinancial information

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

These unaudited condensedconsolidated financial statements should be read in conjunction withthe Company's audited consolidated financial statements for theyear ended December  31,  2005, included in the Form 10-Kfiled by the Company with the SEC on March  31,2006.

The preparation of financial statements in conformity withGAAP requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities reported at the date of the unauditedcondensed consolidated financial statements and the reported amounts ofrevenues and expenses during the reporting period. While managementbelieves the amounts included in the unaudited condensed consolidatedfinancial statements reflect management's best estimates andassumptions, the actual results could ultimately be materiallydifferent from the amounts currently provided for in the unauditedcondensed consolidated financial statements. The Company'sprincipal estimates and assumptions relate to the development anddetermination of thefollowing:

|  |              |                                                  |
|--|--------------|--------------------------------------------------|
|  | •  | reserves for losses andloss adjustment expenses; |

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

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

|  |              |                                                |
|--|--------------|------------------------------------------------|
|  | •  | the valuation ofgoodwill and intangibleassets; |

|  |              |                                   |
|--|--------------|-----------------------------------|
|  | •  | environmental liabilitiesassumed; |

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

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

|  |              |                                      |
|--|--------------|--------------------------------------|
|  | •  | deferred incometaxes and liabilities |

|  |              |                           |
|--|--------------|---------------------------|
|  | •  | severancecost provisions. |

|          |                                |
|----------|--------------------------------|
| 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.

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

Accounting for stock-basedcompensation

The Company has a long-term stock-basedemployee incentive plan (the ‘‘IncentivePlan’’), which is described more fully in Note 9. Prior toJanuary  1,  2006, the Company accounted for the IncentivePlan under the recognition and measurement provisions of APB OpinionNo. 25, Accounting for Stock Issued to Employees(‘‘APB 25’’) and related Interpretations, aspermitted by FASB Statement No. 123, Accounting forStock-Based Compensation (‘‘SFAS 123’’). Nostock-based employee compensation cost was recognized in the Statementof Operations for the years ended December  31,  2005 or2004, as all options granted under the Incentive Plan had an exerciseprice equal to the market value of the underlying common stock on thedate of grant. Effective January  1,  2006, the Companyadopted the fair value recognition provisions of FASB StatementNo. 123(R), Share-Based Payment (‘‘SFAS123(R)’’), using the modified-prospective-transitionmethod. Under that transition method, compensation cost recognized in2006 includes: (a) compensation cost for all share-based paymentsgranted prior to, but not yet vested as of January  1,2006, based on the grant date fair value estimated in accordance withthe original provisions of SFAS 123, and (b) compensationcost for all share-based payments granted subsequent to January1,  2006, based on the grant-date fair value estimated inaccordance with the provisions of SFAS 123(R). Results for priorperiods have not been restated.

As a result of adopting SFAS123(R) on January  1,  2006, the Company's net income(loss) for the three and nine months ended September  30,2006, are $(0.1) million lower than and $0.4  million greaterthan if it had continued to account for share-based compensation underAPB 25. Basic and diluted gain (loss) per share for the three and ninemonths ended September  30,  2006 would have been $0.04 and$(0.81), if the Company had not adopted SFAS 123(R), compared toreported basic and diluted earnings per share of $0.04 and $(0.81).

The following table illustrates the effect on net income andearnings per share if the Company had applied the fair valuerecognition provisions of SFAS 123 to options granted under theCompany's stock option plans in the period prior toJanuary  1,  2006. For purposes of this pro formadisclosure, the value of the options is estimated using aBlack-Scholes-Merton option-pricing formula and amortized to expenseover the options' vestingperiods.

|                                                                                             |  |  |                   |   |         |                    |  |  |                   |   |         |                   |  |  |  |   |         |   |  |  |  |   |         |   |
|---------------------------------------------------------------------------------------------|--|--|-------------------|---|---------|--------------------|--|--|-------------------|---|---------|-------------------|--|--|--|---|---------|---|--|--|--|---|---------|---|
|                                                                                        |  |  | Threemonths ended |   |         | Nine monthsended   |
|                                                                                        |  |  | September30,2006  |   |         | September 30, 2005 |  |  | September 30,2006 |   |         | September 30,2005 |
| Stock compensationexpense                                                                   |  |  |                   |   |    |                    |  |  |                   |   |    |                   |  |  |  |   |    |   |  |  |  |   |    |   |
| Asreported                                                                                  |  |  |                   | $ | (127    | )                  |  |  |                   | $ | — |                   |  |  |  | $ | 406     |   |  |  |  | $ | — |   |
| Additionalstock-based employee compensation expense determined under fair valuebased method |  |  |                   |   | — |                    |  |  |                   |   | (642    | )                 |  |  |  |   | — |   |  |  |  |   | (2,283  | ) |
| Proforma                                                                                    |  |  |                   | $ | (127    | )                  |  |  |                   | $ | (642    | )                 |  |  |  | $ | 406     |   |  |  |  | $ | (2,283  | ) |
| Netincome (loss)                                                                            |  |  |                   |   |    |                    |  |  |                   |   |    |                   |  |  |  |   |    |   |  |  |  |   |    |   |
| Asreported                                                                                  |  |  |                   | $ | 3,075   |                    |  |  |                   | $ | (59,084 | )                 |  |  |  | $ | (56,994 | ) |  |  |  | $ | (51,198 | ) |
| Additionalstock-based employee compensation expense determined under fair valuebased method |  |  |                   |   | — |                    |  |  |                   |   | (642    | )                 |  |  |  |   | — |   |  |  |  |   | (2,283  | ) |
| Proforma                                                                                    |  |  |                   | $ | 3,075   |                    |  |  |                   | $ | (59,726 | )                 |  |  |  | $ | (56,994 | ) |  |  |  | $ | (53,481 | ) |
| Basicincome (loss) pershare                                                                 |  |  |                   |   |    |                    |  |  |                   |   |    |                   |  |  |  |   |    |   |  |  |  |   |    |   |
| Asreported                                                                                  |  |  |                   | $ | 0.04    |                    |  |  |                   | $ | (1.04   | )                 |  |  |  | $ | (0.81   | ) |  |  |  | $ | (0.90   | ) |
|                                                                                             |

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

|                               |  |  |                   |   |        |                    |  |  |                   |   |        |                   |  |  |  |   |        |   |  |  |  |   |        |   |
|-------------------------------|--|--|-------------------|---|--------|--------------------|--|--|-------------------|---|--------|-------------------|--|--|--|---|--------|---|--|--|--|---|--------|---|
|                          |  |  | Threemonths ended |   |        | Nine monthsended   |
|                          |  |  | September30,2006  |   |        | September 30, 2005 |  |  | September 30,2006 |   |        | September 30,2005 |
| Pro forma                     |  |  |                   | $ | 0.04   |                    |  |  |                   | $ | (1.05  | )                 |  |  |  | $ | (0.81  | ) |  |  |  | $ | (0.94  | ) |
| Dilutedincome (loss) pershare |  |  |                   |   |   |                    |  |  |                   |   |   |                   |  |  |  |   |   |   |  |  |  |   |   |   |
| Asreported                    |  |  |                   | $ | 0.04   |                    |  |  |                   | $ | (1.04  | )                 |  |  |  | $ | (0.81  | ) |  |  |  | $ | (0.90  | ) |
| Proforma                      |  |  |                   | $ | 0.04   |                    |  |  |                   | $ | (1.05  | )                 |  |  |  | $ | (0.81  | ) |  |  |  | $ | (0.94  | ) |
|                               |

|          |                                 |
|----------|---------------------------------|
| 3.  | Recentaccounting pronouncements |

In November  2005, the FinancialAccounting Standards Board's (‘‘FASB’’)issued FSP FAS 115-1 and FAS 124-1, ‘‘The meaning ofother than temporary impairment 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 ‘‘The meaning ofOther-Than-Temporary Impairment and Its Application to CertainInvestments’’, 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 the impairment isdeemed other-than-temporary, even if the decision to sell has not beenmade. The new guidance was effective for other than temporaryimpairment analysis conducted from January  1,  2006. Theadoption of FSP FAS 115-1 did not have a material effect on theCompany's consolidated results of operations, financial positionor cash flows as the impairments recognized for the three and ninemonths ended September  30,  2006 were not impacted by theadoption of this guidance.

In July  2006, the FASB issuedFASB Interpretation No. 48, ‘‘Accounting forUncertainty in Income Taxes — an interpretation of FASBStatement No. 109’’ (‘‘FIN48’’). FIN 48 clarifies the accounting foruncertainty in tax positions by prescribing a financial statementrecognition threshold and measurement attribute for tax positions takenor expected to be taken in a tax return. Further, FIN 48 expandsthe required disclosures associated with such uncertain taxpositions. The provisions of FIN 48 are effectiveJanuary 1, 2007 and the cumulative effect of adoption, if any,will result in an adjustment to opening retained earnings. TheCompany does not expect FIN 48 to have a material effect on thefinancial statements.

In September  2006, the FASB issuedFASB Statement No. 157, ‘‘Fair valuemeasurements’’ (‘‘FAS157’’). FAS 157 defines fair value, establishes aframework for measuring fair value in GAAP, and enhances disclosuresabout fair value measurements. FAS 157 applies when other accountingpronouncements require fair value measurements; it does not require newfair value measurements. FAS 157 is effective for financial statementsissued for fiscal years beginning after November  15,2007, and interim periods within those years. The Company is currentlyevaluating the effects of this statement on its financialreporting.

|          |                 |
|----------|-----------------|
| 4.  | Disposal of ESC |

EffectiveSeptember  15,  2006, the Company sold all of the equityinterests of ESC, which was part of the Company’s Technicalservices segment, to WSP for total consideration of $12.5million represented by $11.5  million in cash, after certainpost-closing adjustments, plus forgiveness of intercompany debt ofapproximately $1.0  million.

The Company determined thatthe disposal of ESC should be presented as a discontinued operation inaccordance with FASB Statement No. 144, ‘‘Accountingfor the Impairment or Disposal of 

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

Long-lived Assets’’(‘‘FAS 144’’) and EITF 03-13,‘‘Applying the conditions in Paragraph 42 of FAS 144in Determining whether to report DiscontinuedOperations’’ (‘‘EITF03-13’’). In the third quarter of 2006, the Company hasreclassified the results of operations related to ESC from itscontinuing operations to discontinued operations for all periodspresented in accordance with SFAS 144 and EITF 03-13. These results arereflected in the Condensed Consolidated Statement of Operations asIncome from operations of discontinued operations. The presentation ofthe reclassified segmental footnote and the reclassified statements ofoperations includes the previously eliminated inter-companytransactions between ESC and the Company. The Company has separatelydisclosed the operating, investing and financing portions of the cashflows attributable to its discontinued operations, for which itreclassified amounts from the prior periods.

Following thedisposal of ESC, ESC will continue to provide technical services to theCompany’s two environmental liability assumption programs, QLTBuffalo LLC and QLT of Alabama LLC. The provision of technical servicesby ESC to the Company is expected to end during 2008, when theenvironmental sites are expected to be fully remediated. During theassessment period of one year (as defined in EITF 03-13) following thedisposal, the Company estimates that the continuing cash outflows of$1.8  million will approximate 6.1% of the estimated cashoutflows of $30.1  million that would have been generated by ESCabsent the disposal. Therefore the Company’s cash flowsgenerated from the continuation of activities with ESC after thedisposal are not expected to be significant and the Company will nothave any continuing involvement in the operations of ESC after thedisposal.

The Company recognized income on disposal of ESC of$0.7  million related to this transaction during the thirdquarter of 2006. This income is presented in the Consolidated Statementof Operations as Income (loss) on disposal of discontinued operations,a component of discontinued operations. The components of this incomeare summarized below.

|                               |  |  |  |   |         |   |
|-------------------------------|--|--|--|---|---------|---|
| Cashproceeds from WSP(1)      |  |  |  | $ | 11,484  |   |
| Debtforgiveness               |  |  |  |   | 1,000   |   |
| Totalconsideration            |  |  |  |   | 12,484  |   |
| Less:                         |  |  |  |   |    |   |
| Carryingvalue ofESC(2)        |  |  |  |   | (11,140 | ) |
| Estimatedtransaction costs(3) |  |  |  |   | (640    | ) |
| Income on disposalofESC       |  |  |  | $ | 704     |   |
|                               |

|  |
|--|
|  |  |
|  |

|     |                                                         |
|-----|---------------------------------------------------------|
| (1) | Totalproceeds from WSP include post closingadjustments. |

|     |                                                                                       |
|-----|---------------------------------------------------------------------------------------|
| (2) | Net assets of ESC atSeptember  15,  2006, prior to the impact of the saletransaction. |

|     |                                                                                                                                         |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Transaction costsinclude advisory fees directly associated with the sale, of which$0.6  million were with FBR, which is a relatedparty. |

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

As of September  15,  2006,the disposed assets and liabilities of ESC were as follows:

|                                     |  |  |  |   |        |  |
|-------------------------------------|--|--|--|---|--------|--|
| Assets:                             |  |  |  |   |   |  |
| Cashand cash equivalents            |  |  |  | $ | 1,527  |  |
| Otheraccounts receivable            |  |  |  |   | 7,581  |  |
| Propertyand equipment               |  |  |  |   | 423    |  |
| Goodwill and otherintangible assets |  |  |  |   | 2,727  |  |
| Otherassets                         |  |  |  |   | 1,324  |  |
| Totalassets                         |  |  |  |   | 13,582 |  |
| Liabilities:                        |  |  |  |   |   |  |
| Accountspayable and accruedexpenses |  |  |  |   | 2,361  |  |
| Deferred income andotherliabilities |  |  |  |   | 81     |  |
| Totalliabilities                    |  |  |  |   | 2,442  |  |
| Netassets                           |  |  |  | $ | 11,140 |  |
|                                     |

Thefollowing table details the inter-company costs charged by ESC to theCompany for all periods presented. Prior to its disposal, ESC wasincluded in the Company’s Technical services segment and ESCcharged the Company’s two environmental assumption liabilityprograms (QLT’s), also included in the Company’sTechnical services segment, costs which previously eliminated at theTechnical services segment level. ESC also charged the Company’sinsurance run-off and reinsurance run-off segments, which together withthe Lloyd’s segment are referred to as its underwriting segment,with costs related to technical services rendered and loss adjustmentexpenses, which previously eliminated on consolidation.

|                                                           |  |  |                                              |   |      |                                           |  |  |                                               |   |        |                                         |  |  |  |   |        |   |  |  |  |   |         |   |
|-----------------------------------------------------------|--|--|----------------------------------------------|---|------|-------------------------------------------|--|--|-----------------------------------------------|---|--------|-----------------------------------------|--|--|--|---|--------|---|--|--|--|---|---------|---|
|                                                      |  |  | Periodfrom July 1, 2006 to September 15,2006 |   |      | For thethreemonths endedSeptember 30,2005 |  |  | PeriodfromJanuary 1, 2006to September 15,2006 |   |        | For theninemonths endedSeptember30,2005 |
| Technical services revenues charged toQLT’s         |  |  |                                              | $ | 853  |                                           |  |  |                                               | $ | 8,620  |                                         |  |  |  | $ | 3,058  |   |  |  |  | $ | 10,059  |   |
| Technicalservices revenues charged to underwritingsegment |  |  |                                              |   | (118 | )                                         |  |  |                                               |   | 833    |                                         |  |  |  |   | 506    |   |  |  |  |   | 2,591   |   |
| Totalinter-company revenues charged byESC                 |  |  |                                              | $ | 735  |                                           |  |  |                                               | $ | 9,453  |                                         |  |  |  | $ | 3,564  |   |  |  |  | $ | 12,650  |   |
| Netlosses and lossexpenses                                |  |  |                                              | $ | (7   | )                                         |  |  |                                               | $ | (45    | )                                       |  |  |  | $ | (149   | ) |  |  |  | $ | (132    | ) |
| Generaland administrativeexpenses                         |  |  |                                              |   | (728 | )                                         |  |  |                                               |   | (9,408 | )                                       |  |  |  |   | (3,415 | ) |  |  |  |   | (12,518 | ) |
| Totalinter-company costs charged to theCompany            |  |  |                                              | $ | (735 | )                                         |  |  |                                               | $ | (9,453 | )                                       |  |  |  | $ | (3,564 | ) |  |  |  | $ | (12,650 | ) |
|                                                           |

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

The Company’s (loss) income fromoperations of discontinued operations generated by ESC, previouslyincluded in the Technical services segment, now reported indiscontinued operations were as follows:

|                                                                  |  |  |                                              |   |         |                                           |  |  |                                               |   |         |                                         |  |  |  |   |         |   |  |  |  |   |         |   |
|------------------------------------------------------------------|--|--|----------------------------------------------|---|---------|-------------------------------------------|--|--|-----------------------------------------------|---|---------|-----------------------------------------|--|--|--|---|---------|---|--|--|--|---|---------|---|
|                                                             |  |  | Periodfrom July 1, 2006 to September 15,2006 |   |         | For thethreemonths endedSeptember 30,2005 |  |  | PeriodfromJanuary 1, 2006to September 15,2006 |   |         | For theninemonths endedSeptember30,2005 |
| Technical servicesrevenues                                       |  |  |                                              | $ | 5,769   |                                           |  |  |                                               | $ | 16,849  |                                         |  |  |  | $ | 21,954  |   |  |  |  | $ | 34,273  |   |
| Otherincome                                                      |  |  |                                              |   | 3       |                                           |  |  |                                               |   | 52      |                                         |  |  |  |   | 14      |   |  |  |  |   | 184     |   |
| Directtechnical servicescosts                                    |  |  |                                              |   | (3,743  | )                                         |  |  |                                               |   | (13,133 | )                                       |  |  |  |   | (13,968 | ) |  |  |  |   | (23,993 | ) |
| Generaland administrativeexpenses                                |  |  |                                              |   | (2,790  | )                                         |  |  |                                               |   | (2,307  | )                                       |  |  |  |   | (7,725  | ) |  |  |  |   | (6,799  | ) |
| Losson impairment ofgoodwill                                     |  |  |                                              |   | — |                                           |  |  |                                               |   | — |                                         |  |  |  |   | (12,561 | ) |  |  |  |   | — |   |
| Depreciationof fixed assets and amortization of intangibleassets |  |  |                                              |   | (173    | )                                         |  |  |                                               |   | (240    | )                                       |  |  |  |   | (647    | ) |  |  |  |   | (720    | ) |
| Incometaxexpense                                                 |  |  |                                              |   | (2      | )                                         |  |  |                                               |   | (7      | )                                       |  |  |  |   | (20     | ) |  |  |  |   | (12     | ) |
| (Loss)income from operations of discontinuedoperations           |  |  |                                              | $ | (936    | )                                         |  |  |                                               | $ | 1,214   |                                         |  |  |  | $ | (12,953 | ) |  |  |  | $ | 2,933   |   |
|                                                                  |

ESC’stechnical services revenues include the inter-company revenues chargedby ESC to the QLT’s and to the Company’s underwritingsegment.

|          |                     |
|----------|---------------------|
| 5.  | Segment information |

During the threemonths ended September  30,  2006, following the decisionof our Board of Directors in May  2006 to place most of itsbusiness in run-off, the Company changed the composition of itsreportable segments and renamed its specialty insurance segment andspecialty reinsurance segment to specialty insurance run-off segmentand specialty reinsurance run-off segment. The Company created theLloyd’s segment for its Syndicate 4000 business, which waspreviously aggregated with its specialty insurance run-off reportablesegment. The inclusion of the results of Syndicate 4000 with thespecialty insurance run-off operating segments is not appropriate giventhe different economic characteristics and the fact that the specialtyinsurance run-off segment is no longer writing new or renewal businesswhile the Company’s Lloyd’s syndicate continues to writenew and renewal business. The Company also continues to earn premium inits insurance and reinsurance run-off segments related to businesswritten in prior periods and related to extensions and renewals ofpolicies which the Company is legally required to write in businesslines the Company has exited.

As a result of the disposal ofESC, the technical services segment now consists only of the twoenvironmental liability assumption programs. The three and nine monthsended September  30,  2005 results of the technicalservices segment have been reclassified to conform with thepresentation of ESC in discontinued operations for the three and ninemonths ended September  30,  2006.

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

The following tables summarize theCompany's results from continuing operations before income taxesfor each reportable segment for the three and nine months endedSeptember  30,  2006 and 2005 based on the reportablesegments in effect during the three months ended September30,2006.

|                                                            |  |  |                                      |   |         |                             |  |  |               |   |         |                   |  |  |                   |   |         |              |   |        |   |   |         |   |  |  |        |   |         |  |   |         |   |   |         |   |
|------------------------------------------------------------|--|--|--------------------------------------|---|---------|-----------------------------|--|--|---------------|---|---------|-------------------|--|--|-------------------|---|---------|--------------|---|--------|---|---|---------|---|--|--|--------|---|---------|--|---|---------|---|---|---------|---|
|                                                       |  |  | Threemonths ended September  30,2006 |
| Statementof operations bysegment                           |  |  | Specialtyinsurancerun-off            |   |         | Specialtyreinsurancerun-off |  |  | Lloyd’s |   |         | Underwritingtotal |  |  | Technicalservices |   |         | Consolidated |
| Directinsurance                                            |  |  |                                      | $ | (9,877  | )                           |  |  |               | $ | — |                   |  |  |                   | $ | 22,063  |              |   |        |   | $ | 12,186  |   |  |  |        | $ | — |  |   |         |   | $ | 12,186  |   |
| Reinsuranceassumed                                         |  |  |                                      |   | (68     | )                           |  |  |               |   | (18,811 | )                 |  |  |                   |   | — |              |   |        |   |   | (18,879 | ) |  |  |        |   | — |  |   |         |   |   | (18,879 | ) |
| Totalgross premiumswritten                                 |  |  |                                      |   | (9,945  | )                           |  |  |               |   | (18,811 | )                 |  |  |                   |   | 22,063  |              |   |        |   |   | (6,693  | ) |  |  |        |   | — |  |   |         |   |   | (6,693  | ) |
| Premiumsceded                                              |  |  |                                      |   | 665     |                             |  |  |               |   | 10,243  |                   |  |  |                   |   | (9,632  | )            |   |        |   |   | 1,276   |   |  |  |        |   | — |  |   |         |   |   | 1,276   |   |
| Netpremiumswritten                                         |  |  |                                      | $ | (9,280  | )                           |  |  |               | $ | (8,568  | )                 |  |  |                   | $ | 12,431  |              |   |        |   | $ | (5,417  | ) |  |  |        | $ | — |  |   |         |   | $ | (5,417  | ) |
| Netpremiumsearned                                          |  |  |                                      | $ | 25,172  |                             |  |  |               | $ | 8,565   |                   |  |  |                   | $ | 15,465  |              |   |        |   | $ | 49,202  |   |  |  |        | $ | — |  |   |         |   | $ | 49,202  |   |
| Technicalservicesrevenues                                  |  |  |                                      |   | — |                             |  |  |               |   | — |                   |  |  |                   |   | — |              |   |        |   |   | — |   |  |  |        |   | 752     |  |   |         |   |   | 752     |   |
| Otherincome                                                |  |  |                                      |   | 272     |                             |  |  |               |   | 829     |                   |  |  |                   |   | — |              |   |        |   |   | 1,101   |   |  |  |        |   | 58      |  |   |         |   |   | 1,159   |   |
| Netlosses and lossexpenses                                 |  |  |                                      |   | (13,660 | )                           |  |  |               |   | (4,641  | )                 |  |  |                   |   | (11,852 | )            |   |        |   |   | (30,153 | ) |  |  |   |   |         |  |   | (30,153 | ) |
| Acquisitionexpenses                                        |  |  |                                      |   | (3,583  | )                           |  |  |               |   | (1,708  | )                 |  |  |                   |   | (3,124  | )            |   |        |   |   | (8,415  | ) |  |  |   |   |         |  |   | (8,415  | ) |
| Generaland administrativeexpenses                          |  |  |                                      |   | (9,462  | )                           |  |  |               |   | (3,363  | )                 |  |  |                   |   | (6,888  | )            |   |        |   |   | (19,713 | ) |  |  | (865)  |   |         |  |   | (20,578 | ) |
| Segmentloss                                                |  |  |                                      | $ | (1,261  | )                           |  |  |               | $ | (318    | )                 |  |  |                   | $ | (6,399  | )            |   |        |   | $ | (7,978  | ) |  |  | $(55)  |   |         |  | $ | (8,033  | ) |
| Depreciationof fixed assets and amortization ofintangibles |  |  |                                 |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              | $ | (715   | ) |
| Interestexpense                                            |  |  |                                 |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              |   | (1,430 | ) |
| Netinvestmentincome                                        |  |  |                                 |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              |   | 12,821 |   |
| Netrealized gains oninvestments                            |  |  |                                 |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              |   | 906    |   |
| Otherincome                                                |  |  |                                 |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              |   | 15     |   |
| Netforeign exchangeloss                                    |  |  |                                 |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              |   | (257   | ) |
| Incomefrom continuing operations before incometaxes        |  |  |                                 |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              | $ | 3,307  |   |
|                                                            |

Specialtyinsurance run-off and specialty reinsurance run-off gross premiumswritten include $11.9  million and $21.0  million ofreturned gross premium associated with cancelled policies during thethree months ended September  30,  2006.

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

|                                                            |  |  |                                      |   |         |                             |  |  |               |   |         |                   |  |  |                   |   |         |              |   |         |   |   |          |   |  |  |  |   |         |   |  |  |  |   |          |   |
|------------------------------------------------------------|--|--|--------------------------------------|---|---------|-----------------------------|--|--|---------------|---|---------|-------------------|--|--|-------------------|---|---------|--------------|---|---------|---|---|----------|---|--|--|--|---|---------|---|--|--|--|---|----------|---|
|                                                       |  |  | Threemonths ended September  30,2005 |
| Statementof operations bysegment                           |  |  | Specialtyinsurancerun-off            |   |         | Specialtyreinsurancerun-off |  |  | Lloyd’s |   |         | Underwritingtotal |  |  | Technicalservices |   |         | Consolidated |
| Directinsurance                                            |  |  |                                      | $ | 78,103  |                             |  |  |               | $ | — |                   |  |  |                   | $ | 12,527  |              |   |         |   | $ | 90,630   |   |  |  |  | $ | — |   |  |  |  | $ | 90,630   |   |
| Reinsuranceassumed                                         |  |  |                                      |   | 6,718   |                             |  |  |               |   | 74,194  |                   |  |  |                   |   | — |              |   |         |   |   | 80,912   |   |  |  |  |   | — |   |  |  |  |   | 80,912   |   |
| Totalgross premiumswritten                                 |  |  |                                      |   | 84,821  |                             |  |  |               |   | 74,194  |                   |  |  |                   |   | 12,527  |              |   |         |   |   | 171,542  |   |  |  |  |   | — |   |  |  |  |   | 171,542  |   |
| Premiumsceded                                              |  |  |                                      |   | (30,923 | )                           |  |  |               |   | (20,319 | )                 |  |  |                   |   | (4,335  | )            |   |         |   |   | (55,577  | ) |  |  |  |   | — |   |  |  |  |   | (55,577  | ) |
| Netpremiumswritten                                         |  |  |                                      | $ | 53,898  |                             |  |  |               | $ | 53,875  |                   |  |  |                   | $ | 8,192   |              |   |         |   | $ | 115,965  |   |  |  |  | $ | — |   |  |  |  | $ | 115,965  |   |
| Netpremiumsearned                                          |  |  |                                      | $ | 40,515  |                             |  |  |               | $ | 49,512  |                   |  |  |                   | $ | 10,519  |              |   |         |   | $ | 100,546  |   |  |  |  | $ | — |   |  |  |  | $ | 100,546  |   |
| Technicalservicesrevenues                                  |  |  |                                      |   | — |                             |  |  |               |   | — |                   |  |  |                   |   | — |              |   |         |   |   | —  |   |  |  |  |   | 8,623   |   |  |  |  |   | 8,623    |   |
| Other(loss)income                                          |  |  |                                      |   | (42     | )                           |  |  |               |   | 865     |                   |  |  |                   |   | — |              |   |         |   |   | 823      |   |  |  |  |   | 983     |   |  |  |  |   | 1,806    |   |
| Netlosses and lossexpenses                                 |  |  |                                      |   | (28,993 | )                           |  |  |               |   | (85,582 | )                 |  |  |                   |   | (6,557  | )            |   |         |   |   | (121,132 | ) |  |  |  |   | — |   |  |  |  |   | (121,132 | ) |
| Acquisitionexpenses                                        |  |  |                                      |   | (7,654  | )                           |  |  |               |   | (13,718 | )                 |  |  |                   |   | (1,626  | )            |   |         |   |   | (22,998  | ) |  |  |  |   | — |   |  |  |  |   | (22,998  | ) |
| Generaland administrativeexpenses                          |  |  |                                      |   | (10,968 | )                           |  |  |               |   | (6,229  | )                 |  |  |                   |   | (4,767  | )            |   |         |   |   | (21,964  | ) |  |  |  |   | (8,711  | ) |  |  |  |   | (30,675  | ) |
| Segment(loss)income                                        |  |  |                                      | $ | (7,142  | )                           |  |  |               | $ | (55,152 | )                 |  |  |                   | $ | (2,431  | )            |   |         |   | $ | (64,725  | ) |  |  |  | $ | 895     |   |  |  |  | $ | (63,830  | ) |
| Depreciationof fixed assets and amortization ofintangibles |  |  |                                 |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              | $ | (839    | ) |
| Interestexpense                                            |  |  |                                 |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              |   | (1,200  | ) |
| Netinvestmentincome                                        |  |  |                                 |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              |   | 6,991   |   |
| Netrealized losses oninvestments                           |  |  |                                 |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              |   | (1,168  | ) |
| Otherincome                                                |  |  |                                 |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              |   | 87      |   |
| Netforeign exchangelosses                                  |  |  |                                 |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              |   | (311    | ) |
| Lossfrom continuing operations before incometaxes          |  |  |                                 |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              | $ | (60,270 | ) |
|                                                            |

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

|                                                            |  |  |                                     |   |         |                             |  |  |               |   |         |                   |  |  |                   |   |         |              |   |         |   |   |          |   |  |  |  |   |         |   |  |  |  |   |          |   |
|------------------------------------------------------------|--|--|-------------------------------------|---|---------|-----------------------------|--|--|---------------|---|---------|-------------------|--|--|-------------------|---|---------|--------------|---|---------|---|---|----------|---|--|--|--|---|---------|---|--|--|--|---|----------|---|
|                                                       |  |  | Ninemonths ended September  30,2006 |
| Statementof operations bysegment                           |  |  | Specialtyinsurancerun-off           |   |         | Specialtyreinsurancerun-off |  |  | Lloyd’s |   |         | Underwritingtotal |  |  | Technicalservices |   |         | Consolidated |
| Directinsurance                                            |  |  |                                     | $ | 61,386  |                             |  |  |               | $ | — |                   |  |  |                   | $ | 64,608  |              |   |         |   | $ | 125,994  |   |  |  |  | $ | — |   |  |  |  | $ | 125,994  |   |
| Reinsuranceassumed                                         |  |  |                                     |   | 11,818  |                             |  |  |               |   | 3,263   |                   |  |  |                   |   | — |              |   |         |   |   | 15,081   |   |  |  |  |   | — |   |  |  |  |   | 15,081   |   |
| Totalgross premiumswritten                                 |  |  |                                     |   | 73,204  |                             |  |  |               |   | 3,263   |                   |  |  |                   |   | 64,608  |              |   |         |   |   | 141,075  |   |  |  |  |   | — |   |  |  |  |   | 141,075  |   |
| Premiumsceded                                              |  |  |                                     |   | (38,396 | )                           |  |  |               |   | (13,650 | )                 |  |  |                   |   | (21,587 | )            |   |         |   |   | (73,633  | ) |  |  |  |   | — |   |  |  |  |   | (73,633  | ) |
| Netpremiumswritten                                         |  |  |                                     | $ | 34,808  |                             |  |  |               | $ | (10,387 | )                 |  |  |                   | $ | 43,021  |              |   |         |   | $ | 67,442   |   |  |  |  | $ | — |   |  |  |  | $ | 67,442   |   |
| Netpremiumsearned                                          |  |  |                                     | $ | 101,688 |                             |  |  |               | $ | 39,317  |                   |  |  |                   | $ | 48,170  |              |   |         |   | $ | 189,175  |   |  |  |  | $ | — |   |  |  |  | $ | 189,175  |   |
| Technicalservicesrevenues                                  |  |  |                                     |   | — |                             |  |  |               |   | — |                   |  |  |                   |   | — |              |   |         |   |   | —  |   |  |  |  |   | 2,947   |   |  |  |  |   | 2,947    |   |
| Otherincome                                                |  |  |                                     |   | 502     |                             |  |  |               |   | 2,511   |                   |  |  |                   |   | — |              |   |         |   |   | 3,013    |   |  |  |  |   | 215     |   |  |  |  |   | 3,228    |   |
| Netlosses and lossexpenses                                 |  |  |                                     |   | (63,632 | )                           |  |  |               |   | (32,768 | )                 |  |  |                   |   | (37,778 | )            |   |         |   |   | (134,178 | ) |  |  |  |   | — |   |  |  |  |   | (134,178 | ) |
| Acquisitionexpenses                                        |  |  |                                     |   | (14,156 | )                           |  |  |               |   | (9,552  | )                 |  |  |                   |   | (8,900  | )            |   |         |   |   | (32,608  | ) |  |  |  |   | — |   |  |  |  |   | (32,608  | ) |
| Generaland administrativeexpenses                          |  |  |                                     |   | (43,906 | )                           |  |  |               |   | (14,441 | )                 |  |  |                   |   | (21,451 | )            |   |         |   |   | (79,798  | ) |  |  |  |   | (4,250  | ) |  |  |  |   | (84,048  | ) |
| Segmentloss                                                |  |  |                                     | $ | (19,504 | )                           |  |  |               | $ | (14,933 | )                 |  |  |                   | $ | (19,959 | )            |   |         |   | $ | (54,396  | ) |  |  |  | $ | (1,088  | ) |  |  |  | $ | (55,484  | ) |
| Depreciationof fixed assets and amortization ofintangibles |  |  |                                |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              | $ | (1,983  | ) |
| Interestexpense                                            |  |  |                                |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              |   | (4,036  | ) |
| Netinvestmentincome                                        |  |  |                                |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              |   | 35,350  |   |
| Netrealized losses oninvestments                           |  |  |                                |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              |   | (14,142 | ) |
| Otherloss                                                  |  |  |                                |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              |   | (536    | ) |
| Netforeign exchangelosses                                  |  |  |                                |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              |   | (1,951  | ) |
| Lossfrom continuing operations before incometaxes          |  |  |                                |   |         |                        |  |  |          |   |         |              |  |  |              |   |         |              | $ | (42,782 | ) |
|                                                            |

Specialtyinsurance run-off and specialty reinsurance run-off gross premiumswritten include $36.3  million and $38.3  million ofreturned gross premium associated with cancelled policies during thenine months ended September  30,2006.

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

|                                                            |  |  |                                       |   |         |                             |  |  |               |   |          |                   |  |  |                   |   |         |              |  |  |  |   |          |   |  |  |  |   |         |   |  |  |  |   |          |   |
|------------------------------------------------------------|--|--|---------------------------------------|---|---------|-----------------------------|--|--|---------------|---|----------|-------------------|--|--|-------------------|---|---------|--------------|--|--|--|---|----------|---|--|--|--|---|---------|---|--|--|--|---|----------|---|
|                                                       |  |  | Ninemonths ended September  30,  2005 |
| Statementof operations bysegment                           |  |  | Specialtyinsurancerun-off             |   |         | Specialtyreinsurancerun-off |  |  | Lloyd’s |   |          | Underwritingtotal |  |  | Technicalservices |   |         | Consolidated |
| Directinsurance                                            |  |  |                                       | $ | 226,270 |                             |  |  |               | $ | —  |                   |  |  |                   | $ | 53,486  |              |  |  |  | $ | 279,756  |   |  |  |  | $ | — |   |  |  |  | $ | 279,756  |   |
| Reinsuranceassumed                                         |  |  |                                       |   | 19,303  |                             |  |  |               |   | 213,757  |                   |  |  |                   |   | — |              |  |  |  |   | 233,060  |   |  |  |  |   | — |   |  |  |  |   | 233,060  |   |
| Totalgross premiumswritten                                 |  |  |                                       |   | 245,573 |                             |  |  |               |   | 213,757  |                   |  |  |                   |   | 53,486  |              |  |  |  |   | 512,816  |   |  |  |  |   | — |   |  |  |  |   | 512,816  |   |
| Premiumsceded                                              |  |  |                                       |   | (83,273 | )                           |  |  |               |   | (31,666  | )                 |  |  |                   |   | (11,671 | )            |  |  |  |   | (126,610 | ) |  |  |  |   | — |   |  |  |  |   | (126,610 | ) |
| Netpremiumswritten                                         |  |  |                                       | $ | 162,300 |                             |  |  |               | $ | 182,091  |                   |  |  |                   | $ | 41,815  |              |  |  |  | $ | 386,206  |   |  |  |  | $ | — |   |  |  |  | $ | 386,206  |   |
| Netpremiumsearned                                          |  |  |                                       | $ | 119,350 |                             |  |  |               | $ | 156,014  |                   |  |  |                   | $ | 21,676  |              |  |  |  | $ | 297,040  |   |  |  |  | $ | — |   |  |  |  | $ | 297,040  |   |
| Technicalservicesrevenues                                  |  |  |                                       |   | — |                             |  |  |               |   | —  |                   |  |  |                   |   | — |              |  |  |  |   | —  |   |  |  |  |   | 9,793   |   |  |  |  |   | 9,793    |   |
| Otherincome                                                |  |  |                                       |   | 787     |                             |  |  |               |   | 2,413    |                   |  |  |                   |   | — |              |  |  |  |   | 3,200    |   |  |  |  |   | 1,704   |   |  |  |  |   | 4,904    |   |
| Netlosses and lossexpenses                                 |  |  |                                       |   | (79,620 | )                           |  |  |               |   | (149,034 | )                 |  |  |                   |   | (12,580 | )            |  |  |  |   | (241,234 | ) |  |  |  |   | — |   |  |  |  |   | (241,234 | ) |
| Acquisitionexpenses                                        |  |  |                                       |   | (20,312 | )                           |  |  |               |   | (39,505  | )                 |  |  |                   |   | (2,901  | )            |  |  |  |   | (62,718  | ) |  |  |  |   | — |   |  |  |  |   | (62,718  | ) |
| Generaland administrativeexpenses                          |  |  |                                       |   | (32,407 | )                           |  |  |               |   | (17,527  | )                 |  |  |                   |   | (13,639 | )            |  |  |  |   | (63,573  | ) |  |  |  |   | (10,573 | ) |  |  |  |   | (74,146  | ) |
| Segment(loss)income                                        |  |  |                                       | $ | (12,202 | )                           |  |  |               | $ | (47,639  | )                 |  |  |                   | $ | (7,444  | )            |  |  |  | $ | (67,285  | ) |  |  |  | $ | 924     |   |  |  |  | $ | (66,361  | ) |
| Depreciationof fixed assets and amortization ofintangibles |  |  |                                       |   |    |                             |  |  |               |   |     |                   |  |  |                   |   |    |              |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  | $ | (2,159   | ) |
| Interestexpense                                            |  |  |                                       |   |    |                             |  |  |               |   |     |                   |  |  |                   |   |    |              |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   | (2,971   | ) |
| Netinvestmentincome                                        |  |  |                                       |   |    |                             |  |  |               |   |     |                   |  |  |                   |   |    |              |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   | 18,403   |   |
| Netrealized losses oninvestments                           |  |  |                                       |   |    |                             |  |  |               |   |     |                   |  |  |                   |   |    |              |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   | (789     | ) |
| Otherincome                                                |  |  |                                       |   |    |                             |  |  |               |   |     |                   |  |  |                   |   |    |              |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   | 552      |   |
| Netforeign exchangelosses                                  |  |  |                                       |   |    |                             |  |  |               |   |     |                   |  |  |                   |   |    |              |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  |   | (336     | ) |
| Lossfrom continuing operations before incometaxes          |  |  |                                       |   |    |                             |  |  |               |   |     |                   |  |  |                   |   |    |              |  |  |  |   |     |   |  |  |  |   |    |   |  |  |  | $ | (53,661  | ) |
|                                                            |

TheCompany's specialty insurance run-off segment business has beenwritten both on a direct basis with insured clients or by assumingreinsurance of underlying policies that are issued on its behalf bythird party insurers and reinsurers.

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

|          |                          |
|----------|--------------------------|
| 6.  | Earnings (Loss) pershare |

The following table sets forth the computation of basicand diluted loss pershare.

|                                                                 |  |  |                   |   |            |                   |  |  |                  |   |            |                   |  |  |  |   |            |   |  |  |  |   |            |   |
|-----------------------------------------------------------------|--|--|-------------------|---|------------|-------------------|--|--|------------------|---|------------|-------------------|--|--|--|---|------------|---|--|--|--|---|------------|---|
|                                                            |  |  | Threemonths ended |   |            | Nine monthsended  |
|                                                            |  |  | September30,2006  |   |            | September 30,2005 |  |  | September30,2006 |   |            | September 30,2005 |
| Netincome (loss) from continuingoperations                      |  |  |                   | $ | 3,307      |                   |  |  |                  | $ | (60,298    | )                 |  |  |  | $ | (44,745    | ) |  |  |  | $ | (54,131    | ) |
| (Loss)income from discontinuedoperations                        |  |  |                   |   | (936       | )                 |  |  |                  |   | 1,214      |                   |  |  |  |   | (12,953    | ) |  |  |  |   | 2,933      |   |
| Incomeon disposal of discontinuedoperations                     |  |  |                   |   | 704        |                   |  |  |                  |   | —    |                   |  |  |  |   | 704        |   |  |  |  |   | —    |   |
| Netincome(loss)                                                 |  |  |                   | $ | 3,075      |                   |  |  |                  | $ | (59,084    | )                 |  |  |  | $ | (56,994    | ) |  |  |  | $ | (51,198    | ) |
| Weightedaverage common shares outstanding –basic          |  |  |                   |   | 69,981,925 |                   |  |  |                  |   | 56,810,020 |                   |  |  |  |   | 69,970,237 |   |  |  |  |   | 56,804,119 |   |
| Weightedaverage common sharesoutstanding                        |  |  |                   |   | 69,981,925 |                   |  |  |                  |   | 56,810,020 |                   |  |  |  |   | 69,970,237 |   |  |  |  |   | 56,804,119 |   |
| Weightedaverage common shareequivalents                         |  |  |                   |   |       |                   |  |  |                  |   |       |                   |  |  |  |   |       |   |  |  |  |   |       |   |
| Options                                                         |  |  |                   |   | 2,689      |                   |  |  |                  |   | —    |                   |  |  |  |   | —    |   |  |  |  |   | —    |   |
| Warrants                                                        |  |  |                   |   | —    |                   |  |  |                  |   | —    |                   |  |  |  |   | —    |   |  |  |  |   | —    |   |
| Weightedaverage common shares outstanding –diluted        |  |  |                   |   | 69,984,614 |                   |  |  |                  |   | 56,810,020 |                   |  |  |  |   | 69,970,237 |   |  |  |  |   | 56,804,119 |   |
| Basicincome (loss) pershare                                     |  |  |                   |   |       |                   |  |  |                  |   |       |                   |  |  |  |   |       |   |
| Basic income(loss) from continuing operations pershare          |  |  |                   | $ | 0.04       |                   |  |  |                  | $ | (1.06      | )                 |  |  |  | $ | (0.64      | ) |  |  |  | $ | (0.95      | ) |
| Basic(loss) income from discontinued operations pershare        |  |  |                   | $ | (0.01      | )                 |  |  |                  | $ | 0.02       |                   |  |  |  | $ | (0.18      | ) |  |  |  | $ | 0.05       |   |
| Basicincome from disposal of discontinued operations pershare   |  |  |                   | $ | 0.01       |                   |  |  |                  | $ | —    |                   |  |  |  | $ | 0.01       |   |  |  |  | $ | —    |   |
| Basicincome (loss) pershare                                     |  |  |                   | $ | 0.04       |                   |  |  |                  | $ | (1.04      | )                 |  |  |  | $ | (0.81      | ) |  |  |  | $ | (0.90      | ) |
| Dilutedincome (loss) pershare                                   |  |  |                   |   |       |                   |  |  |                  |   |       |                   |  |  |  |   |       |   |
| Diluted income(loss) from continuing operations pershare        |  |  |                   | $ | 0.04       |                   |  |  |                  | $ | (1.06      | )                 |  |  |  | $ | (0.64      | ) |  |  |  | $ | (0.95      | ) |
| Diluted(loss) income from discontinued operations pershare      |  |  |                   | $ | (0.01      | )                 |  |  |                  | $ | 0.02       |                   |  |  |  | $ | (0.18      | ) |  |  |  | $ | 0.05       |   |
| Dilutedincome from disposal of discontinued operations pershare |  |  |                   | $ | 0.01       |                   |  |  |                  | $ | —    |                   |  |  |  | $ | 0.01       |   |  |  |  | $ | —    |   |
| Dilutedincome (loss) pershare                                   |  |  |                   | $ | 0.04       |                   |  |  |                  | $ | (1.04      | )                 |  |  |  | $ | (0.81      | ) |  |  |  | $ | (0.90      | ) |
|                                                                 |

Dueto a net loss for the nine months ended September  30,2006 and for the three and nine months ended September30,  2005, the assumed net exercise of options and warrants underthe treasury stock method has been excluded, as the effect would havebeen anti-dilutive. Accordingly, for the nine months endedSeptember  30,  2006, the calculation of weighted averagecommon shares outstanding on a diluted basis excludes 1,468,224 optionsand 2,542,813 warrants. For the three and nine months endedSeptember  30,  2005, the calculation of weighted averagecommon shares outstanding on a diluted basis excludes 4,142,879 optionsand 2,542,813 warrants.

|          |             |
|----------|-------------|
| 7.  | Reinsurance |

The Companyutilizes reinsurance and retrocessional agreements principally to limitnet exposures to losses arising on business assumed. TheCompany's reinsurance agreements provide for the recovery of aportion of losses and loss expenses from reinsurers.

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

Reinsurance assets due from ourreinsurers include losses and loss adjustment expenses recoverable anddeferred reinsurance premiums. The Company is subject to credit riskwith respect 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 ofSeptember  30,  2006 is ‘‘A’’(excellent) by A.M. Best. As of September  30,  2006, thelosses and loss adjustment expenses recoverable from reinsurers balancein the consolidated balance sheet included approximately 25.5%due from Everest Reinsurance Ltd., a reinsurer rated‘‘A+’’ (superior) by A.M. Best, andapproximately 12.3% due from Arch Reinsurance Ltd. which israted ‘‘A−’’ (excellent) by A.M.Best. Approximately 12.2% is 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 September  30,  2006.

The followingtable lists our largest reinsurers measured by the amount of losses andloss adjustment expenses recoverable at September  30,2006 and the reinsurers' financial strength rating from A.M.Best:

|                                              |  |  |                                              |   |       |                |  |  |               |
|----------------------------------------------|--|--|----------------------------------------------|---|-------|----------------|--|--|---------------|
|                                         |  |  | Lossesand LossAdjustment ExpensesRecoverable |   |       | A.M.BestRating |
| Reinsurer                                    |  |  | ($in millions)                               |   |       |           |
| Everest ReinsuranceLtd.                      |  |  |                                              | $ | 56.4  |                |  |  | A+            |
| ArchReinsuranceLtd.                          |  |  |                                              |   | 27.2  |                |  |  | A−      |
| VariousLloyd'ssyndicates                     |  |  |                                              |   | 26.8  |                |  |  | A   |
| GlacierReinsurance AG                        |  |  |                                              |   | 10.8  |                |  |  | A−      |
| AllianzMarine & Aviation VersicherungsAG |  |  |                                              |   | 10.7  |                |  |  | A−      |
| The Toa ReinsuranceCompany, Ltd.(Tokyo)      |  |  |                                              |   | 10.6  |                |  |  | A   |
| AspenInsuranceLtd.                           |  |  |                                              |   | 9.4   |                |  |  | A   |
| OdysseyAmerica ReinsuranceCorporation        |  |  |                                              |   | 8.7   |                |  |  | A   |
| MaxRe Ltd.                                   |  |  |                                              |   | 8.3   |                |  |  | A−      |
| TransatlanticReinsurance Company             |  |  |                                              |   | 8.2   |                |  |  | A+            |
| XLCapital Ltd.                               |  |  |                                              |   | 7.8   |                |  |  | A+            |
| PXRE ReinsuranceLimited                      |  |  |                                              |   | 6.0   |                |  |  | NR            |
| Other ReinsurersRated A− orBetter      |  |  |                                              |   | 23.5  |                |  |  | A−      |
| All OtherReinsurers                          |  |  |                                              |   | 4.6   |                |  |  | Various       |
| Total                                        |  |  |                                              | $ | 219.0 |                |  |  |          |
|                                              |

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

The effect of reinsurance activity onpremiums written, premiums earned and losses and loss expenses incurredfor the three and nine months ended September  30,  2006and 2005 is shownbelow.

|                                     |  |  |                 |   |         |                |  |  |                         |   |         |   |  |  |  |   |        |   |
|-------------------------------------|--|--|-----------------|---|---------|----------------|--|--|-------------------------|---|---------|---|--|--|--|---|--------|---|
| Threemonths ended September 30,2006 |  |  | PremiumsWritten |   |         | PremiumsEarned |  |  | Lossesand Loss Expenses |
| Directinsurance                     |  |  |                 | $ | 12,186  |                |  |  |                         | $ | 63,256  |   |  |  |  | $ | 36,051 |   |
| Reinsuranceassumed                  |  |  |                 |   | (18,879 | )              |  |  |                         |   | 16,557  |   |  |  |  |   | 3,656  |   |
| Gross                               |  |  |                 |   | (6,693  | )              |  |  |                         |   | 79,813  |   |  |  |  |   | 39,707 |   |
| Cededreinsurance                    |  |  |                 |   | 1,276   |                |  |  |                         |   | (30,611 | ) |  |  |  |   | (9,554 | ) |
| Net                                 |  |  |                 | $ | (5,417  | )              |  |  |                         | $ | 49,202  |   |  |  |  | $ | 30,153 |   |
|                                     |

|                                     |  |  |                 |   |         |                 |  |  |                        |   |         |   |  |  |  |   |          |   |
|-------------------------------------|--|--|-----------------|---|---------|-----------------|--|--|------------------------|---|---------|---|--|--|--|---|----------|---|
| Threemonths ended September 30,2005 |  |  | PremiumsWritten |   |         | Premiums Earned |  |  | Losses andLossExpenses |
| Directinsurance                     |  |  |                 | $ | 90,630  |                 |  |  |                        | $ | 70,379  |   |  |  |  | $ | 77,474   |   |
| Reinsuranceassumed                  |  |  |                 |   | 80,912  |                 |  |  |                        |   | 77,771  |   |  |  |  |   | 158,773  |   |
| Gross                               |  |  |                 |   | 171,542 |                 |  |  |                        |   | 148,150 |   |  |  |  |   | 236,247  |   |
| Cededreinsurance                    |  |  |                 |   | (55,577 | )               |  |  |                        |   | (47,604 | ) |  |  |  |   | (115,115 | ) |
| Net                                 |  |  |                 | $ | 115,965 |                 |  |  |                        | $ | 100,546 |   |  |  |  | $ | 121,132  |   |
|                                     |

|                                    |  |  |                 |   |         |                 |  |  |                        |   |          |   |  |  |  |   |         |   |
|------------------------------------|--|--|-----------------|---|---------|-----------------|--|--|------------------------|---|----------|---|--|--|--|---|---------|---|
| Ninemonths ended September 30,2006 |  |  | PremiumsWritten |   |         | Premiums Earned |  |  | Losses andLossExpenses |
| Directinsurance                    |  |  |                 | $ | 125,994 |                 |  |  |                        | $ | 227,113  |   |  |  |  | $ | 136,475 |   |
| Reinsuranceassumed                 |  |  |                 |   | 15,081  |                 |  |  |                        |   | 94,696   |   |  |  |  |   | 55,331  |   |
| Gross                              |  |  |                 |   | 141,075 |                 |  |  |                        |   | 321,809  |   |  |  |  |   | 191,806 |   |
| Cededreinsurance                   |  |  |                 |   | (73,633 | )               |  |  |                        |   | (132,634 | ) |  |  |  |   | (57,628 | ) |
| Net                                |  |  |                 | $ | 67,442  |                 |  |  |                        | $ | 189,175  |   |  |  |  | $ | 134,178 |   |
|                                    |

|                                    |  |  |                 |   |          |                |  |  |                        |   |         |   |  |  |  |   |          |   |
|------------------------------------|--|--|-----------------|---|----------|----------------|--|--|------------------------|---|---------|---|--|--|--|---|----------|---|
| Ninemonths ended September 30,2005 |  |  | PremiumsWritten |   |          | PremiumsEarned |  |  | Lossesand LossExpenses |
| Directinsurance                    |  |  |                 | $ | 279,756  |                |  |  |                        | $ | 162,109 |   |  |  |  | $ | 140,204  |   |
| Reinsuranceassumed                 |  |  |                 |   | 233,060  |                |  |  |                        |   | 225,575 |   |  |  |  |   | 242,532  |   |
| Gross                              |  |  |                 |   | 512,816  |                |  |  |                        |   | 387,684 |   |  |  |  |   | 382,736  |   |
| Cededreinsurance                   |  |  |                 |   | (126,610 | )              |  |  |                        |   | (90,644 | ) |  |  |  |   | (141,502 | ) |
| Net                                |  |  |                 | $ | 386,206  |                |  |  |                        | $ | 297,040 |   |  |  |  | $ | 241,234  |   |
|                                    |

|          |                              |
|----------|------------------------------|
| 8.  | Commitmentsand contingencies |

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

As of September  30,  2006 andDecember  31,  2005, substantially all of theCompany's cash and cash equivalents, and investments were held bythree custodians. Management believes these custodians to be of highcredit quality. The Company's investment portfolio is managed byexternal investment advisors in accordance with the Company'sinvestment guidelines. The Company's investment guidelinesrequire that the average credit quality of the investment portfolio istypically Aa3/AA− and that no more than 5% of theinvestment 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 ofSeptember  30,  2006 and 2005, the largest single non-U.S.

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

government and government agencies issueraccounted for less than 1.0% of the aggregate market value ofthe externally managed portfolios.

The premiums receivablebalances of $39.1  million and $115.1  million as ofSeptember  30,  2006 and December  31,  2005include approximately $5.2  million, or 13.3%, andapproximately $12.8  million, or 11.1%, 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.

The Company has recorded a provision foruncollectible premiums receivable of $1.3  million during thethree and nine months ended September  30,  2006. TheCompany did not record any provision for uncollectible premiumsreceivable for the three and nine months ended September30,  2005.

Concentrations related to losses and lossadjustment expenses recoverable from reinsurers are discussed furtherin Note 7.

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

During the nine months ended September30,  2006 and 2005, the HBW program accounted for approximately$67.5  million, or 47.9%, and $129.3  million, or25.2%, of the Company’s gross written premiums. Policiesunderwritten in this program are sourced by one third party agent thatthe Company believes is a large and established specialist in thisclass of business.

During the nine months ended September30,  2006 and 2005, the Company’s Lloyd’s syndicateaccounted for approximately $64.6  million, or 45.8%, and$53.5  million, or 10.4%, of its gross written premiums.The Lloyd’s syndicate generates its business primarily throughbrokers. During the nine months ended September  30,  2006,three brokers accounted for approximately 27.2%, 10.6%and 10.2% of the Lloyd’s segment’s gross premiumswritten. No other brokers accounted for more than 10% of theLloyd’s segments’ gross written premium for the ninemonths ended September  30,  2006.

During the ninemonths ended September  30,  2005, two brokers accountedfor approximately 23.7% and 16.9% of the Lloyd’ssegment’s gross premiums written. No other broker accounted formore than 10% of the Lloyd’s segments’ grosswritten premium for the nine months ended September  30,2005.

|          |                   |
|----------|-------------------|
| c)  | Restricted assets |

The Companyis required to maintain assets on deposit with various regulatoryauthorities to support its insurance and reinsurance operations. Theserequirements are generally promulgated by the regulations of theindividual locations within which the Company operates. These funds ondeposit are available to settle insurance and reinsuranceliabilities.

The Company participates in the Lloyd's ofLondon market through Syndicate 4000 and has dedicated a significantamount of its capital to the Lloyd's business. The regulations ofthe Council of Lloyd's determine the amount of premium that maybe written, also known as stamp capacity, based on the Company'sFunds at Lloyd's. The Company will maintain Funds atLloyd's for every underwriting year in which it has businessthrough Syndicate 4000 at Lloyd's. These funds may not bewithdrawn until each underwriting year is closed. This processcurrently takes three years and requires the purchase of reinsurance.Traditionally, three years have been necessary to report substantiallyall premiums associated with an underwriting year and to report mostrelated claims, although claims may remain unsettled after theunderwriting year is closed. A Lloyd's syndicate typically closesan 

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

underwriting year by reinsuring outstandingclaims on that underwriting year with the participants of the nextunderwriting year. As of September  30,  2006 cash andinvestments with a market value of $115.6  million were held byLloyd’s as trustee. As of December  31,  2005, cashand investments with a market value of $114.6  million were heldby Lloyd's as trustee, which includes an additional $6.3million of investments deposited to support the Company's 2006underwriting year. At September  30,  2006, in addition toits Funds at Lloyd's, the Company had cash and investments of$35.0  million that were held under Premium Trust Funds forpayments and discharge of certain trust outgoings, and a further$24.4  million held on deposit pursuant to regulatoryrequirements. At December  31,  2005, in addition to itsFunds at Lloyd's, the Company had cash and investments of$15.1  million that were held under Premium Trust Funds forpayments and discharge of certain trust outgoings, and a further$13.5  million held on deposit pursuant to regulatoryrequirements. The cash and investments held by Lloyd's areincluded within the table below.

The Company has also issuedletters of credit under its credit agreement for which cash and cashequivalents and investments are pledged as security, in favor ofcertain ceding companies to collateralize its claims paying obligationsunder contracts of insurance and reinsurance and in favor of a landlordrelating to a lease agreement for office space.

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

The fairvalues of these restricted assets by category at September30,  2006 and December 31, 2005 are asfollows:

|                                                          |  |  |                         |   |         |                  |  |  |                          |   |         |             |  |  |  |   |        |  |  |  |  |   |         |  |
|----------------------------------------------------------|--|--|-------------------------|---|---------|------------------|--|--|--------------------------|---|---------|-------------|--|--|--|---|--------|--|--|--|--|---|---------|--|
|                                                     |  |  | September30, 2006       |   |         | December 31,2005 |
|                                                     |  |  | Cash andcashequivalents |   |         | Investments      |  |  | Cash and cashequivalents |   |         | Investments |
| Deposits with U.S.regulatoryauthorities                  |  |  |                         | $ | 2,084   |                  |  |  |                          | $ | 29,902  |             |  |  |  | $ | 422    |  |  |  |  | $ | 29,328  |  |
| Fundsdeposited withLloyd's                               |  |  |                         |   | 65,209  |                  |  |  |                          |   | 109,797 |             |  |  |  |   | 35,472 |  |  |  |  |   | 107,759 |  |
| LOCpledgedassets                                         |  |  |                         |   | 16,611  |                  |  |  |                          |   | 246,948 |             |  |  |  |   | 17,865 |  |  |  |  |   | 199,342 |  |
| Trustfunds                                               |  |  |                         |   | 16,797  |                  |  |  |                          |   | 168,662 |             |  |  |  |   | 15,544 |  |  |  |  |   | 118,686 |  |
| Amountsheld in trust funds related to depositliabilities |  |  |                         |   | 3,567   |                  |  |  |                          |   | 37,376  |             |  |  |  |   | 13,540 |  |  |  |  |   | 38,316  |  |
| Total                                                    |  |  |                         | $ | 104,268 |                  |  |  |                          | $ | 592,685 |             |  |  |  | $ | 82,843 |  |  |  |  | $ | 493,431 |  |
|                                                          |

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

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

The Company leases office space and furnitureand equipment under operating lease agreements. Certain office spaceleases include an escalation clause that calls for annual increases tothe base rental payments. Rent expenses are being recognized on astraight-line basis over the respective lease terms. Future annualminimum payments under non-cancelable operating leases as ofSeptember  30,  2006, are asfollows:

|                         |  |  |        |   |        |  |
|-------------------------|--|--|--------|---|--------|--|
| Yearending September30, |  |  |   |
| 2007                    |  |  |        | $ | 3,359  |  |
| 2008                    |  |  |        |   | 2,584  |  |
| 2009                    |  |  |        |   | 2,769  |  |
| 2010                    |  |  |        |   | 2,757  |  |
| 2011                    |  |  |        |   | 2,645  |  |
| 2012andthereafter       |  |  |        |   | 18,866 |  |
| Total                   |  |  |        | $ | 32,980 |  |
|                         |

Totalrent expense under operating leases for the three and nine months endedSeptember  30,  2006, was approximately $1.5  millionand $4.7  million. Total rent expense under operating leases forthe three and nine months ended September  30,  2005, wasapproximately $1.2  million and $3.3million.

|          |                                     |
|----------|-------------------------------------|
| 9.  | Options and stock basedcompensation |

In July  2003, the shareholders of theCompany approved the 2003 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 theCompensation Committee of the Board of Directors. The CompensationCommittee determines the dates, amounts, exercise prices, vestingperiods and other relevant terms of the awards. Option awards aregenerally granted with an exercise price equal to the market price ofthe Company's stock at the date of grant; those option awardsgenerally vest based on four years of continuous service and have sevenor 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 seven or ten years from the date of grant, as thecase may be.

Performance share units were also awarded to variousemployees pursuant to the Incentive Plan. The number of shares ofcommon stock to be received under these awards followingDecember  31,  2007 (the end of the performance period)will depend on whether the Company's GAAP average return onshareholders' equity over a three year period precedingDecember  31,  2007 was 12% or higher. The granteeswill receive shares of common stock in an amount ranging from zero to300% percent of the share award (as such amount is defined inthe grant).

Since unvested performance share units are contingentupon satisfying performance objectives, those unvested shares areconsidered to be contingently issuable shares and are not included inthe computation of diluted earnings per share until all conditions forissuance are met. Performance share units are included in basic sharesoutstanding when issued.

Awards with graded vesting features willbe accounted for using the graded-vesting method in accordance withFASB Interpretation No. 28 ‘‘Accounting for StockAppreciation Rights and Other Variable Stock Option or AwardPlans.’’

As of September  30,  2006and 2005, the maximum number of shares available for award and issuanceunder the Incentive Plan was 9,350,000.

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

In accordance with SFAS 123 and SFAS123(R), the fair value of each option award is estimated on the date ofgrant using a Black-Scholes-Merton option-pricing formula that uses theassumptions noted in the following table, which represent the weightedaverage assumptions used for grants in the periods presented. Expectedvolatilities are based on implied volatilities from traded options onthe Company's stock, historical volatility of the Company'sstock, and other factors. The Company uses historical data to estimatefuture employee terminations. The expected term of options granted iscalculated using the Staff Accounting Bulletin No. 107 simplifiedmethod. It is the mid-point between the vesting date and the expirationdate and represents the period of time that options granted areexpected to be outstanding. The risk-free rate for periods within thecontractual life of the option is based on the U.S. Treasury yieldcurve in effect at the time of grant. The dividend yield is based onhistoricaldata.

|                        |  |  |                                      |  |      |                                    |  |  |      |  |      |      |  |  |  |  |      |   |  |  |  |  |      |   |
|------------------------|--|--|--------------------------------------|--|------|------------------------------------|--|--|------|--|------|------|--|--|--|--|------|---|--|--|--|--|------|---|
|                   |  |  | Threemonths ended September 30, 2006 |  |      | Nine months endedSeptember 30,2005 |
|                   |  |  | 2006                                 |  |      | 2005                               |  |  | 2006 |  |      | 2005 |
| Expectedvolatility     |  |  |                                      |  | 41.8 | %                                  |  |  |      |  | 24.0 | %    |  |  |  |  | 39.9 | % |  |  |  |  | 24.0 | % |
| Dividendyield          |  |  |                                      |  | 0.0  | %                                  |  |  |      |  | 0.0  | %    |  |  |  |  | 0.0  | % |  |  |  |  | 0.0  | % |
| Risk-freeinterestrate  |  |  |                                      |  | 4.5  | %                                  |  |  |      |  | 4.1  | %    |  |  |  |  | 4.5  | % |  |  |  |  | 4.1  | % |
| Expectedterm (inyears) |  |  |                                      |  | 5    |                                    |  |  |      |  | 7    |      |  |  |  |  | 5    |   |  |  |  |  | 7    |   |
|                        |

Thefollowing is a summary of the Company's stock options and relatedactivity during the three and nine months ended September30,  2006 and2005:

|                                        |  |  |                                      |  |           |                                    |  |  |        |   |         |                                |  |  |  |  |           |   |  |  |  |   |         |  |
|----------------------------------------|--|--|--------------------------------------|--|-----------|------------------------------------|--|--|--------|---|---------|--------------------------------|--|--|--|--|-----------|---|--|--|--|---|---------|--|
|                                   |  |  | Threemonths ended September 30, 2006 |  |           | Three months endedSeptember30,2005 |
|                                   |  |  | Number                               |  |           | Weighted-averageexercise price     |  |  | Number |   |         | Weighted-average exerciseprice |
| Outstanding – beginning ofperiod |  |  |                                      |  | 2,086,877 |                                    |  |  |        | $ | 9.70    |                                |  |  |  |  | 4,142,879 |   |  |  |  | $ | 9.65    |  |
| Granted                                |  |  |                                      |  | 175,000   |                                    |  |  |        |   | 2.74    |                                |  |  |  |  | 10,000    |   |  |  |  |   | 6.39    |  |
| Exercised                              |  |  |                                      |  | —   |                                    |  |  |        |   | — |                                |  |  |  |  | —   |   |  |  |  |   | — |  |
| Forfeited                              |  |  |                                      |  | (793,653  | )                                  |  |  |        |   | 9.79    |                                |  |  |  |  | (136,768  | ) |  |  |  |   | 10.22   |  |
| Outstanding– end ofperiod        |  |  |                                      |  | 1,468,224 |                                    |  |  |        | $ | 8.81    |                                |  |  |  |  | 4,016,111 |   |  |  |  | $ | 9.62    |  |
|                                        |

|                                        |  |  |                                     |  |            |                                   |  |  |        |   |         |                                |  |  |  |  |           |   |  |  |  |   |         |  |
|----------------------------------------|--|--|-------------------------------------|--|------------|-----------------------------------|--|--|--------|---|---------|--------------------------------|--|--|--|--|-----------|---|--|--|--|---|---------|--|
|                                   |  |  | Ninemonths ended September 30, 2006 |  |            | Nine months endedSeptember30,2005 |
|                                   |  |  | Number                              |  |            | Weighted-averageexercise price    |  |  | Number |   |         | Weighted-average exerciseprice |
| Outstanding – beginning ofperiod |  |  |                                     |  | 3,402,194  |                                   |  |  |        | $ | 9.55    |                                |  |  |  |  | 3,052,400 |   |  |  |  | $ | 9.99    |  |
| Granted                                |  |  |                                     |  | 195,000    |                                   |  |  |        |   | 2.94    |                                |  |  |  |  | 1,127,942 |   |  |  |  |   | 8.72    |  |
| Exercised                              |  |  |                                     |  | —    |                                   |  |  |        |   | — |                                |  |  |  |  | —   |   |  |  |  |   | — |  |
| Forfeited                              |  |  |                                     |  | (2,128,970 | )                                 |  |  |        |   | 9.48    |                                |  |  |  |  | (164,231  | ) |  |  |  |   | 10.10   |  |
| Outstanding– end ofperiod        |  |  |                                     |  | 1,468,224  |                                   |  |  |        | $ | 8.81    |                                |  |  |  |  | 4,016,111 |   |  |  |  | $ | 9.62    |  |
|                                        |

Theweighted-average grant date fair value of options granted during thethree and nine months ended September  30,  2006 was $1.10and $1.17. The weighted-average grant date fair value of optionsgranted during the three and nine months ended September30,  2005 was $2.32.

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

The fair value of performance share unitsand restricted shares awarded under the Incentive Plan is determinedbased on the closing trading price of the Company's shares on thegrant date. The following is a summary of the Company's nonvested performance share units and restricted shares and relatedactivity during the three and nine months ended September30,  2006 and2005:

|                                       |  |  |                                      |  |         |                                    |  |  |        |   |         |                             |  |  |  |  |         |   |  |  |  |   |         |  |
|---------------------------------------|--|--|--------------------------------------|--|---------|------------------------------------|--|--|--------|---|---------|-----------------------------|--|--|--|--|---------|---|--|--|--|---|---------|--|
|                                  |  |  | Threemonths ended September 30, 2006 |  |         | Three months endedSeptember30,2005 |
|                                  |  |  | Number                               |  |         | Weighted-averageshare price        |  |  | Number |   |         | Weighted-average shareprice |
| Non vested – beginning ofperiod |  |  |                                      |  | 194,400 |                                    |  |  |        | $ | 4.50    |                             |  |  |  |  | 105,185 |   |  |  |  | $ | 8.92    |  |
| Granted                               |  |  |                                      |  | — |                                    |  |  |        |   | — |                             |  |  |  |  | — |   |  |  |  |   | — |  |
| Vested                                |  |  |                                      |  | — |                                    |  |  |        |   | — |                             |  |  |  |  | — |   |  |  |  |   | — |  |
| Forfeited                             |  |  |                                      |  | (12,273 | )                                  |  |  |        |   | 8.92    |                             |  |  |  |  | (2,253  | ) |  |  |  |   | 8.92    |  |
| Nonvested – end ofperiod        |  |  |                                      |  | 182,127 |                                    |  |  |        | $ | 4.20    |                             |  |  |  |  | 102,932 |   |  |  |  | $ | 8.92    |  |
|                                       |

|                                       |  |  |                                     |  |         |                                   |  |  |        |   |         |                             |  |  |  |  |         |   |  |  |  |   |         |  |
|---------------------------------------|--|--|-------------------------------------|--|---------|-----------------------------------|--|--|--------|---|---------|-----------------------------|--|--|--|--|---------|---|--|--|--|---|---------|--|
|                                  |  |  | Ninemonths ended September 30, 2006 |  |         | Nine months endedSeptember30,2005 |
|                                  |  |  | Number                              |  |         | Weighted-averageshare price       |  |  | Number |   |         | Weighted-average shareprice |
| Non vested – beginning ofperiod |  |  |                                     |  | 148,335 |                                   |  |  |        | $ | 7.30    |                             |  |  |  |  | — |   |  |  |  | $ | — |  |
| Granted                               |  |  |                                     |  | 97,057  |                                   |  |  |        |   | 2.60    |                             |  |  |  |  | 106,702 |   |  |  |  |   | 8.92    |  |
| Vested                                |  |  |                                     |  | — |                                   |  |  |        |   | — |                             |  |  |  |  | — |   |  |  |  |   | — |  |
| Forfeited                             |  |  |                                     |  | (63,265 | )                                 |  |  |        |   | 8.92    |                             |  |  |  |  | (3,770  | ) |  |  |  |   | 8.92    |  |
| Nonvested – end ofperiod        |  |  |                                     |  | 182,127 |                                   |  |  |        | $ | 4.20    |                             |  |  |  |  | 102,932 |   |  |  |  | $ | 8.92    |  |
|                                       |

Therewere no performance share units or restricted shares granted during thethree months ended September  30,  2006 and 2005.

Thecompensation cost that was expensed in the Statement of Operationsduring the three and nine months ended September  30,  2006was $(0.1) million and $0.4  million.

The following is asummary of the Company's outstanding options and exercisableoptions as of September  30,2006.

|                         |  |  |                    |  |         |                      |  |  |                                 |   |       |                   |  |  |                       |  |  |  |  |         |  |  |  |  |   |         |  |
|-------------------------|--|--|--------------------|--|---------|----------------------|--|--|---------------------------------|---|-------|-------------------|--|--|-----------------------|--|--|--|--|---------|--|--|--|--|---|---------|--|
|                    |  |  | Optionsoutstanding |  |         | Optionsexercisable   |
| Rangeof exercise prices |  |  | Numberofoptions    |  |         | Averageexerciseprice |  |  | Averageremainingcontractuallife |   |       | Number of options |  |  | Average exerciseprice |
| $1.88                   |  |  |                    |  | 100,000 |                      |  |  |                                 | $ | 1.88  |                   |  |  | 6.96years             |  |  |  |  | — |  |  |  |  | $ | — |  |
| $2.30                   |  |  |                    |  | 36,666  |                      |  |  |                                 | $ | 2.30  |                   |  |  | 9.82years             |  |  |  |  | — |  |  |  |  | $ | — |  |
| $4.59– $5.00      |  |  |                    |  | 76,666  |                      |  |  |                                 | $ | 4.67  |                   |  |  | 8.31years             |  |  |  |  | — |  |  |  |  | $ | — |  |
| $6.39                   |  |  |                    |  | 10,000  |                      |  |  |                                 | $ | 6.39  |                   |  |  | 5.94years             |  |  |  |  | 2,500   |  |  |  |  | $ | 6.39    |  |
| $8.55 –$9.00      |  |  |                    |  | 339,728 |                      |  |  |                                 | $ | 8.93  |                   |  |  | 6.05years             |  |  |  |  | 86,182  |  |  |  |  | $ | 8.92    |  |
| $10.00 –$10.50    |  |  |                    |  | 881,830 |                      |  |  |                                 | $ | 10.00 |                   |  |  | 6.94years             |  |  |  |  | 822,080 |  |  |  |  | $ | 10.00   |  |
| $11.50 –$12.00    |  |  |                    |  | 20,000  |                      |  |  |                                 | $ | 11.60 |                   |  |  | 7.36years             |  |  |  |  | 10,000  |  |  |  |  | $ | 11.60   |  |
| $12.50                  |  |  |                    |  | 15,000  |                      |  |  |                                 | $ | 12.50 |                   |  |  | 7.58years             |  |  |  |  | 7,500   |  |  |  |  | $ | 12.50   |  |
|                         |

As ofSeptember  30,  2006, there was $1.0  million oftotal unrecognized compensation cost related to non vested share-basedcompensation arrangements with respect to stock options and performanceshare units granted under the Incentive Plan. This cost is expected tobe recognized over a weighted-average period of 2.0years.

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

|           |                               |
|-----------|-------------------------------|
| 10.  | Goodwill and intangibleassets |

|          |          |
|----------|----------|
| a)  | Goodwill |

On August4,  2006, the Company determined that its goodwill asset of$12.6  million related to its acquisition of ESC was impaired.The impairment was the result of the uncertain future outlook of ESCand a decline in expected technical services revenues in future periodsgiven the Company's exit from its environmental insurance line ofbusiness. The impairment charge of $12.6  million was recorded inthe Company's results for the three months ended June30,  2006 and was charged to the technical services segment.Following the disposal of ESC, as described in Note 4, the impairmentcharge was reclassified in the Statements of Operations to (loss)income from discontinued operations. The Company does not expect theimpairment charge to result in future cash expenditures.

|          |                   |
|----------|-------------------|
| b)  | Intangible assets |

Prior to theCompany's decision to cease underwriting and enter run-off, theCompany's U.S. insurance licenses, under the provisions ofStatement of Financial Accounting Standards No. 142‘‘Goodwill and other intangibleassets’’, were classified as having indefinite usefullives and were not subject to amortization but were subject toimpairment testing on an annual basis, or more often if events orcircumstances indicate there may be impairment. As a result of theCompany's decision to cease underwriting and place most of itsspecialty insurance and reinsurance lines into orderly run-off, theCompany has determined that its U.S. insurance licenses have definiteuseful lives, which on average are estimated to be 5 years.Accordingly, the Company will amortize its U.S. insurance licenses over5 years in a manner that reflects the estimated decline in the economicvalue and will review for further impairment when events orcircumstances indicate that there may be impairment. The gross carryingvalue and accumulated amortization for the Company's U.S.insurance licenses that are subject to amortization as ofSeptember  30,  2006 was $9.1  million and$0.2  million. The estimated amortization expense of the U.S.insurance licenses subject to amortization in each of the five yearssubsequent to September  30,  2006, is as follows: 2007,$0.3  million; 2008, $0.4  million; 2009, $0.3million; 2010, $0.4  million; and 2011, $0.2  million, witha residual value of $7.4  million.

|           |                  |
|-----------|------------------|
| 11.  | Subsequentevents |

For the period from October  1,  2006 toNovember  1,  2006, we returned additional gross premiumassociated with policy cancellations of $6.0  million.

OnOctober  25,  2006, the Company announced that that it hadsigned definitive documents with Chaucer and the senior underwritingteam of Syndicate 4000, for the formation of Pembroke. Pembroke will bea joint venture among Quanta, Chaucer and the Syndicate 4000underwriting team and will serve as the new managing agency forSyndicate 4000. The transaction is expected to close following thereceipt of required Lloyd's and FSA regulatory approvals. Underthe terms of the agreements, the Company’s capital remainscommitted to Syndicate 4000 for underwriting years 2007 through 2009.Additionally, Chaucer and Quanta Holdings plan to work together closelyto continue to diversify the provision of capital to the Syndicate tosupport its presence and profitable growth in the Lloyd's market.Chaucer has agreed to provide the capital to support 10 percent of theSyndicate's underwriting in 2007 and to support underwriting in2008 and 2009.

On October  27,  2006, the Companyentered into a Credit Agreement with a syndicate of lenders and INGBank N.V., London Branch, as the Mandated Lead Arranger, providing fora secured bank letter of credit facility (the ‘‘INGCredit Facility’’). The ING Credit Facility provides foran aggregate commitment of $240  million for a period of threeyears terminating on October  27,  2009, pursuant to whichthe lenders will issue from time to time, to the account of thedesignated subsidiary borrowers, one or more back-to-back letters ofcredit naming JPMorgan Chase Bank, N.A. as beneficiary in the

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Expressed in thousands of U.S. dollars exceptfor share amounts, or as otherwisestated)

face amount equal to the face amount of theoutstanding letters of credit under the JPM Credit Agreement (asdefined below), and other letters of credit in an aggregate face amountup to the aggregate commitment. The facility is secured by specifiedinvestments of the borrowers. Availability for issuances of letters ofcredit on account of any borrower is based on the amount of eligibleinvestments pledged by the applicable borrower(s) and no materialadverse change provisions. Regulatory restrictions will also limit theamount of investments that may be pledged by certain U.S. insuranceborrowers and, consequently, the amount available for letters of creditunder the facility on account of those borrowers. The Companyunconditionally and irrevocably guaranteed all of the obligations ofits subsidiaries to the lenders under the ING CreditFacility.

The ING Credit Facility includes customaryrepresentations and warranties, affirmative and negative covenants, andevents of default. Upon the occurrence, and during the continuance, ofan event of default, including but not limited to nonpayment ofprincipal when due, failure to perform or observe certain terms,covenants or agreements under the ING Credit Facility, and certaindefaults of other indebtedness, the Administrative Agent may terminatethe obligation of the lenders to make advances and issue letters ofcredit and declare any outstanding obligations immediately due andpayable.

The ING Credit Facility has a financial covenantrequiring the Company to maintain a minimum consolidated tangible networth, as well as covenants restricting the activities of the Companyand its subsidiaries, such as the incurrence of additional indebtednessand liens, the sale of assets, and the payment of dividends and otherrestricted payments.

On October  27,  2006, theCompany also entered into a Fourth Consent and Amendment to CreditAgreement dated October  25,  2006 (the‘‘Fourth Amendment’’), with a syndicate oflenders and JPMorgan Chase Bank, N.A., as the Administrative Agent,which provided for certain amendments and waivers with respect to theCompany's Credit Agreement dated as of July  13,2004 and amended and restated as of July  11,  2005 (the‘‘JPM Credit Agreement’’).

The FourthAmendment, among other things, permanently terminates thelenders' obligations to extend any loan, issue any letter ofcredit, modify the terms of any existing letter of credit, or otherwiseextend any additional credit under the JPM Credit Agreement, releasesthe liens granted by the Company and the designated subsidiaryborrowers and transfers the collateral to the collateral agent underthe ING Credit Facility in exchange for a letter of credit issuedpursuant to the ING Credit Facility in a stated principal amount equalto between 102% and 105% of the letters of creditoutstanding under the JPM Credit Agreement. Furthermore, the FourthAmendment reduces certain fees payable under the JPM Credit Agreementand permanently removes most of the covenants contained in the JPMCredit Agreement, including the covenants mandating a maximum leverageratio, a minimum consolidated net worth, restrictions against theincurrence of additional indebtedness, liens, dividends and otherrestricted payments, and the requirement that the Company maintaincertain insurance ratings. As a result of the Fourth Amendment, theCompany is no longer in default under the JPM CreditAgreement.

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

The following discussion andanalysis of our results of operations, financial condition andliquidity and capital resources should be read in conjunction with ourunaudited condensed consolidated financial statements and related notesfor the nine months ended September  30,  2006, and therisk factors under Part II Item 1A ‘‘RiskFactors’’ contained in our reports on Form 10-Q for thequarterly periods ended March  31,  2006 and June30,  2006, and the audited consolidated financial statements andrelated notes for the year ended December  31,  2005, aswell as ‘‘Management's Discussion and Analysis ofFinancial Condition and Results of Operations,’’ includingthe discussions of critical accounting policies and estimates,quantitative and qualitative disclosures about market risk and riskfactors, contained in the Form 10-K for the year ended December31,  2005, filed by the Company with the SEC on March31,  2006 (‘‘Form 10-K’’) and in the Form10-Q for the quarters ended March  31,  2006 andJune  30,  2006.

Safe Harbor Disclosure

ThePrivate Securities Litigation Reform Act of 1995 provides a‘‘safe harbor’’ for forward-looking statements.Any written or oral statements made by or on our behalf may includeforward-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:

All forward-looking statements address matters thatinvolve risks and uncertainties. There are important factors that couldcause our actual results to differ materially from those indicated inthese statements. We believe that these factors include but are notlimited to the following:

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | We have placedall of our lines of businesses in run-off, with the exception of ourLloyd’s syndicate. Running off these businesses includes anumber of risks, including the risk that we may not be able to mitigateour existing exposures to our historical underwriting risks, obtain therelease of collateral when contracts are cancelled, recover amountsowed to us by our reinsurers and retrocessionaires, enter intosuccessful commutations or other arrangements to mitigate ourliabilities, obtain premium that has been due but not paid to us for anextended period of time, release capital from our subsidiaries to ourholding company where it is available to our shareholders, reduce ourexpenses such that they do not exceed income from investments, preventinvestment losses, maintain sufficient liquidity in each of oursubsidiaries to meet the obligations of those subsidiaries or retaincontrol over our subsidiaries; |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | OnJune  7,  2006, A.M. Best, downgraded our financialstrength rating, from ‘‘B++’’ (Very Good)to ‘‘B’’ (Fair). Following the ratingactions, A.M. Best has, at our request, withdrawn the financialstrength ratings of Quanta Holdings and its operating subsidiaries,excluding its syndicate in the A rated Lloyd's market. The A.M.Best rating action caused a default under our credit facility, which wenow refer to as our old credit facility. The lenders waived the defaultunder the old credit facility until October  27,  2006 andon that date we entered into a new credit facility and extended our oldcredit facility so that we may transition all of our outstandingletters of credit, which secure our claims paying obligations, from ourold credit facility to our new credit facility. We presently haveapproximately $193.4  million of letters of credit issued underour credit facilities, which are fully secured. As a result of futurelosses and other events, we may be required to post additional securityeither through the issuance |

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|  |        |                                                                                                                                                                                                                                                                                                                                                                                                       |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |   | of letters of credit or the placement ofsecurities in trust under the terms of those insurance or reinsurancecontracts. If we fail to maintain or enter into adequate letter ofcredit facilities on a timely basis, we would be required to placesecurities in trust or similar arrangements, which would be moredifficult and costly to establish and administer and could lead toliquidity strains; |

|  |              |                                                                                                                                                                                                                                                                                       |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | The implementation ofour run off plan is expected to create 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 ofoperations; |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Our existing policyobligations in certain lines of business that we have underwritten,including marine, technical risk and aviation reinsurance andenvironmental insurance, continue to have large aggregate exposures tonatural and man-made disasters such as hurricane, typhoon, windstorm,flood, earthquake, acts of war, acts of terrorism and politicalinstability, in certain cases for up to ten years, and our results maycontinue to be volatile as a result; |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Ourability to pay dividends from our subsidiaries to Quanta Holdings isrestricted by regulations in Bermuda, several states in the UnitedStates, the European Union and the UK. In addition, the BermudaMonetary Authority (the ‘‘BMA’’) has,pursuant to its regulatory discretion, amended the license of QuantaBermuda, our principal subsidiary in Bermuda, to require that it, amongother things, seek the approval from the BMA prior to paying anydividend to Quanta Holdings and prohibiting it from engaging in any newtransactions. We are working with the applicable regulatory authoritiesto facilitate dividends from our insurance operating subsidiaries toQuanta Holdings. Completing this work is expected to take a long periodof time and requires us to meet many conditions, particularly thedischarge of all our policyobligations; |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Our current estimates ofour exposure to ultimate claim costs associated with HurricanesKatrina, Rita and Wilma are based on available information, claimsnotifications received to date, industry loss estimates, output fromindustry models, a review of affected contracts and discussions withbrokers and clients. The actual amount of losses from HurricanesKatrina, Rita and Wilma may vary significantly from our estimates basedon such data, which could have a material adverse effect on ourfinancial condition or our results ofoperations; |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Our ability to take steps topreserve shareholder value and improve our position and our ability tocontinue to operate our Lloyd’s business is dependent on ourability to retain our executives and key employees. Our inability toretain, attract and integrate members of our management team, keyemployees and other personnel could significantly and negatively affectthe execution of our run off plan, our Lloyd’s operations andthe preservation of shareholdervalue; |

|  |              |                                                                                                           |
|--|--------------|-----------------------------------------------------------------------------------------------------------|
|  | •  | If actual claims exceed our lossreserves, our financial results could be significantly adverselyaffected; |

|  |              |                                                                                                                                                        |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | The failure of any of the losslimitation methods we employ could have a material adverse effect onour 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 at all; |

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|  |              |                                                                                                                                                                                                  |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | If we receiveadditional premium estimate reductions and cancellations in futureperiods, we may not receive all of our premiums receivable in cash, andour cash flows could be adverselyaffected; |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | We have a significant amountdue from reinsurers and retrocessionaires who may refuse to pay ourclaims even when we believe those payments are contractually due to usbecause we are a run off company or for other reasons. These actions,if taken, will increase our expenses as we take legal action and if weare unsuccessful in recovering these amounts, may have a negativeimpact on our financial results andposition;     |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | The failure to remedyany weakness found in our evaluations of controls required by Section404 of the Sarbanes-Oxley Act of 2002, including the materialweaknesses identified in our annual report on Form 10-K for the yearended December  31,  2005, may result in our financialstatements being materially inaccurate and may cause the share price ofour common and preferred shares to be adverselyaffected; |

|  |              |                                                                   |
|--|--------------|-------------------------------------------------------------------|
|  | •  | Changes in the futureavailability, cost or quality ofreinsurance; |

|  |              |                                                        |
|--|--------------|--------------------------------------------------------|
|  | •  | Risks relating to potentiallitigation and arbitration; |

|  |              |                                                                                                                   |
|--|--------------|-------------------------------------------------------------------------------------------------------------------|
|  | •  | Ourremaining risks are not diversified among classes of risk and aretherefor more susceptible to loss volatility; |

|  |              |                                                                     |
|--|--------------|---------------------------------------------------------------------|
|  | •  | Changes in regulation or tax lawsapplicable to us or our customers; |

|  |              |                                                                                                                                                                                                  |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Risksrelating to our reliance on program managers, third-partyadministrators, consultants and other supporting vendors for claimpayments, data, premium collection and administrative functions; |

|  |              |                                                 |
|--|--------------|-------------------------------------------------|
|  | •  | 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 for the year ended December31,  2005 and in our reports on Form 10-Q for the quarterlyperiods ended March  31,  2006 and June  30,2006 and that are otherwise described from time to time in our U.S.Securities and Exchange 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, strategy and liquidity. Allsubsequent written and oral forward-looking statements attributable tous or individuals acting on our behalf are expressly qualified in theirentirety 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. Weare currently operating our Syndicate 4000 in the‘‘A’’ rated Lloyd's market. We arealso conducting a self managed run-off of our remaining insurance andreinsurance businesses, as more fully described below.

Wecommenced substantive operations on September  3,  2003when we obtained our initial capital and purchased EnvironmentalStrategies Consulting LLC (‘‘ESC’’), anenvironmental consulting business and our predecessor for accountingpurposes. A.M. Best assigned an ‘‘A−’’(excellent) financial strength rating to Quanta Bermuda and itssubsidiaries and Quanta Europe.

From the fourth quarter of 2003until the second quarter of 2006, through operating subsidiaries inBermuda, the U.S. and Europe, we focused on writing coverage forspecialized classes of risks through teams of experienced andtechnically qualified underwriters. Our specialized classes of riskincluded insurance (professional, environmental, fidelity and crime andsurety), reinsurance (property, marine and casualty) and structuredproducts, or a combination of these three products. We wrote riskseither on an individual basis or as part of a program administered by athird party. We used our Bermuda operations primarily to insure U.S.risks from Bermuda on a non-admitted basis and also, from time to time,to underwrite some European risks. We also wrote specialty products inthe United States on an admitted basis through our subsidiary, QuantaIndemnity Company. Further, during 2005 we wrote specialty insurancefrom the United States on an excess and surplus lines basis and U.S.reinsurance on a non-admitted basis through our subsidiary, QuantaSpecialty Lines Insurance Company. Since the fourth quarter of 2004, wealso underwrote European Union sourced specialty business throughQuanta Europe, our Irish subsidiary located in Dublin, Ireland, whichis our European headquarters. Since February  2005, we alsoserved our London-based clients for European insurance and reinsurancebusiness through our Quanta Europe branch in London. We have also beenunderwriting through our Lloyd's syndicate, which we callSyndicate 4000, since the fourth quarter of 2004.

As a result ofthe expected losses from Hurricanes Katrina, Rita and Wilma in 2005(‘‘2005 hurricanes’’), on October5,  2005, A.M. Best placed the‘‘A−’’ (excellent) financial strengthrating assigned to Quanta Bermuda and its subsidiaries and QuantaEurope, under review with negative implications. In response, duringthe fourth quarter of 2005, we worked closely with A.M. Best on a plandesigned to maintain our ‘‘A−’’ rating,which included the retrocession of substantially all the in-forcebusiness, as of October  1,  2005, in our technical riskproperty and property reinsurance lines of business (other than ourprogram business) 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  21,  2005, A.M. Bestaffirmed the financial strength rating of‘‘A−’’ (excellent) of Quanta Bermuda andits subsidiaries, and ascribed a negative outlook to the rating. OnMarch  2,  2006, A.M. Best announced that it had downgradedthe financial strength rating assigned to Quanta Bermuda and itssubsidiaries and Quanta Europe, to ‘‘B++’’(very good), under review with negative implications. The A.M. Best‘‘A’’ (excellent) rated Lloyd's market,including our Lloyd's syndicate, was not subject to the ratingdowngrade. On June  7,  2006, A.M. Best downgraded ourfinancial strength rating from ‘‘B++’’(very good) to ‘‘B’’ (fair). Following therating actions, A.M. Best has, at our request, withdrawn the financialstrength ratings of Quanta Bermuda and its operating subsidiaries,excluding our syndicate in the ‘‘A’’ ratedLloyd's market.

Following the A.M. Best rating actions andextensive strategic review by our Board of Directors and its financialadvisers, on May  25,  2006, we decided to ceaseunderwriting or seeking new business and to place most of our remainingspecialty insurance and reinsurance lines into orderly run-off. OnSeptember  14,  2006, we announced that following thereview of a number of strategic alternatives, we are engaging in anorderly, self-managed run-off of our remaining insurance andreinsurance operations which, in the Board of Directors view, is thebest means of preserving value for shareholders. We also sold ESC, ourenvironmental consulting business, for a total consideration of$12.5  million. The results of that sale and the treatment of thedisposal of ESC as a discontinued operation are more fully describedbelow under ‘‘Results of Operations — DiscontinuedOperations.’’

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During the fourth quarter of 2006, weentered into a series of agreements with Chaucer Holdings PLC(‘‘Chaucer’’), the specialist Lloyd'sinsurer, and the senior underwriting team of Syndicate 4000 under whicha new managing agency, Pembroke Managing Agency Limited(‘‘Pembroke’’). Pembroke, which is expectedto provide technical and administrative support and oversight toSyndicate 4000, is a joint venture among Quanta Holdings, Chaucer andthe Syndicate 4000 underwriting team. We believe that Pembroke willenable Syndicate 4000 to maintain and grow a long-term underwritingpresence within Lloyd's without requiring direct technical oradministrative support from us. We also believe that this arrangementwill preserve our capital invested in Lloyd's and provide for theability of an orderly withdrawal of this capital over time throughdiversification by attracting capital from third parties to replace, oradd to, existing capital. Under the terms of the agreements, theCompany’s capital remains committed to Syndicate 4000 forunderwriting years 2007 through 2009. Additionally, Chaucer and QuantaHoldings plan to work together closely to continue to diversify theprovision of capital to the Syndicate to support its presence andprofitable growth in the Lloyd's market. Chaucer has agreed toprovide the capital to support 10 percent of the Syndicate'sunderwriting in 2007 and to support underwriting in 2008 and2009.

On October  27,  2006 we entered into a newcredit facility and amended our existing facility so that we maytransition all of our outstanding letters of credit, which secure ourclaims paying obligations to the new credit facility. There arecurrently no outstanding borrowings under the credit facility. As ofSeptember  30,  2006, we had approximately $198.4million of letters of credit issued under the credit facility, whichare fully secured by investments and cash totaling approximately$263.6  million. The terms of our credit facility arrangementsare more fully described below under ‘‘Liquidity —Sources of cash’’.

As we continue to run-off andwind-up our businesses we will be seeking, over time and subject to theapproval of our regulators, to extract capital from our subsidiariesand dividend it to our holding company where it may be available to ourshareholders. We believe that the factors that have a direct impact onthe amount of capital that may ultimately be available to ourshareholders and the timing of when it will be available are ourability to (1) determine which portion of our business to maintain,commute, cancel, transfer, or otherwise mitigate, as the case may be,(2) mitigate exposures by purchasing additional reinsurance, (3) investour assets in a way that balances risk with return, (4)reduce our expenses and (5) obtain the approval of our regulators toextract capital from our subsidiaries and distribute it to QuantaHoldings. This process will take a long period of time and require usto meet many conditions.

Third Quarter FinancialResults

While most of our business is in run-off, wecontinue to generate some premium, especially our HBW program. Wecontinue to operate and generate premium through our Lloyd'ssyndicate. To a much lesser extent, we also receive premiums from theextension or renewals of policies that we are legally required to enterinto in business lines we have exited.

Our net premiums writtenwere negative during the third quarter of 2006 as a result of cancelledpolicies and the premium that is returned following cancellations. Weexpect that policies will continue to be cancelled, premium willcontinue to be returned and our net premiums written will continue tobe negatively impacted in future periods. Our other sources of netincome are derived mainly from income from our invested assets and, toa much lesser extent, net income from our technical servicesbusiness.

During the three months ended September30,  2006, we returned approximately $(5.4) million of netpremiums written after premiums ceded on purchased reinsuranceprotection, of which $12.4  million of net premiums written wasgenerated in our Lloyd’s segment. Our insurance run-off andreinsurance run-off segments recognized net premium returns of $(17.8)million. During the three months ended September  30,2006, we also purchased additional retrocessional protection in oursurety and technical risk insurance product lines, which is intended tohelp limit our net loss exposures to future losses and catastrophewindstorm events. This purchase resulted in approximately 

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$2.2  million of premium ceded duringthe three months ended September  30,  2006. The grosswritten premiums are net of $32.9  million and $74.6million of premiums that were returned to our clients throughcancellations.

During the three and nine months endedSeptember  30,  2005, we generated approximately$116.0  million and $386.2  million of net premiums writtenafter premiums ceded on purchased reinsurance protection.

Wegenerated $49.2  million and $189.2  million of netpremiums earned during the three and nine months ended September30,  2006. This compares to approximately $100.5  millionand $297.0  million of net premiums earned during the three andnine months ended September  30,  2005.

OurLloyd's segment recorded $22.1  million and $12.4million in gross and net written premiums in the three months endedSeptember  30,  2006. The syndicate generated net premiumearned of $15.5  million in the three months endedSeptember  30,  2006. Its net loss ratio was 76.6%.The net loss ratio was higher than expected due to the fact that wehave excess of loss reinsurance contracts for this business whichrequire us to cede minimum fixed amounts of our premium, regardless ofthe amount of gross premium we actually write. We believe that ourlevels of gross premium written and earned in our Lloyd'ssyndicate are lower than expected as a result of the uncertaintysurrounding that business and the fact that capital diversification hadnot yet taken place. The Pembroke transaction is intended to providestability for our Lloyd’s business and to result in an increasein gross premium written and earned in the future.

Our decisionto cease underwriting or seeking new business and to place most of ourremaining specialty insurance and reinsurance lines into orderlyrun-off has resulted in a concentration of most of our premiums earnedand written in our Lloyd's segment and HBW. In addition, ourdecision to run-off such a large portion of our business has caused theconcentrations across certain of our risk classes to increasesignificantly. We expect these trends to continue. In particular, weexpect that Lloyd's will contribute almost all of our premiumswritten and earned in the future.

Our general and administrativeexpenses were $20.6  million in the three months endedSeptember  30,  2006 as compared to $34.0  million inthe three months ended June  30,  2006. SinceDecember  31,  2005, we have reduced our workforce,excluding Lloyd's, from 183 employees as of December31,  2005 to 85 employees as of September  30,  2006,including a reduction of 15 employees in the third quarter of 2006. Ourworkforce is now allocated to underwriting in our Lloyd'ssyndicate, run-off of our exited business lines, claims handling,finance, actuarial, general corporate and administrative functions.During the three months ended September  30,  2006, wereduced our severance provision by approximately $0.9  million asa result of voluntary resignations by a number of employees. Thisbrings our total severance costs for 2006 to approximately $14.8million. This severance provision represents costs associated withthose employees who have been provided notice and those who areprobable to be terminated in the future. We expect that we will furtherreduce our workforce as we continue executing the run-off of our exitedbusiness lines. Lastly, we have been incurring significant professionalfees in connection with our board's review of strategicalternatives. We are mindful of these costs and are working to reducethem.

We received three new non-hurricane related reportedlosses in the nine months ended September  30,  2006 of$4.2  million, net of reinsurance protection and reinstatementpremiums, in our marine, technical risk and aviation reinsuranceproduct line. During the three and nine months ended September30,  2006, we recognized adverse development, net ofreinstatement premiums, of $0.8  million and $3.2  millionrelated to the 2005 hurricanes. In addition, during the nine monthsended September  30,  2006, we incurred losses of$3.9  million on tornadoes that occurred in the first quarter of2006. We could continue to incur losses from these as well as otherhistorical events, including from policies that have been cancelled.Additionally, our outstanding policies remain subject to risk of newlosses from future catastrophes and other events. We will continue toseek reinsurance protection for future catastrophes if it is availableon terms that are acceptable to us. Based on our current estimate oflosses related to Hurricane Katrina, we have exhausted our reinsuranceand retrocessional protection with respect to that hurricane. If ourHurricane Katrina losses and our marine reinsurance 

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losses with respect to Hurricane Rita proveto be greater than currently anticipated, we will have no furtherreinsurance and retrocessional coverage available for thosewindstorms.

Our investment portfolio yielded net investmentincome and net realized gains of $13.7  million during the threemonths ended September  30,  2006, an increase of$7.9  million from the three months ended September30,  2005. This increase is primarily due to an increase in netinvestment income of $5.8  million attributable to an increase inour invested assets and higher market interest rates as well as adecrease in net realized losses of $2.1  million. Our averageannualized effective yield (calculated by dividing net investmentincome by the average amortized cost of invested assets, net of amountspayable or receivable for investments purchased or sold) wasapproximately 5.3% for the three months ended September30,  2006 compared to 3.4% for the three months endedSeptember  30,  2005, reflecting higher market interestrates.

We have determined that $13.9  million of investmentsecurities, with unrealized losses of approximately $0.1million, were other-than-temporarily impaired as of September30,  2006. The realization of these losses represents the maximumamount of potential losses in our investment securities if we were tosell all of these securities as of September  30,  2006 andare primarily attributable to changes in interest rates and not changesin credit quality. As a result of our decision, the affectedinvestments were reduced to their estimated fair value, which becomestheir new cost basis. The recognition of the losses has no effect onour shareholders' equity, the market value of our investments,our cash flows or our liquidity.

SegmentInformation

During the three months ended September30,  2006, following the decision of our Board of Directors inMay  2006 to place most of our business in run-off, we changedthe composition of our reportable segments and renamed our specialtyinsurance segment and specialty reinsurance segment as specialtyinsurance run-off segment and specialty reinsurance run-off segment. Wecontinue to earn premium in our insurance and reinsurance run-offsegments related to business written in prior periods and related toextensions and renewals of policies which we are legally required towrite in business lines we have exited. The specialty insurance run-offand specialty reinsurance run-off segments are more fully described asfollows:

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Specialty insurancerun-off.    Our specialty insurance run-off segment includesthe remaining policies written in our traditional, structured andprogram specialty insurance product line until the second quarter of2006. Our traditional specialty insurance products included technicalrisk property, professional liability, environmental liability,fidelity and crime, surety, trade credit and political risk and marineand aviation. These products were written both on a direct basis withinsured clients or by reinsuring policies that were issued on ourbehalf by third-party insurers and reinsurers. Our specialty insuranceprograms includes the HBW program. |

|  |              |                                                                                                                                                                                                                                                                                                                              |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Specialty reinsurancerun-off.    Our specialty reinsurance run-off segment includesthe remaining policies written in our traditional specialty reinsuranceproducts line until the second quarter of 2006. Our specialtyreinsurance products included property, casualty and marine andaviation products. |

We have created a Lloyd's operatingsegment for the results of Syndicate 4000 which was previouslyaggregated with our specialty insurance run-off reportable segment. Itis no longer appropriate to aggregate Lloyd’s and specialtyinsurance run-off operating segments given the different economiccharacteristics of the specialty insurance run-off segment that is nolonger writing new or renewal business while our Lloyd’ssyndicate continues to write new and renewal business. Syndicate 4000at Lloyd's, our Lloyd's segment, was created inDecember  2004 and writes traditional specialty insuranceproducts including professional liability (professional indemnity anddirectors' and officers' coverage), fidelity and crime(financial institutions), kidnap and ransom, specie and fine art. Weexpect that following consummation of the Pembroke transaction and thetransfer of the management of the business of Syndicate 4000 to thePembroke managing agency, we will continue to report the financialresults of our interest in Pembroke in this segment.

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As a result of the disposal of ESC, thetechnical services segment now consists of our two environmentalliability assumption programs, QLT Buffalo LLC and QLT of Alabama LLC.The results for the three and nine months ended September30,  2005 comparatives have been reclassified to conform with thepresentation of ESC in discontinued operations for the three and ninemonths ended September  30,  2006.

We organized ourbusiness on a matrix of five product lines and three geographies. Ourtwo traditional product lines were specialty insurance and specialtyreinsurance (renamed specialty insurance run-off segment and specialtyreinsurance run-off segment and described more fully above). We alsohad program 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.

We refer to the specialty insurance run-off, specialty reinsurancerun-off and Lloyd’s segments as our underwriting segments. Werefer to our environmental assumption programs as our technicalservices segment. We evaluate each segment based on its underwriting ortechnical services results, as applicable, including items of revenueand expense that are associated with, and directly related to, eachsegment. A summary of our financial information by product line is setforth in Part I Item 2 ‘‘Management's Discussion andAnalysis of Financial Condition and Results of Operations —Results of Operations’’ contained herein.

Wecontinue to allocate corporate general and administrative expenses toeach segment based upon each product line's allocated capital forthe relevant reporting period. We allocated 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 have conductedour business are the United States, Europe and Bermuda. The location ofthe risks that are the subject of our insurance and reinsurancepolicies may be anywhere in the world.

Main Drivers of ourResults

Revenues

We derive the majorityof our revenues from three principal sources: premiums from policiescurrently written by our Lloyd's syndicate in our underwritingsegment, the continuation of premium that is being earned on pastpolicies that remain on our books and investment income from ourinvestment portfolios. Our technical services segment contribute a muchlesser amount of revenues.

We record premiums written at the timethat there is sufficient evidence of agreement to the significant termsof the contract but no earlier than the effective date of the policy.The amount of our insurance and reinsurance premiums written and earneddepends on the number and type of policies we write, the amount ofreinsurance protection we provide, as well as prevailing market prices.Furthermore, the amount of net premiums earned depends upon the type ofcontracts we have written, the contractual periods of the contracts wewrite, policy cancellations and commutations, the inception date of thecontracts, the expired portions of the contract periods and the type ofpurchased reinsurance protection. Because of all these factors, theamount of premiums written and ceded may not result in a correlativelevel of profitability.

Reinsurance premiums written on certaintypes of contracts, notably treaty quota share contracts, may not beknown definitively on the inception date of the contract and thereforeinclude estimates of premiums written. These estimates are based ondata provided by the ceding companies or brokers, ourunderwriters' judgment and underlying economic conditions. Ourestimates of written premiums are re-evaluated over the term of thecontract period as underwriting information becomes available and asactual premiums are reported by the ceding companies or brokers. Forcertain excess of loss 

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reinsurance contracts we record the minimumpremium, as defined in the contract, as our estimated premium writtenat inception of the contract. Subsequent changes to our premiumestimates and cancellations are recorded as adjustments to premiumswritten in the period in which they become known and could be material.As a result of potential premium estimate reductions and cancellationsin future periods, we may not receive all of our premiums receivable incash. Adjustments may significantly impact net income in the period inwhich they are determined, particularly when the subject contract isfully or substantially expired resulting in the premium adjustmentbeing fully or substantially earned.

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 (when they become due, at the time of either losssettlement, cancellations or commutations), while maximizing investmentreturns through a diversified portfolio. From time to time, we maydetermine that some or all of our investment securities with unrealizedlosses are other-than-temporarily impaired as of a certain balancesheet date. The realization of these losses then represents the maximumamount of potential losses in our investment securities if we were tosell all of these securities as of that balance sheet date. When thisimpairment takes place, the affected investments are 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, we may be required to sell securities to satisfyreturn premium or loss obligations on contracts that are cancelled orcommuted. As a result and due to the general uncertainties surroundingour business resulting from our decision to place most of our lines ofbusiness into orderly run-off, we concluded that there are noassurances that we will have the ability to hold the affectedinvestments for a sufficient period of time. It is possible that theimpairment factors evaluated by management and fair values will changein subsequent periods, resulting in additional material impairmentcharges. Our investment returns are benchmarked against certainspecified indices. However, the volatility in claim payments and theinterest rate environment can significantly affect the returns wegenerate on our investment portfolios.

We also have revenuesgenerated by our technical services segment from the remediation ofenvironmental obligations that we have assumed.

Expenses

Our expenses primarily consist ofnet loss and loss expenses, general and administrative expenses andacquisition expenses.

Net loss and loss expenses, which are netof loss and loss expenses recovered under our ceded reinsurancecontracts, depend on the number and type of insurance and reinsurancecontracts we write and reflect our best estimate of ultimate losses andloss expenses we expect to incur on each 

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contract written using various actuarialanalyses. Actual losses and loss expenses will depend on either actualcosts to settle insurance and reinsurance claims, or the estimated lossamount that we may agree with our policyholders under the terms ofcommutation and cancellation arrangements. Our ability to accuratelyestimate expected ultimate loss and loss expense at the time of pricingeach insurance and reinsurance contract and the occurrence ofunexpected high loss severity catastrophe events are critical factorsin determining our profitability.

General and administrativeexpenses consist primarily of personnel related expenses (includingseverance costs), leases and other operating overheads, professionalfees and information technology costs as well as severance costs whichcreate initial expenses but lower future costs through savings insalaries and benefits. From time to time we engage administrativeservice providers and legal, accounting, tax and financial advisors.These general and administrative expenses may be incurred directly by asegment or indirectly at the corporate level.

Acquisitionexpenses, which are net of expenses recovered under our cededreinsurance contracts, consist principally of commissions, fees,brokerage and tax expenses that are directly related to obtaining andwriting insurance and reinsurance contracts. Typically, acquisitionexpenses are based on a certain percentage of the premiums written oncontracts of insurance and reinsurance and may be adjustable based uponloss experience. These expenses are a function of the number and typeof insurance and reinsurance contracts written. We may not be able torecover all or a portion of our acquisition costs on commuted orcancelled policies.

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 acquisition expense ratio is calculated by dividingacquisition expenses by net premiums earned. Our net loss and lossexpense ratio and acquisition expense ratio provide a measure of thecurrent profitability of the earned portions of our written insuranceand reinsurance contracts. Our general and administrative expense ratiois calculated by dividing underwriting related general andadministrative expenses by net premiums earned and indicates the levelof indirect costs that we incur in acquiring and writing insurance andreinsurance business. During 2005, we changed the denominator to beused in the calculation of our general and administrative expense ratioto net premiums earned, instead of net premiums written. Our net lossand loss expense ratio is calculated as net losses and loss expensesincurred divided by net premiums earned. Because our net premiumsearned will decrease significantly following our decision to place mostof our lines of business into run-off, we expect that our net lossratios and general and administrative expense ratios may continue to bevolatile. Our combined ratio is the aggregate of our loss and lossexpense, acquisition expense and general and administrative expenseratios. We believe that these financial ratios appropriately reflectthe profitability of our underwriting segments. A combined ratio ofless than 100% indicates an underwriting profit and over100%, an underwriting loss. Because we have a limited operatinghistory and we have placed most of our lines of business in orderlyrun-off, our combined ratio will be subject to significant volatility,will likely be higher than 100% and will not be indicative offuture profitability.

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Resultsof Operations

The following is a discussion of QuantaHoldings' consolidated results of operations for the three andnine months ended September  30,  2006 and2005.

Three months ended September30,  2006 and 2005

Results of operations for thethree months ended September  30,  2006 and 2005 were asfollows:

|                                                            |  |  |                                      |   |         |                                      |  |  |  |   |          |   |
|------------------------------------------------------------|--|--|--------------------------------------|---|---------|--------------------------------------|--|--|--|---|----------|---|
|                                                       |  |  | Threemonths ended September 30, 2006 |   |         | Three months endedSeptember 30, 2005 |
|                                                       |  |  | ($ inthousands)                      |
| Revenues                                                   |  |  |                                      |   |    |                                      |  |  |  |   |     |   |
| Grosspremiumswritten                                       |  |  |                                      | $ | (6,693  | )                                    |  |  |  | $ | 171,542  |   |
| Netpremiumswritten                                         |  |  |                                      | $ | (5,417  | )                                    |  |  |  | $ | 115,965  |   |
| Netpremiumsearned                                          |  |  |                                      | $ | 49,202  |                                      |  |  |  | $ | 100,546  |   |
| Technicalservices revenues                                 |  |  |                                      |   | 752     |                                      |  |  |  |   | 8,623    |   |
| Netinvestment income                                       |  |  |                                      |   | 12,821  |                                      |  |  |  |   | 6,991    |   |
| Netrealized gains (losses) oninvestments                   |  |  |                                      |   | 906     |                                      |  |  |  |   | (1,168   | ) |
| Net foreignexchange losses                                 |  |  |                                      |   | (257    | )                                    |  |  |  |   | (311     | ) |
| Otherincome                                                |  |  |                                      |   | 1,174   |                                      |  |  |  |   | 1,893    |   |
| Totalrevenues                                              |  |  |                                      |   | 64,598  |                                      |  |  |  |   | 116,574  |   |
| Expenses                                                   |  |  |                                      |   |    |                                      |  |  |  |   |     |   |
| Netlosses and lossexpenses                                 |  |  |                                      |   | (30,153 | )                                    |  |  |  |   | (121,132 | ) |
| Acquisitionexpenses                                        |  |  |                                      |   | (8,415  | )                                    |  |  |  |   | (22,998  | ) |
| Generaland administrativeexpenses                          |  |  |                                      |   | (20,578 | )                                    |  |  |  |   | (30,675  | ) |
| Interestexpense                                            |  |  |                                      |   | (1,430  | )                                    |  |  |  |   | (1,200   | ) |
| Depreciationand amortization of intangibleassets           |  |  |                                      |   | (715    | )                                    |  |  |  |   | (839     | ) |
| Totalexpenses                                              |  |  |                                      |   | (61,291 | )                                    |  |  |  |   | (176,844 | ) |
| Income(loss) from continuing operations before incometaxes |  |  |                                      |   | 3,307   |                                      |  |  |  |   | (60,270  | ) |
| Incometaxes                                                |  |  |                                      |   | — |                                      |  |  |  |   | 28       |   |
| Netincome (loss) from continuingoperations                 |  |  |                                      |   | 3,307   |                                      |  |  |  |   | (60,298  | ) |
| Discontinuedoperations:                                    |  |  |                                      |   |    |                                      |  |  |  |   |     |   |
| (Loss) income fromoperations of discontinuedoperations     |  |  |                                      |   | (936    | )                                    |  |  |  |   | 1,214    |   |
| Income ondisposal of discontinuedoperations                |  |  |                                      |   | 704     |                                      |  |  |  |   | —  |   |
| Netincome(loss)                                            |  |  |                                      | $ | 3,075   |                                      |  |  |  | $ | (59,084  | ) |
|                                                            |

Revenues.

Mostof our revenues were generated by our underwriting subsidiaries inEurope, the U.S. and Bermuda. Technical services revenues were derivedfrom the operations of QLT Buffalo LLC and QLT of Alabama LLC. (Loss)income from discontinued operations was derived from the operations ofESC until September  15,  2006. Approximately 17.8%of our revenues are from net investment income. We expect that thispercentage will increase in the near term as our businesses continue torun-off.

Premiums.    Gross premiums written were$(6.7) million for the three months ended September  30,2006, compared to $171.5  million for the three months endedSeptember  30,  2005. The decrease in our gross premiumswritten was largely due to two factors. First, the decrease is due toour decision to cease underwriting or seeking new business and to placemost of our remaining specialty insurance and reinsurance lines intoorderly run-off. Second, the decrease is due to the significant adverseeffects on our business including returned gross premium associatedwith policy cancellations of $32.9  million and non-renewals.

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Our gross premiums written of $(6.7)million for the three months ended September  30,  2006include approximately $22.1  million from our Lloyd'ssyndicate and approximately $1.3  million from our surety line ofbusiness which continues to generate gross premiums as these policieshave mandatory extensions or renewals as required by state laws in theUnited States. These gross written premiums are net of $32.9million of premiums that were returned to our clients throughcancellations.

Our returned gross premium associated withcancelled policies during the three months ended September30,  2006, which continues the trend of returned gross premiumduring the three months ended June  30,  2006, are asfollows:

|                                   |  |  |                                      |   |         |                                 |  |  |  |   |        |  |
|-----------------------------------|--|--|--------------------------------------|---|---------|---------------------------------|--|--|--|---|--------|--|
|                              |  |  | Threemonths ended September 30, 2006 |   |         | Three months endedJune 30, 2006 |
|                              |  |  | ($ inthousands)                      |
| Property                          |  |  |                                      | $ | 10,680  |                                 |  |  |  | $ | 47     |  |
| Casualty                          |  |  |                                      |   | 10,299  |                                 |  |  |  |   | 755    |  |
| Environmentalliability            |  |  |                                      |   | 7,984   |                                 |  |  |  |   | 4,730  |  |
| Technical riskproperty            |  |  |                                      |   | 1,298   |                                 |  |  |  |   | 3,612  |  |
| Trade creditand politicalrisk     |  |  |                                      |   | 1,283   |                                 |  |  |  |   | 3,659  |  |
| Surety                            |  |  |                                      |   | 750     |                                 |  |  |  |   | 1,149  |  |
| Professionalliability             |  |  |                                      |   | 510     |                                 |  |  |  |   | 1,964  |  |
| Fidelity andcrime                 |  |  |                                      |   | 78      |                                 |  |  |  |   | 2,677  |  |
| Marine, technicalrisk andaviation |  |  |                                      |   | — |                                 |  |  |  |   | 9,058  |  |
| Total                             |  |  |                                      | $ | 32,882  |                                 |  |  |  | $ | 27,651 |  |
|                                   |

Therewas an insignificant amount of return premiums in the three monthsended September  30,  2005.

Premiums ceded were$(1.3) million for the three months ended September  30,2006, compared to $55.6  million for the three months endedSeptember  30,  2005. The decrease in premiums ceded isprimarily due to three factors. First, it reflects our lower grosswritten premium during the three months ended September30,  2006. Second, the decrease reflects the cancellation ofceded contracts in our specialty insurance and reinsurance run-offsegments. Finally, the decrease is due to policy cancellations duringthe three months ended September  30,  2006. This decreaseis offset by new ceded treaties entered into in our specialty insurancerun-off segment relating to our surety and technical risk propertylines during the three months ended September  30,2006.

Net premiums earned were $49.2  million for the threemonths ended September  30,  2006, compared to$100.5  million for the three months ended September30,  2005. The decrease in our premiums earned was largely due tothe significant adverse effects on our business arising from A.M. Bestratings downgrade in March  2006, the portfolio transfer to athird party reinsurer in the fourth quarter of 2005, referred to as the‘‘Property Transaction’’, and our decisionto cease underwriting or seeking new business for all of our lines ofbusiness, except for our Lloyd's syndicate. Our net premiumswritten are typically earned over the risk periods of the underlyinginsurance policies which are generally twelve months. Net premiumswritten that are not yet earned and are deferred as unearned premiumreserves, net of deferred reinsurance premiums, totaled $105.5million at September  30,  2006 and we expect it will beearned and recognized in our results of operations in future periods orit will be returned to our clients under cancellation and commutationagreements. We expect that our net premiums earned and unearned premiumreserves will continue to decrease significantly.

Technicalservices revenues.  Technical services revenues were$0.8  million for the three months ended September30,  2006, compared to $8.6  million for the three monthsended September  30,  2005. The decrease is due to asignificant portion of remediation of our QLT Buffalo LLC environmentalliability assumption program occurring during the second and thirdquarters of 2005. This remediation program is now close to beingcompleted and, as a result, has not generated technical servicesrevenues to the same extent as it did in 2005. We expect that ourtechnical services revenues will continue to decrease in future periodsas the remediation is closer to completion.

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Net investment income and net realized(losses) gains.    Net investment income and net realized(losses) gains totaled $13.7  million for the three months endedSeptember  30,  2006, an increase of $7.9  million,compared to $5.8  million for the three months endedSeptember  30,  2005. This increase is primarily due to anincrease in net investment income of $5.8  million attributableto an increase in our invested assets and higher market interest rates.The increase is also due to a decrease in net realized losses of$2.1  million.

Net investment income was $12.8million for the three months ended September  30,  2006 andwas derived primarily from interest earned on fixed maturity and shortterm investments, partially offset by investment management andcustodial fees and amortization of discounts on fixed maturityinvestments. Our average annualized effective yield (calculated bydividing net investment income by the average amortized cost ofinvested assets, net of amounts payable or receivable for investmentspurchased or sold) was approximately 5.3% for the three monthsended September  30,  2006 compared to 3.4% for thethree months ended September  30,  2005, reflecting highermarket interest rates. Net realized gains of $0.9  million weregenerated primarily from the sale of investments which were in anunrealized gain position as we sought to manage our total investmentreturns and the duration of our investment portfolios.

As ofSeptember  30,  2006, the average duration of ourinvestment portfolio was approximately 2.6 years with an average creditrating of approximately‘‘AA+’’.

Otherincome.    Other income was $1.2  million for the threemonths ended September  30,  2006, compared to $1.9million for the three months ended September  30,  2005.Other income for the three months ended September  30,2006 includes amounts recognized on non-traditional insurance andreinsurance contracts of $1.0  million.

Expenses.

Net losses and loss expenses.    Netlosses and loss expenses were $30.2  million for the three monthsended September  30,  2006, compared to $121.1million for the three months ended September  30,  2005.Net losses and loss expenses are a function of our net premiums earnedand our expected ultimate losses and loss expenses for reported andunreported claims on contracts of insurance and reinsuranceunderwritten. The decrease in net losses and loss expenses is primarilydue to the 2005 hurricane losses incurred in the three months endedSeptember  30,  2005 and to the decrease in our netpremiums earned. The decrease is in part offset by increases in netlosses and loss expenses compared to the three months endedSeptember  30,  2005. This decrease is attributable toincreases in some of our selected loss ratios, as described below.

During the three months ended September  30,  2006 wereleased reserves upon the commutation of two treaties in our casualtyreinsurance line of business resulting in a profit of $0.6million. We had favorable development of $0.1  million from the2004 hurricanes. We also had adverse development of $1.2  millionfrom the 2005 hurricanes and $0.1  million related to damagescaused by an oil pipeline in California which ruptured during amudslide in the first quarter of 2005.

During the three monthsended September  30,  2005, we recorded losses of$63.6  million associated with the 2005 hurricanes. Our estimateof our exposure to ultimate claim costs associated with thesehurricanes 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.

Thereremains the possibility of further negative development on our oilpipeline loss in the future, particularly if the timing of thecompletion of the remediation plan for the spill is further delayed. Inaddition to the hurricanes, tornado losses incurred in the three monthsended March  31,  2006, the non-hurricane related lossesand the oil pipeline losses, as of September  30,  2006, wehave received 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 areincurred.

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Our total net loss ratio (calculated bydividing net losses and loss expenses by net premiums earned) was61.3% for the three months ended September  30,2006, compared to a total net loss ratio of 120.5% for the threemonths ended September  30,  2005. The decrease in thetotal net loss ratio is primarily due to the 2005 hurricane lossesincurred in the three months ended September  30,  2005 andfavorable development during the three months ended September30,  2006, as discussed above. This decrease was offset by higherselected loss ratios for our HBW program, professional andenvironmental product lines, compared to the three months endedSeptember  30,  2005 and the adverse development incurredon the 2005 hurricanes during the three months ended September30,  2006.

Acquisition expenses.    Acquisitionexpenses were $8.4  million for the three months endedSeptember  30,  2006, compared to $23.0  million forthe three months ended September  30,  2005. The decreasein acquisition expenses is primarily due to the decrease in our netpremiums earned.

Our acquisition expense ratio for the threemonths ended September  30,  2006 was 17.1%,compared to our acquisition expense ratio of 22.9% for the threemonths ended September  30,  2005. The decrease in ouracquisition ratio is mainly due to the decreased weighting of the netearned premium of our reinsurance run-off segment, which typicallyattracts higher acquisition costs than our insurance run-off segment,in the three months ended September 30, 2006 compared to the threemonths ended September 30, 2005 and due to the lower sliding scalecommissions on our HBW program given the increase in our selected lossratios compared to the three months ended September  30,2005. The decrease is in part offset by the accelerated recognition ofthe minimum ceded earned premium on our Lloyd's syndicate'sexcess of loss reinsurance treaties. Deferred acquisition costsinclude, as of September  30,  2006, $13.2  millionof acquisition expenses on written contracts of insurance andreinsurance that will be amortized in future periods as the premiumswritten to which they relate are earned.

General andadministrative expenses.    General and administrative expenseswere $20.6  million for the three months ended September30,  2006, compared to $30.7  million for the three monthsended September  30,  2005. General and administrativeexpenses were comprised of $8.9  million of personnel relatedexpenses (which are net of $0.9  million release of previouslyaccrued severance costs) and $11.7  million of other general andadministrative expenses during the three months ended September30,  2006 compared to $12.1  million of personnel relatedexpenses and $18.6  million of other expenses during the threemonths ended September  30,  2005. The decrease in generaland administrative expenses is mainly due to the reduction of ourpersonnel costs and technology expenses. This decrease was offset byincreases in professional and legal fees related to our evaluation ofstrategic alternatives and increases in auditing fees and feesassociated with ongoing efforts relating to Sarbanes-Oxley Section 404compliance. General and administrative expenses related to ourunderwriting segment were $19.7  million for the three monthsended September  30,  2006.

Our general andadministrative expenses for the three months ended September30,  2006 include $6.9  million related to ourLloyd’s segment, compared to $4.8  million for the threemonths ended September  30,  2005. The increase in ourgeneral and administrative expense was mainly due to the additionalnumber of employees hired throughout 2005 and increases inLloyd’s central fund and managing agent expenses. The increaseis also attributed to increases in auditing fees and fees associatedwith ongoing efforts relating to Sarbanes-Oxley Section 404 complianceallocated to our Lloyd’s segment.

Our general andadministrative expense ratio was 41.8% for the three monthsended September  30,  2006 compared to 30.5% for thethree months ended September  30,  2005. The increase wasmainly due to the impact of lower net earned premiums. This was offsetby the lower number of employees as of September  30,2006. In 2005, we changed the denominator in the calculation of ourgeneral and administrative expense ratio to net premiums earned,instead of net premiums written.

Interestexpense.    Interest expense was $1.4  million for thethree months ended September  30,  2006, compared to$1.2  million for the three months ended September30,  2005 and 

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relates to the interest expense on ourfloating rate junior subordinated debentures. The increase in theinterest expense is due to higher interest rates compared to the threemonths ended September  30,  2005.

Depreciationand amortization of intangible assets.    Depreciation andamortization of intangible assets was $0.7  million for the threemonths ended September  30,  2006, compared to $0.8million for the three months ended September  30,  2005 andconsisted of amortization of intangible assets related to theacquisition of licenses and depreciation of fixed assets.

Wehave not recorded any net deferred income tax benefits or assetsrelating to tax operating losses generated by our subsidiaries sinceour results of operations include a 100% valuation allowanceagainst net deferred tax assets. For the three months endedSeptember  30,  2006, the net valuation allowance decreasedby approximately $3.0  million, to $37.6million.

Discontinued operations.

EffectiveSeptember  15,  2006, we sold all of the equity interestsof ESC, which was part of our technical services segment, to WSP fortotal consideration of $12.5  million represented by $11.5million in cash, after certain post-closing adjustments plusforgiveness of intercompany debt of approximately $1.0million.

We determined that the disposal of ESC should bereflected as a discontinued operation in accordance with FASB StatementNo. 144, ‘‘Accounting for the Impairment or Disposalof Long-lived Assets’’ (‘‘FAS144’’) and EITF 03-13, ‘‘Applying theconditions in Paragraph 42 of FAS 144 in Determining whether to reportDiscontinued Operations’’ (‘‘EITF03-13’’). These results are reflected in the CondensedConsolidated Statement of Operations as (Loss) income from operationsof discontinued operations. The presentation of the reclassifiedsegmental footnote and the reclassified statements of operationsinclude the previously eliminated inter-company transactions betweenESC and us. We have separately disclosed the operating, investing andfinancing portions of the cash flows attributable to its discontinuedoperations, for which we reclassified the prior periodsamounts.

We recognized income on disposal of ESC of $0.7million related to this transaction during the third quarter of 2006.This income on disposal is presented in the Consolidated Statement ofOperations as Income on disposal of discontinued operations, acomponent of discontinued operations. The components of this income aresummarized below.

(Loss) income from operations ofdiscontinued operations.    We recognized a loss from operationsof discontinued operations of $0.9  million for the period fromJuly  1,  2006 to September  15,  2006 ascompared to income from operations of discontinued operations of$1.2  million for the three months ended September30,  2005. Our results of operations of discontinued operationsconsists, in its entirety of revenues and expenses from ESC, which wassold on September  15,  2006.

Our loss and incomefrom operations of ESC, previously included in the technical servicessegment, for the period from July  1,  2006 toSeptember  15,  2006 and for the three months endedSeptember  30,  2005, now reported in discontinuedoperations, are as follows:

|                                                                   |  |  |                                              |   |        |                                     |  |  |  |   |         |   |
|-------------------------------------------------------------------|--|--|----------------------------------------------|---|--------|-------------------------------------|--|--|--|---|---------|---|
|                                                              |  |  | Periodfrom July 1, 2006to September 15, 2006 |   |        | Three monthsendedSeptember 30, 2005 |
| Technical servicesrevenues                                        |  |  |                                              | $ | 5,769  |                                     |  |  |  | $ | 16,849  |   |
| Otherincome                                                       |  |  |                                              |   | 3      |                                     |  |  |  |   | 52      |   |
| Direct technicalservicescosts                                     |  |  |                                              |   | (3,743 | )                                   |  |  |  |   | (13,133 | ) |
| General andadministrativeexpenses                                 |  |  |                                              |   | (2,790 | )                                   |  |  |  |   | (2,307  | ) |
| Depreciationof fixed assets and amortization of intangible assets |  |  |                                              |   | (173   | )                                   |  |  |  |   | (240    | ) |
| Income taxexpense                                                 |  |  |                                              |   | (2     | )                                   |  |  |  |   | (7      | ) |
| (Loss)income from operations of discontinuedoperations            |  |  |                                              | $ | (936   | )                                   |  |  |  | $ | 1,214   |   |
|                                                                   |

ESC’stechnical services revenues include the inter-company revenues chargedby ESC to the QLT’s and to the Company’s underwritingsegment which are more fully described in Note 4 to the ConsolidatedFinancial Statements.

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Technical servicesrevenues.    Technical services revenues were $5.8million for the period from July  1,  2006 toSeptember  15,  2006 compared to $16.8  million forthe three months ended September  30,  2005. The decreaseis mainly due to ESC generating significant inter-company revenue inthe second and third quarter of 2005 remediating QLT Buffalo LLCcompared to the period from July  1,  2006 toSeptember  15,  2006. In addition, the decrease is also dueto our exit from the environmental insurance business.

Directtechnical services costs.    Direct technical services costswere $3.7  million for the period from July  1,  2006to September  15,  2006, compared to $13.1  millionfor the three months ended September  30,  2005, and werecomprised of subcontractor and direct labor expenses. Direct technicalservices costs, as a percentage of technical services revenues wereapproximately 64.9% for the three months ended September30,  2006 compared to 77.9% for the three months endedSeptember  30,  2005.

General and administrativeexpenses.    General and administrative expenses were$2.8  million for the period from July  1,  2006 toSeptember  15,  2006, compared to $2.3  million forthe three months ended September  30,  2005 and consistedprimarily of personnel related expenses.

Depreciation andamortization of intangible assets.    Depreciation andamortization of intangible assets was $0.2  million for theperiod from July  1,  2006 to September  15,2006 and three months ended September  30,  2005 andconsisted of amortization of intangible assets related to theacquisition of ESC and depreciation of fixed assets.

Income ondisposal of discontinued operations.    Income on disposal ofdiscontinued operations was $0.7  million, as described below.This income is presented in the Consolidated Statement of Operations asIncome on disposal of discontinued operations, a component ofdiscontinued operations. The components of this income are summarizedbelow.

|                              |  |  |  |   |         |   |
|------------------------------|--|--|--|---|---------|---|
| Cashproceeds from WSP(1)     |  |  |  |   | 11,484  |   |
| Debtforgiveness              |  |  |  |   | 1,000   |   |
| Totalconsideration           |  |  |  |   | 12,484  |   |
| Less:                        |  |  |  |   |    |   |
| Carryingvalue ofESC(2)       |  |  |  |   | (11,140 | ) |
| Estimatedtransactioncosts(3) |  |  |  |   | (640    | ) |
| Incomeon disposal ofESC      |  |  |  | $ | 704     |   |
|                              |

|  |
|--|
|  |  |
|  |

|     |                                                         |
|-----|---------------------------------------------------------|
| (1) | Totalproceeds from WSP include post closingadjustments. |

|     |                                                                                       |
|-----|---------------------------------------------------------------------------------------|
| (2) | Net assets of ESC atSeptember  15,  2006, prior to the impact of the saletransaction. |

|     |                                                                                                                                            |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Transaction costsinclude advisory fees directly associated with the sale, of which$0.6  million were paid to FBR, which is a relatedparty. |

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Nine months endedSeptember  30,  2006 and 2005

Results ofoperations for the nine months ended September  30,  2006and 2005 were asfollows:

|                                                                    |  |  |                                     |   |          |                                     |  |  |  |   |          |   |
|--------------------------------------------------------------------|--|--|-------------------------------------|---|----------|-------------------------------------|--|--|--|---|----------|---|
|                                                               |  |  | Ninemonths ended September 30, 2006 |   |          | Nine months endedSeptember 30, 2005 |
|                                                               |  |  | ($ inthousands)                     |
| Revenues                                                           |  |  |                                     |   |     |                                     |  |  |  |   |     |   |
| Grosspremiumswritten                                               |  |  |                                     | $ | 141,075  |                                     |  |  |  | $ | 512,816  |   |
| Netpremiumswritten                                                 |  |  |                                     | $ | 67,442   |                                     |  |  |  | $ | 386,206  |   |
| Netpremiumsearned                                                  |  |  |                                     | $ | 189,175  |                                     |  |  |  | $ | 297,040  |   |
| Technicalservices revenues                                         |  |  |                                     |   | 2,947    |                                     |  |  |  |   | 9,793    |   |
| Netinvestment income                                               |  |  |                                     |   | 35,350   |                                     |  |  |  |   | 18,403   |   |
| Netrealized losses oninvestments                                   |  |  |                                     |   | (14,142  | )                                   |  |  |  |   | (789     | ) |
| Netforeign exchangelosses                                          |  |  |                                     |   | (1,951   | )                                   |  |  |  |   | (336     | ) |
| Otherincome                                                        |  |  |                                     |   | 2,692    |                                     |  |  |  |   | 5,456    |   |
| Totalrevenues                                                      |  |  |                                     |   | 214,071  |                                     |  |  |  |   | 329,567  |   |
| Expenses                                                           |  |  |                                     |   |     |                                     |  |  |  |   |     |   |
| Netlosses and lossexpenses                                         |  |  |                                     |   | (134,178 | )                                   |  |  |  |   | (241,234 | ) |
| Acquisitionexpenses                                                |  |  |                                     |   | (32,608  | )                                   |  |  |  |   | (62,718  | ) |
| Generaland administrativeexpenses                                  |  |  |                                     |   | (84,048  | )                                   |  |  |  |   | (74,146  | ) |
| Interestexpense                                                    |  |  |                                     |   | (4,036   | )                                   |  |  |  |   | (2,971   | ) |
| Depreciationand amortization of intangibleassets                   |  |  |                                     |   | (1,983   | )                                   |  |  |  |   | (2,159   | ) |
| Totalexpenses                                                      |  |  |                                     |   | (256,853 | )                                   |  |  |  |   | (383,228 | ) |
| Lossfrom continuing operations before incometaxes                  |  |  |                                     |   | (42,782  | )                                   |  |  |  |   | (53,661  | ) |
| Incometaxes                                                        |  |  |                                     |   | 47       |                                     |  |  |  |   | 470      |   |
| Netloss from continuing operations                                 |  |  |                                     |   | (42,829  | )                                   |  |  |  |   | (54,131  | ) |
| Dividendson preferredshares                                        |  |  |                                     |   | (1,916   | )                                   |  |  |  |   | —  |   |
| Netloss from continuing operations available to commonshareholders |  |  |                                     |   | (44,745  | )                                   |  |  |  |   | (54,131  | ) |
| Discontinuedoperations:                                            |  |  |                                     |   |     |                                     |  |  |  |   |     |   |
| (Loss) income fromoperations of discontinuedoperations             |  |  |                                     |   | (12,953  | )                                   |  |  |  |   | 2,933    |   |
| Income ondisposal of discontinuedoperations                        |  |  |                                     |   | 704      |                                     |  |  |  |   | —  |   |
| Netloss available to commonshareholders                            |  |  |                                     | $ | (56,994  | )                                   |  |  |  | $ | (51,198  | ) |
|                                                                    |

Revenues.

Substantiallyall of our revenues were generated by our underwriting subsidiaries inthe U.S., Europe and Bermuda. Technical services revenues were derivedfrom the operations of QLT Buffalo LLC and QLT of Alabama, LLC. Incomefrom discontinued operations was derived from the operations of ESCuntil its sale on September  15,2006.

Premiums.    Gross premiums written were$141.1  million for the nine months ended September30,  2006, compared to $512.8  million for the nine monthsended September  30,  2005. The decrease in our grosspremiums written was largely due to the significant adverse effects onour business following the A.M. Best downgrade and our decision, duringthe second quarter ended June  30,  2006, to ceaseunderwriting or seeking new business (other than in our Lloyd’ssyndicate) and to place most of our remaining specialty insurance andreinsurance lines into orderly run-off, as discussed above. It is alsodue to the impact of the Property Transaction, described above, and thereutn of premium following policy cancellation.

Our grosspremiums written of $141.1  million for the nine months endedSeptember  30,  2006 also include $64.6  million fromour Lloyd's syndicate, $67.5  million from our HBW programwhich 

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continued to generate gross premiums and$3.3  million in gross premium that is associated withreinsurance treaties we mostly entered into in 2005. In addition, wecontinue to receive gross premium from policies that have mandatoryextension or renewals pursuant to state law.

Our returned grosspremium associated with cancelled policies during the nine months endedSeptember  30,  2006, which continues the trend of returnedgross premium during the three months ended June  30,2006, was as follows:

|                               |  |  |                                     |   |        |                              |  |  |  |   |        |  |
|-------------------------------|--|--|-------------------------------------|---|--------|------------------------------|--|--|--|---|--------|--|
|                          |  |  | Ninemonths ended September 30, 2006 |   |        | Six months endedJune30, 2006 |
|                          |  |  | ($ inthousands)                     |
| Marine, technical andaviation |  |  |                                     | $ | 15,624 |                              |  |  |  | $ | 15,624 |  |
| Environmentalliability        |  |  |                                     |   | 13,079 |                              |  |  |  |   | 5,095  |  |
| Property                      |  |  |                                     |   | 11,560 |                              |  |  |  |   | 880    |  |
| Casualty                      |  |  |                                     |   | 11,144 |                              |  |  |  |   | 845    |  |
| Technicalrisk property        |  |  |                                     |   | 9,945  |                              |  |  |  |   | 8,647  |  |
| Tradecredit and politicalrisk |  |  |                                     |   | 5,105  |                              |  |  |  |   | 3,822  |  |
| Professionalliability         |  |  |                                     |   | 3,100  |                              |  |  |  |   | 2,590  |  |
| Fidelity andcrime             |  |  |                                     |   | 2,922  |                              |  |  |  |   | 2,844  |  |
| Surety                        |  |  |                                     |   | 2,129  |                              |  |  |  |   | 1,379  |  |
| Total                         |  |  |                                     | $ | 74,608 |                              |  |  |  | $ | 41,726 |  |
|                               |

Therewas an insignificant amount of return premiums in the nine months endedSeptember  30,  2005. However, there was $72.3million of returned premium related to the Property Transaction andcommutation agreements in the fourth quarter of 2005.

Premiumsceded were $73.6  million for the nine months endedSeptember  30,  2006, compared to $126.6  million forthe nine months ended September  30,  2005. The decrease inpremiums ceded is mainly due to three factors. First, it reflects ourlower gross written premium during the nine months endedSeptember  30,  2006. Second, the decrease reflects thecancellation of ceded contracts in our specialty insurance andreinsurance run-off segments. Finally, the decrease is due to policycancellations during the nine months ended September  30,2006. This decrease is partially offset by new ceded treaties enteredinto in our specialty insurance run-off segment during the nine monthsended September  30,  2006.

Net premiums earned were$189.2  million for the nine months ended September30,  2006, compared to $297.0  million for the nine monthsended September  30,  2005. The decrease in our premiumsearned was largely due to the significant adverse effects on ourbusiness arising from A.M. Best ratings downgrade in March  2006,the portfolio transfer to the third party reinsurer under the PropertyTransaction during the three months ended September  30,2005 and, to a lesser extent, our recent decision to cease underwritingor seeking new or renewal business for all of our lines of business,except for our Lloyd's syndicate. This decision, and the previouseffects of the downgrade, resulted in policy cancellations. 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$105.5  million at September  30,  2006 and we expectit will be earned and recognized in our results of operations in futureperiods or returned to our clients under cancellation or commutationagreements. Due to our decision to cease underwriting or seeking newbusiness other than in our Lloyd’s syndicate and to place mostof our remaining specialty insurance and reinsurance lines into orderlyrun-off, we expect that our net premiums earned and unearned premiumreserves will continue to decrease significantly.

Technicalservices revenues.  Technical services revenues were$2.9  million for the nine months ended September30,  2006, compared to $9.8  million for the nine monthsended September  30,  2005. The decrease is due to asignificant portion of remediation of our QLT Buffalo LLC environmentalliability assumption program occurring during the second and thirdquarters of 2005. This program is 

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now close to being fully remediated. Weexpect that our technical services revenues will decrease in futureperiods as a result of our environmental liability assumption programsbecoming closer to being fully remediated.

Net investmentincome and net realized gains.    Net investment income and netrealized gains totaled $21.2  million for the nine months endedSeptember  30,  2006, an increase of $3.6  million,or 20.4%, compared to $17.6  million for the nine monthsended September  30,  2005. The increase is primarily dueto an increase in net investment income of $16.9  millionattributable to an increase in our invested assets and higher marketinterest rates, and is offset by a decrease in net realized losses of$13.4  million, of which $11.1  million is attributable toother than temporary impairment losses recognized during the ninemonths ended September  30,  2006.

Net investmentincome was $35.3  million for the nine months endedSeptember  30,  2006 and was derived primarily frominterest earned on fixed maturity and short term investments, partiallyoffset by investment management and custodial fees and amortization ofdiscounts on fixed maturity investments. Our average annualizedeffective yield (calculated by dividing net investment income by theaverage amortized cost of invested assets, net of amounts payable orreceivable for investments purchased or sold) was approximately4.8% for the nine months ended September  30,  2006compared to 3.3% for the nine months ended September30,  2005, reflecting higher market interest rates. Net realizedlosses of $14.1  million were generated primarily from our otherthan temporary impairment charge of $11.1  million and also fromthe sale of investments which were in an unrealized loss position as wesought to manage our total investment returns and the duration of ourinvestment portfolios.

As of September  30,  2006,the average duration of our investment portfolio was approximately 2.6years with an average credit rating of approximately‘‘AA+’’.

Otherincome.    Other income was $2.7  million for the ninemonths ended September  30,  2006 as compared to$5.5  million for the nine months ended September30,  2005. Other income for the nine months endedSeptember  30,  2006 includes amounts recognized onnon-traditional insurance and reinsurance contracts of $2.8million, which are in part offset by a loss of $0.6  million onthe Company's mortality-risk-linkedderivative.

Expenses.

Net losses and lossexpenses.    Net losses and loss expenses were $134.2million for the nine months ended September  30,  2006,compared to $241.2  million for the nine months endedSeptember  30,  2005. Net losses and loss expenses are afunction of our net premiums earned and our expected ultimate lossesand loss expenses for reported and unreported claims on contracts ofinsurance and reinsurance underwritten. The decrease in net losses andloss expenses is primarily due to the 2005 hurricane losses incurred inthe nine months ended September  30,  2005, to the decreasein our net premiums earned and to losses ceded to the third partyreinsurer under the Property Transaction. The decrease is in partoffset by increases in net losses and loss expenses compared to thenine months ended September  30,  2005 as a result ofhigher selected loss ratios in certain product lines, as describedbelow.

During the nine months ended September  30,2006, we recorded adverse development arising from the 2005 hurricanesof $5.1  million, $4.2  million of non-hurricane relatedlosses reported in our marine, technical risk and aviation reinsuranceproduct line, $3.9  million of losses related to a claim underour PWIB program (a property program that insures poultry and swinecontainment facilities) from tornado losses which occurred inMarch  2006, $0.8  million of adverse development arisingfrom the 2004 hurricanes and $0.2  million of adverse developmentrelated to damages caused by an oil pipeline in California whichruptured during a mudslide in the first quarter of 2005.

Thiscompares to net loss and loss expenses during the nine months endedSeptember  30,  2005 of $68.5  million associatedwith the 2005 hurricanes and $7.5  million related to damagesfrom a ruptured oil pipeline in California which was covered by aninsurance contract issued by our environmental liability productline.

Our estimate of our exposure to ultimate claim costsassociated with the 2004 and 2005 hurricanes is primarily based oncurrently available information, claims notifications received to date,industry 

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loss estimates, output from industry models,a review of affected contracts and discussion with cedents and brokers.The actual amount of losses from the hurricanes may vary significantlyfrom the estimate.

There remains the possibility of furthernegative development on our oil pipeline loss in the future,particularly if the timing of the completion of the remediation planfor the spill is further delayed. In addition to the hurricanes, thetornado, the non-hurricane related marine, technical risk and aviationlosses, and the oil pipeline losses, as of September  30,2006, we have received a limited amount of large reported losses.However, we participate in lines of business where claims may not bereported 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 70.9% forthe nine months ended September  30,  2006, compared to atotal net loss ratio of 81.2% for the nine months endedSeptember  30,  2005. The decrease in the total net lossratio is primarily due to the decrease in the 2005 hurricane lossesincurred in the nine months ended September  30,  2006,compared to the nine months ended September  30,  2005.This decrease was offset by the impact of the reported losses describedabove, by our lower net premiums earned base and also to higherselected loss ratios for our HBW program, professional andenvironmental product lines, compared to the nine months endedSeptember  30,  2005.

Acquisitionexpenses.    Acquisition expenses were $32.6  million forthe nine months ended September  30,  2006, compared to$62.7  million for the nine months ended September30,  2005. The decrease in acquisition expenses is primarily dueto the decrease in our net premiums earned.

Our acquisitionexpense ratio for the nine months ended September  30,2006 was 17.2%, compared to our acquisition expense ratio of21.1% for the nine months ended September  30,2005. The decrease is due to four factors. First, during 2006, ourearned premium was more heavily weighted towards specialty insurancerun-off, which carries lower acquisition costs than specialtyreinsurance run-off. Second, we are paying less fronting costs on ourspecialty insurance run-off lines because we are licensed in morestates and no longer need to utilize fronting companies to the sameextent in order to write our business. Third, the ceding commissionincome that we are recovering on our specialty insurance run-offsegment's reinsurance treaties has increased as a result of therestructuring of those treaties during the second quarter of 2005.Finally, we paid less commission in our HBW program because thecontracts contain sliding scale commission provisions that vary withchanges in the selected loss ratio. Deferred acquisition costs include,as of September  30,  2006, $13.2  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.

General and administrativeexpenses.    General and administrative expenses were$84.0  million for the nine months ended September30,  2006, compared to $74.1  million for the nine monthsended September  30,  2005. General and administrativeexpenses were comprised of $48.5  million of personnel relatedexpenses (including $14.8  million of severance costs) and$35.5  million of other general and administrative expensesduring the nine months ended September  30,  2006 comparedto $36.9  million of personnel related expenses and $37.2million of other expenses during the nine months ended September30,  2005. The increase in general and administrative expenses isdue primarily to our severance costs and increases in auditing fees andfees associated with ongoing efforts relating to Sarbanes-Oxley Section404 compliance. The increase is also due to increases in professionaland legal fees related to our evaluation of strategic alternatives andwas partly offset by the reduction of our workforce during the ninemonths ended September  30,  2006. General andadministrative expenses related to our underwriting segment was$79.8  million for the nine months ended September30,  2006.

Our general and administrative expenses for thenine months ended September  30,  2006 included$21.5  million related to our Lloyd’s segment compared to$13.6  million for the nine months ended September30,  2005. The increase in our general and administrative expensewas due to the additional number of employees hired throughout 2005 andincreases in Lloyd’s central fund and managing agent expenses.The increase is also attributed to increases in auditing fees and feesassociated with ongoing efforts relating to Sarbanes-Oxley Section 404compliance allocated to our Lloyd’s segment.

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Our general and administrative expenseratio was 44.4% for the nine months ended September30,  2006, compared to our general and administrative expenseratio of 25.0% for the nine months ended September30,  2005. The increase was mainly due to our severance costs andto the impact of lower net earned premiums. This increase was offset bythe lower number of employees. In 2005, we changed the denominator inthe calculation of our general and administrative expense ratio to netpremiums earned, instead of net premiums written.

Interestexpense.    Interest expense was $4.0  million for thenine months ended September  30,  2006, compared to$3.0  million for the nine months ended September30,  2005 and relates to the interest expense on our floatingrate junior subordinated debentures. The increase in the interestexpense is due to the increase in the average balance of our juniorsubordinated debentures for the nine months ended September30,  2006 compared to the nine months ended September30,  2005, following the issuance of $20.6  millionsecurities in February  2005, and to an increase in the interestrates.

Depreciation and amortization of intangibleassets.    Depreciation and amortization of intangible assetswas $2.0  million for the nine months ended September30,  2006, compared to $2.2  million for the nine monthsended September  30,  2005 and consisted of amortization ofintangible assets related to the acquisition of licenses anddepreciation of fixed assets.

Dividend on preferredshares.    Dividend expense was $1.9  million for thenine months ended September  30,  2006, compared to zerofor the nine months ended September  30,  2005 andrepresents the dividend paid on our series A preferred shares that wereissued in December  2005. As a result of the default triggeredunder our credit facility following A.M. Best's rating action inthe second quarter of 2006, we were prohibited from paying anydividends. Therefore, the dividend expense for the nine months endedSeptember  30,  2006 represents only the dividend paid inthe three months ended March  31,  2006.

We have notrecorded any net deferred income tax benefits or assets relating to taxoperating losses generated by our subsidiaries since our results ofoperations include a 100% valuation allowance against netdeferred tax assets. For the nine months ended September30,  2006, the net valuation allowance increased by approximately$12.8  million, to $37.6  million.

Discontinuedoperations.

(Loss) income from operations of discontinuedoperations.    (Loss) income from operations of discontinuedoperations was $(13.0) million forthe period from January1,  2006 to September  15,  2006, a decrease of$15.9  million, compared to $2.9  million for the threemonths ended September  30,  2005 and consisted of revenuesand expenses from ESC, which was sold on September  15,2006.

(Loss) income from operations of ESC, previously includedin the Technical services segment, for the period from January1,  2006 to September  15,  2006, and the nine monthsended September  30,  2005, now reported in discontinuedoperations are as follows:

|                                                                   |  |  |                                                  |   |         |                                    |  |  |  |   |         |   |
|-------------------------------------------------------------------|--|--|--------------------------------------------------|---|---------|------------------------------------|--|--|--|---|---------|---|
|                                                              |  |  | Periodfrom January 1, 2006 to September 15, 2006 |   |         | Nine monthsendedSeptember 30, 2005 |
| Technical servicesrevenues                                        |  |  |                                                  | $ | 21,954  |                                    |  |  |  | $ | 34,273  |   |
| Otherincome                                                       |  |  |                                                  |   | 14      |                                    |  |  |  |   | 184     |   |
| Direct technicalservicescosts                                     |  |  |                                                  |   | (13,968 | )                                  |  |  |  |   | (23,993 | ) |
| General andadministrativeexpenses                                 |  |  |                                                  |   | (7,725  | )                                  |  |  |  |   | (6,799  | ) |
| Loss onimpairment ofgoodwill                                      |  |  |                                                  |   | (12,561 | )                                  |  |  |  |   | — |   |
| Depreciationof fixed assets and amortization of intangible assets |  |  |                                                  |   | (647    | )                                  |  |  |  |   | (720    | ) |
| Income taxexpense                                                 |  |  |                                                  |   | (20     | )                                  |  |  |  |   | (12     | ) |
| (Loss)income from operations of discontinuedoperations            |  |  |                                                  | $ | (12,953 | )                                  |  |  |  | $ | 2,933   |   |
|                                                                   |

ESC’stechnical services revenues include the inter-company revenues chargedby ESC to the QLT’s and to the Company’s underwritingsegment.

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Technical servicesrevenues.    Technical services revenues were $22.0million for the period from January  1,  2006 toSeptember  15,  2006 compared to $34.3  million forthe nine months ended September  30,  2005. The decrease ismainly due to ESC generating significant inter-company revenue in thesecond and third quarter of 2005 remediating QLT Buffalo, LLC comparedto the period from January  1,  2006 to September15,  2006. In addition, the decrease is also due to our exit fromthe environmental insurance business.

Direct technicalservices. costs.    Direct technical services costs were$14.0  million for the period from January  1,  2006to September  15,  2006, compared to $24.0  millionfor the nine months ended September  30,  2005, and werecomprised of subcontractor and direct labor expenses. Direct technicalservices costs, as a percentage of technical services revenues wereapproximately 63.6% for the January  1,  2006 toSeptember  15,  2006 compared to 70.0% for the ninemonths ended September  30,  2005.

General andadministrative expenses.    General and administrative expenseswere $7.7  million for the period from period from January1,  2006 to September  15,  2006, compared to$6.8  million for the nine months ended September30,  2005 and consisted primarily of personnel relatedexpenses.

Loss on impairment of goodwill.    Loss onimpairment of goodwill was $12.6  million for the period fromJanuary  1,  2006 to September  15,  2006 andrelates to the Company’s determination that the carrying valueof its previously carried goodwill asset related to ESC was impairedduring the second quarter of 2006.

Depreciation andamortization of intangible assets.    Depreciation andamortization of intangible assets was $0.6  million for theperiod from January  1,  2006 to September15,  2006, compared to $0.7  million for the nine monthsendedSeptember 30, 2005 and consisted of amortization of intangibleassets related to the acquisition of ESC and depreciation of fixedassets

Income on disposal of discontinuedoperations.    Income on disposal of discontinued operations was$0.7  million, as described below. This income is presented inthe Consolidated Statement of Operations as Income on disposal ofdiscontinued operations, a component of discontinued operations. Thecomponents of this income are summarizedbelow.

|                              |  |  |  |   |         |   |
|------------------------------|--|--|--|---|---------|---|
| Cashproceeds from WSP(1)     |  |  |  |   | 11,484  |   |
| Debtforgiveness              |  |  |  |   | 1,000   |   |
| Totalconsideration           |  |  |  |   | 12,484  |   |
| Less:                        |  |  |  |   |    |   |
| Carryingvalue ofESC(2)       |  |  |  |   | (11,140 | ) |
| Estimatedtransactioncosts(3) |  |  |  |   | (640    | ) |
| Incomeon disposal ofESC      |  |  |  | $ | 704     |   |
|                              |

|  |
|--|
|  |  |
|  |

|     |                                                         |
|-----|---------------------------------------------------------|
| (1) | Totalproceeds from WSP include post closingadjustments. |

|     |                                                                                       |
|-----|---------------------------------------------------------------------------------------|
| (2) | Net assets of ESC atSeptember  15,  2006, prior to the impact of the saletransaction. |

|     |                                                                                                                                            |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Transaction costsinclude advisory fees directly associated with the sale, of which$0.6  million were paid to FBR, which is a relatedparty. |

Results bySegments

Underwriting

Prior to thesecond quarter of 2006, we principally provided insurance andreinsurance protection for risks that were often unusual or difficultto place, that did not fit the underwriting criteria of standardcommercial product carriers and that required technical underwritingand assessment resources in order to be profitably underwritten.

We allocate indirect corporate general and administrative expensesamong each of our segments, including those related to underwritingoperations, as described above under ‘‘SegmentInformation’’.

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During the three months endedSeptember  30,  2006, following the decision of our Boardof Directors in May  2006 to place most of our business inrun-off, we changed the composition of our reportable segments suchthat the Lloyd's operating segment, which was previouslyaggregated with our specialty insurance run-off reportable segment, isa reportable segment. We also continue to earn premium in our insuranceand reinsurance run-off segments related to business written in priorperiods and related to extensions and renewals of policies which we arelegally required to write in business lines we have exited.

Following the sale of ESC, as described more fully above, ourTechnical services segment now consists of our environmental liabilityassumption programs, QLT Buffalo LLC and QLT of Alabama, LLC. Thecomparatives for the three and nine months ended September30,  2005 have been reclassified to conform with the presentationof ESC as a discontinued operation for the three and nine months endedSeptember  30,  2006.

The following is a discussionof our net underwriting results and profitability measures by segmentfor the three and nine months ended September  30,  2006and 2005.

Three months ended September30,  2006 and 2005

The following tables summarize ournet underwriting results and profitability measures for our segmentsfor the three months ended September  30,  2006 and2005.

Specialty insurancerun-off

|                                        |  |  |                                     |   |         |                                      |  |  |        |   |         |   |  |  |  |   |         |    |
|----------------------------------------|--|--|-------------------------------------|---|---------|--------------------------------------|--|--|--------|---|---------|---|--|--|--|---|---------|----|
|                                   |  |  | Threemonths endedSeptember 30, 2006 |   |         | Three months endedSeptember 30, 2005 |  |  | Change |
|                                   |  |  | ($ inthousands)                     |
| Gross premiumswritten                  |  |  |                                     | $ | (9,945  | )                                    |  |  |        | $ | 84,821  |   |  |  |  | $ | (94,766 | )  |
| Premiumsceded                          |  |  |                                     |   | 665     |                                      |  |  |        |   | (30,923 | ) |  |  |  |   | 31,588  |    |
| Netpremiumswritten                     |  |  |                                     | $ | (9,280  | )                                    |  |  |        | $ | 53,898  |   |  |  |  | $ | (63,178 | )  |
| Netpremiumsearned                      |  |  |                                     | $ | 25,172  |                                      |  |  |        | $ | 40,515  |   |  |  |  | $ | (15,343 | )  |
| Otherincome(loss)                      |  |  |                                     |   | 272     |                                      |  |  |        |   | (42     | ) |  |  |  |   | 314     |    |
| Netlosses and lossexpenses             |  |  |                                     |   | (13,660 | )                                    |  |  |        |   | (28,993 | ) |  |  |  |   | 15,333  |    |
| Acquisitionexpenses                    |  |  |                                     |   | (3,583  | )                                    |  |  |        |   | (7,654  | ) |  |  |  |   | 4,071   |    |
| Generaland administrativeexpenses      |  |  |                                     |   | (9,462  | )                                    |  |  |        |   | (10,968 | ) |  |  |  |   | 1,506   |    |
| Netunderwriting income(loss)           |  |  |                                     | $ | (1,261  | )                                    |  |  |        | $ | (7,142  | ) |  |  |  | $ | 5,881   |    |
| Ratios:                                |
| Lossand loss expenseratio              |  |  |                                     |   | 54.3    | %                                    |  |  |        |   | 71.6    | % |  |  |  |   | 17.3    | %  |
| Acquisitionexpenseratio                |  |  |                                     |   | 14.2    | %                                    |  |  |        |   | 18.9    | % |  |  |  |   | 4.7     | %  |
| Generaland administrative expenseratio |  |  |                                     |   | 37.6    | %                                    |  |  |        |   | 27.1    | % |  |  |  |   | (10.5   | )% |
| Combinedratio                          |  |  |                                     |   | 106.1   | %                                    |  |  |        |   | 117.6   | % |  |  |  |   | 11.5    | %  |
|                                        |

Premiums.    Grossand net premiums written were $(9.9) million and $(9.3) million for thethree months ended September  30,  2006 compared to$84.8  million and $53.9  million for the three monthsended September  30,  2005. The decrease is due to thesignificant adverse effects on our business of the A.M. Best’srating action and our subsequent decision to cease seeking new businessand to run off our remaining business, other than our Lloyd’sbusiness. This resulted in returned gross premium associated withpolicy cancellations of $11.9  million and non-renewals.Our grossand net premiums written will continue to significantly decrease infuture periods.

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Our returned gross premium associatedwith cancelled policies during the three months ended September30,  2006, which continues the trend of returned gross premiumduring the three months ended June  30,  2006, are asfollows:

|                               |  |  |                                      |   |        |                                 |  |  |  |   |        |  |
|-------------------------------|--|--|--------------------------------------|---|--------|---------------------------------|--|--|--|---|--------|--|
|                          |  |  | Threemonths ended September 30, 2006 |   |        | Three months endedJune 30, 2006 |
|                          |  |  | ($ inthousands)                      |
| Environmentalliability        |  |  |                                      | $ | 7,984  |                                 |  |  |  | $ | 4,730  |  |
| Technicalrisk property        |  |  |                                      |   | 1,298  |                                 |  |  |  |   | 3,612  |  |
| Tradecredit and politicalrisk |  |  |                                      |   | 1,283  |                                 |  |  |  |   | 3,659  |  |
| Surety                        |  |  |                                      |   | 750    |                                 |  |  |  |   | 1,149  |  |
| Professionalliability         |  |  |                                      |   | 510    |                                 |  |  |  |   | 1,964  |  |
| Fidelity andcrime             |  |  |                                      |   | 78     |                                 |  |  |  |   | 2,677  |  |
| Total                         |  |  |                                      | $ | 11,903 |                                 |  |  |  | $ | 17,791 |  |
|                               |

Therewas an insignificant amount of return premiums in the three monthsended September  30,  2005.

Premiums ceded were$(0.7) million during the three months ended September30,  2006, compared to $30.9  million for the three monthsended September  30,  2005. The decrease in premiums cededis attributable to the decrease in gross premium written as describedabove. The decrease is in part offset by the 100% retrocessionof certain risk classes within our HBW program.

Net premiumsearned during the three months ended September  30,  2006were $25.2  million, compared to $40.5  million for thethree months ended September  30,  2005, representing theearning of premiums written and ceded during the years endedDecember  31,  2004 and 2005 and the nine months endedSeptember  30,  2006. The decrease in our net premiumsearned is due to the effect of the A.M. Best's ratings downgrade,including policy cancellations and our decision to cease underwritingor seeking new business and to place most of our remaining specialtyinsurance lines into orderly run-off. 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 $0.3million for the three months ended September  30,  2006,compared to zero for the three months ended September  30,2005 and related to income, including fees, recognized onnon-traditional insurance contracts.

Net losses and lossexpenses.    Net losses and loss expenses were $13.7million for the three months ended September  30,  2006,compared to $29.0  million for the three months endedSeptember  30,  2005. Net losses and loss expenses are afunction of our net premiums earned and our expected ultimate lossesand loss expenses for reported and unreported claims on contracts ofinsurance and reinsurance underwritten. The decrease in net losses andloss expenses is primarily due to significant losses related to the2005 hurricanes incurred in the three months ended September30,  2005 as described below. This decrease was offset by thehigher selected loss ratios for our HBW program, professional and ourenvironmental product lines in the three months ended September30,  2006 as compared to loss ratios applicable to those lines inthe three months ended September  30,  2005.

Duringthe three months ended September  30,  2006, we recordedapproximately $1.1  million of favorable development related tothe release of reserves on expiring insurance contracts, mainly in ourfidelity and surety lines of business, $0.1  million of adversedevelopment related to the 2005 hurricanes and $0.1  million ofadverse development on our oil pipeline loss. Included in net loss andloss expenses are $8.8  million related to the 2005 hurricanesduring the three months ended September  30,  2005.

There remains the possibility of further negative development on ouroil pipeline loss in the future, particularly if the timing of thecompletion of the remediation plan for the spill is further delayed.Other than the hurricanes, the tornado losses that occurred inMarch  2006 and the oil 

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pipeline loss, as of September30,  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 estimate of our exposure to ultimate claim costsassociated with the 2004 and 2005 hurricanes is primarily based oncurrently available information, claims notifications received to date,industry loss estimates, output from industry models, a review ofaffected contracts and discussion with cedents and brokers. The actualamount of losses from the hurricanes may vary significantly from theestimate.

Our specialty insurance run-off segment net loss ratiowas 54.3% for the three months ended September  30,2006, compared to a net loss ratio of 71.6% for the three monthsended September  30,  2005. The decrease in net losses andloss expenses is primarily due to the significant 2005 hurricaneslosses incurred in the three months ended September  30,2005 and the favorable development during the three months endedSeptember  30,  2006, as discussed above. This decrease wasoffset by the higher selected loss ratios for our HBW program,professional and environmental product lines in the three months endedSeptember  30,  2006 as compared to loss ratios applicableto those lines in the three months ended September  30,2005.

Acquisition expenses.    Acquisition expenseswere $3.6  million for the three months ended September30,  2006, compared to $7.7  million for the three monthsended September  30,  2005. The decrease in acquisitionexpenses is primarily due to the decrease in our net premiums earned.Acquisition expenses primarily represented brokerage fees, commissionfees and premium tax expenses and were net of ceding commissions earnedon purchased reinsurance treaties.

Our acquisition expense ratiowas 14.2% for the three months ended September  30,2006, compared to 18.9% for the three months endedSeptember  30,  2005. The decrease in our acquisitionexpense ratio is due to lower commissions on our HBW program becausethe contracts contain sliding scale commissions that vary with changesin the selected loss ratio and due to us incurring less fronting costson our specialty insurance run-off lines because we are licensed inmore states. Deferred acquisition costs include, as of September30,  2006, $7.6  million of acquisition expenses on writtencontracts of insurance that will be amortized in future periods as thepremiums written to which they relate are earned.

General andadministrative expenses.    Direct and allocated indirectgeneral and administrative expenses totaled $9.5  million for thethree months ended September  30,  2006, compared to$11.0  million for the three months ended September30,  2005. The decrease in our general and administrative expensewas mainly due to the reduction of our workforce during 2006. Thedecrease was offset by increases in professional fees related to ourevaluation of strategic alternatives and increases in auditing fees andfees associated with ongoing efforts relating to Sarbanes-Oxley Section404 compliance allocated to our specialty insurance run-off segment.Our general and administrative expense ratio increased to 37.6%for the three months ended September  30,  2006, comparedto 27.1% for the three months ended September  30,2005 mainly due to the impact of the reduced net earned premium, asdescribed above and is offset by the reduction of our workforce during2006.

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Specialty reinsurancerun-off

|                                        |  |  |                                      |   |         |                                      |  |  |        |   |         |   |  |  |  |   |         |    |
|----------------------------------------|--|--|--------------------------------------|---|---------|--------------------------------------|--|--|--------|---|---------|---|--|--|--|---|---------|----|
|                                   |  |  | Threemonths ended September 30, 2006 |   |         | Three months endedSeptember 30, 2005 |  |  | Change |
|                                   |  |  | ($ inthousands)                      |
| Gross premiumswritten                  |  |  |                                      | $ | (18,811 | )                                    |  |  |        | $ | 74,194  |   |  |  |  | $ | (93,005 | )  |
| Premiumsceded                          |  |  |                                      |   | 10,243  |                                      |  |  |        |   | (20,319 | ) |  |  |  |   | 30,562  |    |
| Netpremiumswritten                     |  |  |                                      | $ | (8,568  | )                                    |  |  |        | $ | 53,875  |   |  |  |  | $ | (62,443 | )  |
| Netpremiumsearned                      |  |  |                                      | $ | 8,565   |                                      |  |  |        | $ | 49,512  |   |  |  |  | $ | (40,947 | )  |
| Otherincome                            |  |  |                                      |   | 829     |                                      |  |  |        |   | 865     |   |  |  |  |   | (36     | )  |
| Netlosses and lossexpenses             |  |  |                                      |   | (4,641  | )                                    |  |  |        |   | (85,582 | ) |  |  |  |   | 80,941  |    |
| Acquisitionexpenses                    |  |  |                                      |   | (1,708  | )                                    |  |  |        |   | (13,718 | ) |  |  |  |   | 12,010  |    |
| Generaland administrativeexpenses      |  |  |                                      |   | (3,363  | )                                    |  |  |        |   | (6,229  | ) |  |  |  |   | 2,866   |    |
| Netunderwritingloss                    |  |  |                                      | $ | (318    | )                                    |  |  |        | $ | (55,152 | ) |  |  |  | $ | 54,834  |    |
| Ratios:                                |  |  |                                      |   |    |                                      |  |  |        |   |    |   |
| Lossand loss expenseratio              |  |  |                                      |   | 54.2    | %                                    |  |  |        |   | 172.9   | % |  |  |  |   | 118.7   | %  |
| Acquisitionexpenseratio                |  |  |                                      |   | 19.9    | %                                    |  |  |        |   | 27.7    | % |  |  |  |   | 7.8     | %  |
| Generaland administrative expenseratio |  |  |                                      |   | 39.3    | %                                    |  |  |        |   | 12.6    | % |  |  |  |   | (26.7   | )% |
| Combinedratio                          |  |  |                                      |   | 113.4   | %                                    |  |  |        |   | 213.2   | % |  |  |  |   | 99.8    | %  |
|                                        |

Premiums.    Grossand net premiums written were $(18.8) million and $(8.6) million forthe three months ended September  30,  2006 compared to$74.2  million and $53.9  million of gross and net premiumsfor the three months ended September  30,  2005. Thedecrease in our specialty reinsurance run-off segment's netpremiums written reflects our decision to cease underwriting or seekingnew business and to place all of our remaining specialty reinsurancelines of business into orderly run-off. The decrease also reflects theadverse effects of A.M. Best's ratings downgrade, including grossreturned premium associated with policy cancellations of $21.0million in our property and casualty reinsurance lines of business inthe three months ended September  30,  2006. There is noimpact on our property reinsurance line’s net written premiumfor the three months ended September  30,  2006 from thedownward premium estimates given the Property Transaction. Net premiumswritten have also decreased in the three months ended September30,  2006 as compared to the three months ended September30,  2005 as a result of the Property Transaction.

Ourreturned gross premium associated with cancelled policies during thethree months ended September  30,  2006, which continuesthe trend of returned gross premium during the three months endedJune  30,  2006, are asfollows:

|          |  |  |                                      |   |        |                                 |  |  |  |   |     |  |
|----------|--|--|--------------------------------------|---|--------|---------------------------------|--|--|--|---|-----|--|
|     |  |  | Threemonths ended September 30, 2006 |   |        | Three months endedJune 30, 2006 |
|     |  |  | ($ inthousands)                      |
| Property |  |  |                                      | $ | 10,680 |                                 |  |  |  | $ | 47  |  |
| Casualty |  |  |                                      |   | 10,299 |                                 |  |  |  |   | 755 |  |
| Total    |  |  |                                      | $ | 20,979 |                                 |  |  |  | $ | 802 |  |
|          |

Therewas an insignificant amount of return premiums in the three monthsended September  30,  2005.

Ceded premiums were$(10.2) million during the three months ended September30,  2006, compared to $20.3  million for the three monthsended September  30,  2005. The decrease in our cededpremiums written is attributable to the purchase, during the threemonths ended September  30,  2005, of additionalretrocession protection, including reinstatement premiums, for ourspecialty reinsurance run-off marine, technical risk and aviationproduct line and is in part offset by cancelled ceded premium under theProperty Transaction as a result of the reduction in premium estimatesdescribed 

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above. We obtained the retrocessionprotection to help limit our net loss exposures to natural catastropheevents in 2005. These retrocession treaties provided us with protectionon an excess of loss, quota share treaty and facultative basis forpolicies written in our reinsurance product lines of business. Cededpremiums are earned over the period of each insured risk.

Netpremiums earned were $8.6  million for the three months endedSeptember  30,  2006, compared to $49.5  million forthe three months ended September  30,  2005. The decreaseis mainly due to four factors. First, it reflects the impact of theProperty Transaction. Second, it reflects the impact of writing lowernet premiums as a result of the A.M. Best ratings downgrade. Third, thedecrease is due to the cancellation of treaties in our casualtyreinsurance line of business. Finally, it is due to our decision tocease underwriting or seeking new business and to place all of ourremaining specialty reinsurance lines of business into orderly run-off.Gross premiums written in our specialty reinsurance run-off segment arebeing earned over the periods of reinsured or underlying insured riskswhich are typically one year.

Other income.    Otherincome was $0.9  million for the three months endedSeptember  30,  2006 compared to $0.9  million forthe three months ended September  30,  2005, and related toincome, including fees, recognized on non-traditional reinsurancecontracts.

Net losses and loss expenses.    Net lossesand loss expenses were $4.6  million for the three months endedSeptember  30,  2006, compared to $85.6  million forthe three months ended September  30,  2005. The decreasein net losses and loss expenses incurred was mainly due to thesignificant losses resulting from the 2005 hurricanes incurred in thethree months ended September  30,  2005 and also due to thedecrease in our net premiums earned. 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.

During the three months endedSeptember  30,  2006, we recorded favorable development of$1.8  million related to the release of reserves on expiredcontracts based on updated bordereau reports from cedants, whichincludes $0.6  million reduction in net losses and loss expensesrelated to the commutation of two treaties in our casualty reinsuranceline of business. In addition, we recorded adverse development from the2005 hurricanes of $1.1  million and favorable development of$0.1  million from the 2004 hurricanes. This compares to therecording of losses during the three months ended September30,  2005 of $54.7  million from the 2005 hurricanes.

Our estimate of our exposure to ultimate claim costs associated withthe 2004 and 2005 hurricanes is primarily based on currently availableinformation, claims notifications received to date, industry lossestimates, output from industry models, a review of affected contractsand discussion with cedents and brokers. The actual amount of lossesfrom the hurricanes may vary significantly from the estimate. Otherthan the hurricane losses and new non-hurricane marine, technical riskand aviation losses, as of September  30,  2006, we havereceived a limited amount of large reported losses in our specialtyreinsurance run-off 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 run-offsegment net loss ratio was 54.2% for the three months endedSeptember  30,  2006, compared to 172.9% for thethree months ended September  30,  2005. The decrease inthe specialty reinsurance run-off segment net loss ratio is mainly dueto the significant losses resulting from the 2005 hurricanes, whichwere incurred in the three months ended September  30,2005 and the favorable development during the three months endedSeptember  30,  2006, as discussed above.

Acquisition expenses.    Acquisition expenses were$1.7  million for the three months ended September30,  2006, compared to $13.7  million for the three monthsended September  30,  2005. The decrease in acquisitionexpenses was due to the decrease in our net premiums earned. Theseacquisition expenses primarily represented brokerage and cedingcommissions.

Our acquisition expense ratio was 19.9% forthe three months ended September  30,  2006, compared to27.7% for the three months ended September  30,2005. The decrease is due to an increased weighting of the net earnedpremium in our reinsurance portfolio, following the cancellation

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and expiration of contracts, towardscontracts written with lower acquisition costs. Deferred acquisitioncosts include, as of September  30,  2006, $0.8million of acquisition expenses on written contracts of reinsurancethat will be amortized in future periods as the premiums written towhich they relate are earned.

General and administrativeexpenses.    Direct and allocated indirect general andadministrative expenses totaled $3.4  million for the threemonths ended September  30,  2006, compared to $6.2million for the three months ended September  30,  2005.The decrease in general and administrative expenses is mainly due tothe reduction of our workforce during 2006. Our general andadministrative expense ratio was 39.3% for the three monthsended September  30,  2006, an increase of 26.7%,compared to 12.6% for the three months ended September30,  2005. The increase in our general and administrative expenseratio was mainly due to the decrease in our net premiums earned, theimpact of which offsets the impact of reducing ourworkforce.

Lloyd’s

|                                        |  |  |                                     |   |         |                                    |  |  |        |   |        |   |  |  |  |   |        |    |
|----------------------------------------|--|--|-------------------------------------|---|---------|------------------------------------|--|--|--------|---|--------|---|--|--|--|---|--------|----|
|                                   |  |  | Threemonths endedSeptember 30, 2006 |   |         | Three monthsendedSeptember 30,2005 |  |  | Change |
|                                   |  |  | ($ inthousands)                     |
| Gross premiumswritten                  |  |  |                                     | $ | 22,063  |                                    |  |  |        | $ | 12,527 |   |  |  |  | $ | 9,536  |    |
| Premiumsceded                          |  |  |                                     |   | (9,632  | )                                  |  |  |        |   | (4,335 | ) |  |  |  |   | (5,297 | )  |
| Netpremiumswritten                     |  |  |                                     | $ | 12,431  |                                    |  |  |        | $ | 8,192  |   |  |  |  | $ | 4,239  |    |
| Netpremiumsearned                      |  |  |                                     | $ | 15,465  |                                    |  |  |        | $ | 10,519 |   |  |  |  | $ | 4,946  |    |
| Netlosses and lossexpenses             |  |  |                                     |   | (11,852 | )                                  |  |  |        |   | (6,557 | ) |  |  |  |   | (5,295 | )  |
| Acquisitionexpenses                    |  |  |                                     |   | (3,124  | )                                  |  |  |        |   | (1,626 | ) |  |  |  |   | (1,498 | )  |
| Generaland administrativeexpenses      |  |  |                                     |   | (6,888  | )                                  |  |  |        |   | (4,767 | ) |  |  |  |   | (2,121 | )  |
| Netunderwritingloss                    |  |  |                                     | $ | (6,399  | )                                  |  |  |        | $ | (2,431 | ) |  |  |  | $ | (3,968 | )  |
| Ratios:                                |
| Lossand loss expenseratio              |  |  |                                     |   | 76.6    | %                                  |  |  |        |   | 62.3   | % |  |  |  |   | (14.3  | )% |
| Acquisitionexpenseratio                |  |  |                                     |   | 20.2    | %                                  |  |  |        |   | 15.5   | % |  |  |  |   | (4.7   | )% |
| Generaland administrative expenseratio |  |  |                                     |   | 44.5    | %                                  |  |  |        |   | 45.3   | % |  |  |  |   | 0.8    | %  |
| Combinedratio                          |  |  |                                     |   | 141.3   | %                                  |  |  |        |   | 123.1  | % |  |  |  |   | (18.2  | )% |
|                                        |

Premiums.    Grossand net premiums written were $22.1  million and $12.4million for the three months ended September  30,  2006compared to $12.5  million and $8.2  million for the threemonths ended September  30,  2005. The increase in ourgross premiums written was largely due to the continued growth in ourLloyd’s segment, which commenced operation in 2004. Thisincrease was offset by the adverse effects on our Lloyd’sbusiness following A.M. Best's ratings downgrade in March2006 of other members of the Quanta group.

Our gross and netpremiums written will significantly decrease in future periods and theproportion of the contribution from our Lloyd's business willincrease significantly. We believe that we are currently seeing achallenging business environment for our Lloyd's business and weexpect this trend to continue.

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The table below shows gross and netpremiums written by product line for the three months endedSeptember  30,  2006 and 2005 whether written on atraditional insurance, programs or structuredbasis.

|                                          |  |  |                                      |   |        |                                     |  |  |                      |   |        |                    |  |  |  |   |         |  |  |  |  |   |         |  |
|------------------------------------------|--|--|--------------------------------------|---|--------|-------------------------------------|--|--|----------------------|---|--------|--------------------|--|--|--|---|---------|--|--|--|--|---|---------|--|
|                                     |  |  | Threemonths ended September 30, 2006 |   |        | Three monthsendedSeptember 30, 2005 |
|                                     |  |  | ($ inthousands)                      |
|                                     |  |  | Grosspremiumswritten                 |   |        | Netpremiumswritten                  |  |  | Grosspremiumswritten |   |        | Netpremiumswritten |
| Fidelity,crime and professionalliability |  |  |                                      | $ | 20,112 |                                     |  |  |                      | $ | 11,209 |                    |  |  |  | $ | 12,527  |  |  |  |  | $ | 8,192   |  |
| Specieand fineart                        |  |  |                                      |   | 1,941  |                                     |  |  |                      |   | 1,224  |                    |  |  |  |   | — |  |  |  |  |   | — |  |
| Kidnapand ransom                         |  |  |                                      |   | 10     |                                     |  |  |                      |   | (2     | )                  |  |  |  |   | — |  |  |  |  |   | — |  |
| Total                                    |  |  |                                      | $ | 22,063 |                                     |  |  |                      | $ | 12,431 |                    |  |  |  | $ | 12,527  |  |  |  |  | $ | 8,192   |  |
|                                          |

Premiumsceded were $9.6  million during the three months endedSeptember  30,  2006, an increase of $5.3  million,compared to $4.3  million for the three months endedSeptember  30,  2005. The increase in premiums ceded isattributable to the increase in our gross premiums written and theimpact of accelerating the minimum ceded earned premium on our excessof loss reinsurance treaties.

Net premiums earned during thethree months ended September  30,  2006 were $15.5million, an increase of $5.0  million, or 47.0%, comparedto $10.5  million for the three months ended September30,  2005, representing amortization of premiums written andceded during the years ended December  31,  2004 and 2005and the nine months ended September  30,  2006. Grosspremiums written and ceded premiums are being earned over the period ofeach insured risk which is typically one year.

Net losses andloss expenses.    Net losses and loss expenses were$11.9  million for the three months ended September30,  2006, an increase of $5.3  million, or 80.8%,compared to $6.6  million for the three months endedSeptember  30,  2005. Net losses and loss expenses are afunction of our net premiums earned and our expected ultimate lossesand loss expenses for reported and unreported claims on contracts ofinsurance underwritten. The increase in net losses and loss expenses isprimarily due to the increase in net premiums earned and to the higherselected loss ratios for our Lloyd's syndicate in the threemonths ended September  30,  2006 as compared to lossratios applicable to those lines in the three months endedSeptember  30,  2005 and also due to the impact ofaccelerating the minimum ceded earned premium on our excess of lossreinsurance treaties.

We have received a limited amount of largereported losses. However, we participate in lines of business whereclaims may not be reported for some period of time after those claimsare incurred.

Our Lloyd’s segment net loss ratio was76.6% for the three months ended September  30,2006, an increase of 14.3% compared to a net loss ratio of62.3% for the three months ended September  30,2005. The increase in the net loss ratio is primarily due to the higherselected loss ratios for our Lloyd's syndicate in the threemonths ended September  30,  2006 as compared to lossratios applicable to this line in the three months endedSeptember  30,  2005. The increase is also due to theimpact of accelerating the minimum ceded earned premium on our excessof loss reinsurance treaties.

Acquisitionexpenses.    Acquisition expenses were $3.1  million forthe three months ended September  30,  2006 an increase of$1.5  million, or 92.1%, compared to $1.6  millionfor the three months ended September  30,  2005. Theincrease in acquisition expenses was due to the increase in the numberof insurance contracts entered into and the associated net premiumsearned. Acquisition expenses primarily represented brokerage fees andcommission fees and were net of ceding commissions earned on purchasedreinsurance treaties.

Our acquisition expense ratio was20.2% for the three months ended September  30,2006, an increase of 4.7% compared to 15.5% for the threemonths ended September  30,  2005. The increase in ouracquisition expense ratio was due to the impact of accelerating theminimum ceded earned premium on our excess of loss reinsurancetreaties. Deferred acquisition costs include, as of September30,  2006, $4.8  million of acquisition expenses on writtencontracts of insurance that will be amortized in future periods as thepremiums written to which they relate are earned.

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General and administrativeexpenses.    Direct and allocated indirect general andadministrative expenses totaled $6.9  million for the threemonths ended September  30,  2006, an increase of$2.2  million, or 45.9%, compared to $4.8  millionfor the three months ended September  30,  2005. Theincrease in our general and administrative expense was mainly due tothe additional number of employees hired throughout 2005 and increasesin Lloyd’s central fund and managing agent expenses. Theincrease is also attributed to increases in auditing fees and feesassociated with ongoing efforts relating to Sarbanes-Oxley Section 404compliance allocated to our Lloyd’s segment. Our general andadministrative expense ratio decreased to 44.5% for the threemonths ended September  30,  2006, compared to 45.3%for the three months ended September  30,  2005 mainly dueto increase in net premiums earned offsetting the impact of theadditional number of employees and increases in Lloyd’s centralfund and Managing Agent expenses.

Technicalservices

|                                   |  |  |                                      |   |      |                                      |  |  |        |   |        |   |  |  |  |   |        |   |
|-----------------------------------|--|--|--------------------------------------|---|------|--------------------------------------|--|--|--------|---|--------|---|--|--|--|---|--------|---|
|                              |  |  | Threemonths ended September 30, 2006 |   |      | Three months endedSeptember 30, 2005 |  |  | Change |
|                              |  |  | ($ inthousands)                      |
| Technical servicesrevenues        |  |  |                                      | $ | 752  |                                      |  |  |        | $ | 8,623  |   |  |  |  | $ | (7,871 | ) |
| Otherincome                       |  |  |                                      |   | 58   |                                      |  |  |        |   | 983    |   |  |  |  |   | (925   | ) |
| Generaland administrativeexpenses |  |  |                                      |   | (865 | )                                    |  |  |        |   | (8,711 | ) |  |  |  |   | 7,846  |   |
| Nettechnical servicesincome       |  |  |                                      | $ | (55  | )                                    |  |  |        | $ | 895    |   |  |  |  | $ | (950   | ) |
|                                   |

Technicalservices revenues.    Technical services revenues were$0.8  million for the three months ended September30,  2006, compared to $8.6  million for the three monthsended September  30,  2005. The decrease is due to asignificant portion of remediation of our QLT Buffalo LLC environmentalliability assumption program occurring during the second and thirdquarters of 2005. The remediation is now close to being completed and,as a result, has not generated technical services revenues to the sameextent as it did in 2005. We expect that our technical servicesrevenues will continue to decrease in future periods as the remediationis closer to completion.

Other income.    We recorded$0.1  million of other income for the three months endedSeptember  30,  2006 compared to $1.0  million forthe three months ended September  30,  2005. The otherincome during the three months ended September  30,  2005was primarily generated from our liability assumption program inBuffalo, New York. This income primarily represents the amount ofconsideration received for the assumption of remediation liabilities inexcess of the expected environmental remediation liability which isinitially deferred in the consolidated balance sheet and subsequentlyrecognized in earnings over the remediation period using the costrecovery or percentage of completion method.

General andadministrative expenses.    Direct and indirect allocatedgeneral and administrative expenses were $0.9  million for thethree months ended September  30,  2006, compared to$8.7  million for the three months ended September30,  2005. The decrease is due to a significant portion ofremediation of our QLT Buffalo LLC environmental liability assumptionprogram occurring during the second and third quarters of 2005, andthis program is now close to being fully.

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Nine months endedSeptember  30,  2006 and 2005

The followingtables summarize our net underwriting results and profitabilitymeasures for our segments for the nine months ended September30,  2006 and 2005.

Specialty insurancerun-off

|                                        |  |  |                                    |   |         |                                   |  |  |        |   |         |   |  |  |  |   |          |    |
|----------------------------------------|--|--|------------------------------------|---|---------|-----------------------------------|--|--|--------|---|---------|---|--|--|--|---|----------|----|
|                                   |  |  | Ninemonths endedSeptember 30, 2006 |   |         | Nine monthsendedSeptember 30,2005 |  |  | Change |
|                                   |  |  | ($ inthousands)                    |
| Gross premiumswritten                  |  |  |                                    | $ | 73,204  |                                   |  |  |        | $ | 245,573 |   |  |  |  | $ | (172,369 | )  |
| Premiumsceded                          |  |  |                                    |   | (38,396 | )                                 |  |  |        |   | (83,273 | ) |  |  |  |   | 44,877   |    |
| Netpremiumswritten                     |  |  |                                    | $ | 34,808  |                                   |  |  |        | $ | 162,300 |   |  |  |  | $ | (127,492 | )  |
| Netpremiumsearned                      |  |  |                                    | $ | 101,688 |                                   |  |  |        | $ | 119,350 |   |  |  |  | $ | (17,662  | )  |
| Otherincome                            |  |  |                                    |   | 502     |                                   |  |  |        |   | 787     |   |  |  |  |   | (285     | )  |
| Netlosses and lossexpenses             |  |  |                                    |   | (63,632 | )                                 |  |  |        |   | (79,620 | ) |  |  |  |   | 15,988   |    |
| Acquisitionexpenses                    |  |  |                                    |   | (14,156 | )                                 |  |  |        |   | (20,312 | ) |  |  |  |   | 6,156    |    |
| Generaland administrativeexpenses      |  |  |                                    |   | (43,906 | )                                 |  |  |        |   | (32,407 | ) |  |  |  |   | 11,499   |    |
| Netunderwritingloss                    |  |  |                                    | $ | (19,504 | )                                 |  |  |        | $ | (12,202 | ) |  |  |  | $ | (7,302   | )  |
| Ratios:                                |
| Lossand loss expenseratio              |  |  |                                    |   | 62.6    | %                                 |  |  |        |   | 66.7    | % |  |  |  |   | 4.1      | %  |
| Acquisitionexpenseratio                |  |  |                                    |   | 13.9    | %                                 |  |  |        |   | 17.0    | % |  |  |  |   | 3.1      | %  |
| Generaland administrative expenseratio |  |  |                                    |   | 43.2    | %                                 |  |  |        |   | 27.2    | % |  |  |  |   | (16.0    | )% |
| Combinedratio                          |  |  |                                    |   | 119.7   | %                                 |  |  |        |   | 110.9   | % |  |  |  |   | (8.8     | )% |
|                                        |

Premiums.    Grossand net premiums written were $73.2  million and $34.8million for the nine months ended September  30,  2006compared to $245.6  million and $162.3  million for thenine months ended September  30,  2005. The decrease in ourgross premiums written was largely due to the significant adverseeffects on our business including returned gross premium associatedwith policy cancellations of $36.3  million and non-renewalarising from A.M. Best's ratings downgrade in March  2006,and our decision, during the second quarter of 2006, to ceaseunderwriting or seeking new business and to place most of our remainingspecialty insurance and reinsurance lines into orderly run-off, asdiscussed above. Our gross and net premiums written will significantlydecrease in future periods.

We are no longer underwriting orseeking new business and we placed most of our remaining specialtyinsurance lines of business into orderly run-off.

Our returnedgross premium associated with cancelled policies during the nine monthsended September  30,  2006, which continues the trend ofreturned gross premium during the six months ended June30,  2006, are as follows:

|                               |  |  |                                     |   |        |                              |  |  |  |   |        |  |
|-------------------------------|--|--|-------------------------------------|---|--------|------------------------------|--|--|--|---|--------|--|
|                          |  |  | Ninemonths ended September 30, 2006 |   |        | Six months endedJune30, 2006 |
|                          |  |  | ($ inthousands)                     |
| Environmentalliability        |  |  |                                     | $ | 13,079 |                              |  |  |  | $ | 5,095  |  |
| Technicalrisk property        |  |  |                                     |   | 9,945  |                              |  |  |  |   | 8,647  |  |
| Tradecredit and politicalrisk |  |  |                                     |   | 5,105  |                              |  |  |  |   | 3,822  |  |
| Professionalliability         |  |  |                                     |   | 3,100  |                              |  |  |  |   | 2,590  |  |
| Fidelity andcrime             |  |  |                                     |   | 2,922  |                              |  |  |  |   | 2,844  |  |
| Surety                        |  |  |                                     |   | 2,129  |                              |  |  |  |   | 1,379  |  |
| Total                         |  |  |                                     | $ | 36,280 |                              |  |  |  | $ | 24,377 |  |
|                               |

Therewas an insignificant amount of return premiums in the nine months endedSeptember  30,  2005.

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During the nine months endedSeptember  30,  2006, we wrote, in our technical riskproperty product line, the HBW program, which accounted forapproximately $32.5  million, or 79.3%, of the technicalrisk property line of business net premiums written in the nine monthsended September  30,  2006. The HBW program accounted for$129.3  million, or 90.3%, of the technical risk propertyproduct line and 52.7% of the total specialty insurance run-offsegment net premiums written for the nine months ended September30,  2005. Our HBW gross and net premiums written willsignificantly decrease in future periods. The policies in the HBWprogram are underwritten by a third-party agent which follows ourunderwriting guidelines. We believe that this agent is an establishedspecialist in this technical field. Our HBW gross premiums writtenduring the nine months ended September  30,  2006 aresummarized in the table below by specialty riskclass:

|           |  |  |               |   |      |  |
|-----------|--|--|---------------|---|------|--|
|      |  |  | ($inmillions) |
| Casualty  |  |  |               | $ | 55.3 |  |
| Warranty* |  |  |               |   | 7.6  |  |
| Property  |  |  |               |   | 4.6  |  |
| Total     |  |  |               | $ | 67.5 |  |
|           |

|  |
|--|
|  |  |
|  |

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

Premiums ceded were $38.4million during the nine months ended September  30,  2006,compared to $83.3  million for the nine months endedSeptember  30,  2005. The decrease in premiums cededreflects the decrease in our gross premium written described above andis in part offset by an increase in the retrocession of the casualtyspecialty risk class related to our HBW program compared to the ninemonths ended September  30,  2005.

Net premiumsearned during the nine months ended September  30,  2006were $101.7  million, compared to $162.3  million for thenine months ended September  30,  2005, representing theearning of premiums written and ceded during the years endedDecember  31,  2004 and 2005 and the nine months endedSeptember  30,  2006. The decrease in our net premiumsearned was largely due to the effect of the A.M. Best's ratingsdowngrade, including policy cancellations, and our decision to ceaseunderwriting or seeking new business and to place most of our remainingspecialty insurance lines of business into orderly run-off. Grosspremiums written and ceded premiums are earned over the period of eachinsured risk. The terms of our insurance contracts range from betweenone and ten years with the majority of our contracts being for a oneyear period.

Other income.    Otherincome was $0.5  million for the nine months endedSeptember  30,  2006, compared to $0.8  million forthe nine months ended September  30,  2005 and related toincome, including fees, recognized on non-traditional insurancecontracts.

Net losses and loss expenses.    Net lossesand loss expenses were $63.6  million for the nine months endedSeptember  30,  2006, compared to $79.6  million forthe nine months ended September  30,  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 underwritten. The decrease in netlosses and loss expenses incurred was mainly due to the lossesresulting from the 2005 hurricanes incurred in the nine months endedSeptember  30,  2005 and a decrease in our net premiumsearned. This decrease was offset by higher selected loss ratios for ourHBW program and our environmental insurance in the nine months endedSeptember  30,  2006 as compared to loss ratios applicableto those lines in the nine months ended September  30,2005.

During the nine months ended September  30,2006, we recorded $3.9  million of specific losses incurredduring the nine months ended September  30,  2006 relatedto a claim under our PWIB program from tornado losses occurring inMarch  2006 and adverse development of $0.1  millionrelated to damages caused by a rupture to an oil pipeline in Californiaduring a mudslide in the first quarter of 2005, which was covered by aninsurance contract issued by our environmental liability product line.This compares to net loss and loss expenses recorded during the ninemonths ended September  30,  2005 of $8.8  millionassociated to the 2005 hurricanes and $7.5  million of lossesrelated to the ruptured oil pipeline in California.

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There remains the possibility of furthernegative development on our oil pipeline loss in the future,particularly if the timing of the completion of the remediation planfor the spill is further delayed. Other than the hurricanes, thetornado and the oil pipeline losses, as of September  30,2006, we have received a limited amount of large reported losses.However, we participate in lines of business where claims may not bereported for some period of time after those claims areincurred.

Our specialty insurance run-off segment net loss ratiowas 62.6% for the nine months ended September  30,2006, compared to a net loss ratio of 66.7% for the nine monthsended September  30,  2005. The decrease in the specialtyinsurance run-off segment net loss ratio is primarily due to the lossesincurred in the nine months ended September  30,  2005resulting from the 2005 hurricanes and from the oil pipeline describedabove. This decrease was offset by the higher selected loss ratios forour HBW program and our environmental insurance line of business in thenine months ended September  30,  2006 as compared to lossratios applicable to those lines and the losses incurred relating tothe tornado in the nine months ended September  30,2005.

Acquisition expenses.    Acquisition expenseswere $14.2  million for the nine months ended September30,  2006 compared to $20.3  million for the nine monthsended September  30,  2005. The decrease in acquisitionexpenses was due to the lower net premiums earned. These acquisitionexpenses primarily represented brokerage fees, commission fees andpremium tax expenses and were net of ceding commissions earned onpurchased reinsurance treaties.

Our acquisition expense ratio was13.9% for the nine months ended September  30,2006, compared to 17.0% for the nine months endedSeptember  30,  2005. The decrease is mainly due to theincrease in our ceding commission income that we are recovering on ourspecialty insurance segment's reinsurance treaties increasing asa result of the restructuring of those treaties during the secondquarter of 2005. The decrease in our acquisition expense ratio was dueto us incurring less commission on our HBW program because thecontracts contain sliding scale commissions that vary with changes inthe selected loss ratio and due to us paying less fronting costs on ourspecialty insurance run-off lines because we are licensed in morestates. Deferred acquisition costs include, as of September30,  2006, $7.6  million of acquisition expenses on writtencontracts of insurance that will be amortized in future periods as thepremiums written to which they relate are earned.

General andadministrative expenses.    Direct and allocated indirectgeneral and administrative expenses totaled $43.9  million forthe nine months ended September  30  2006, compared to$32.4  million for the nine months ended September30,  2005. The increase in our general and administrative expensewas due to severance costs and the additional number of employees hiredthroughout 2005. The increase is also attributed to increases inprofessional fees related to our evaluation of strategic alternativesand increases in auditing fees and fees associated with ongoing effortsrelating to Sarbanes-Oxley Section 404 compliance allocated to ourspecialty insurance run-off segment. Our general and administrativeexpense ratio increased to 43.2% for the nine months endedSeptember  30,  2006, compared to 27.2% for the ninemonths ended September  30,  2005 mainly due to severancecosts.

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Specialty reinsurancerun-off

|                                        |  |  |                                     |   |         |                                   |  |  |        |   |          |   |  |  |  |   |          |    |
|----------------------------------------|--|--|-------------------------------------|---|---------|-----------------------------------|--|--|--------|---|----------|---|--|--|--|---|----------|----|
|                                   |  |  | Ninemonths ended September 30, 2006 |   |         | Nine monthsendedSeptember 30,2005 |  |  | Change |
|                                   |  |  | ($ inthousands)                     |
| Gross premiumswritten                  |  |  |                                     | $ | 3,263   |                                   |  |  |        | $ | 213,757  |   |  |  |  | $ | (210,494 | )  |
| Premiumsceded                          |  |  |                                     |   | (13,650 | )                                 |  |  |        |   | (31,666  | ) |  |  |  |   | 18,016   |    |
| Netpremiumswritten                     |  |  |                                     | $ | (10,387 | )                                 |  |  |        | $ | 182,091  |   |  |  |  | $ | (192,478 | )  |
| Netpremiumsearned                      |  |  |                                     | $ | 39,317  |                                   |  |  |        | $ | 156,014  |   |  |  |  | $ | (116,697 | )  |
| Otherincome                            |  |  |                                     |   | 2,511   |                                   |  |  |        |   | 2,413    |   |  |  |  |   | 98       |    |
| Netlosses and lossexpenses             |  |  |                                     |   | (32,768 | )                                 |  |  |        |   | (149,034 | ) |  |  |  |   | 116,266  |    |
| Acquisitionexpenses                    |  |  |                                     |   | (9,552  | )                                 |  |  |        |   | (39,505  | ) |  |  |  |   | 29,953   |    |
| Generaland administrativeexpenses      |  |  |                                     |   | (14,441 | )                                 |  |  |        |   | (17,527  | ) |  |  |  |   | 3,086    |    |
| Netunderwritingloss                    |  |  |                                     | $ | (14,933 | )                                 |  |  |        | $ | (47,639  | ) |  |  |  | $ | 32,706   |    |
| Ratios:                                |  |  |                                     |   |    |                                   |  |  |        |   |     |   |
| Lossand loss expenseratio              |  |  |                                     |   | 83.3    | %                                 |  |  |        |   | 95.5     | % |  |  |  |   | 12.2     | %  |
| Acquisitionexpenseratio                |  |  |                                     |   | 24.3    | %                                 |  |  |        |   | 25.3     | % |  |  |  |   | 1.0      | %  |
| Generaland administrative expenseratio |  |  |                                     |   | 36.7    | %                                 |  |  |        |   | 11.2     | % |  |  |  |   | (25.5    | )% |
| Combinedratio                          |  |  |                                     |   | 144.3   | %                                 |  |  |        |   | 132.0    | % |  |  |  |   | (12.3    | )% |
|                                        |

Premiums.    Grossand net premiums written were $3.3  million and $(10.4) millionfor the nine months ended September  30,  2006 compared to$213.8  million and $182.1  million of gross and netpremiums for the nine months ended September  30,  2005.The decrease in our specialty reinsurance run-off segment's netpremiums written reflects the adverse effects of A.M. Best'sratings downgrade and our decision to cease underwriting or seeking newbusiness and to place all of our remaining specialty reinsurance linesof business into orderly run-off. Our gross premiums written includes$38.3  million in returned gross premium associated with policycancellation and $78.8  million from the property reinsurancebusiness (which was subject to the Property Transaction).

Ourreturned gross premium associated with cancelled policies during thenine months ended September  30,  2006, which continues thetrend of returned gross premium during the six months ended June30,  2006, are as follows:

|                               |  |  |                                     |   |        |                               |  |  |  |   |        |  |
|-------------------------------|--|--|-------------------------------------|---|--------|-------------------------------|--|--|--|---|--------|--|
|                          |  |  | Ninemonths ended September 30, 2006 |   |        | Six months ended June30, 2006 |
|                          |  |  | ($ inthousands)                     |
| Marine, technical andaviation |  |  |                                     | $ | 15,624 |                               |  |  |  | $ | 15,624 |  |
| Property                      |  |  |                                     |   | 11,560 |                               |  |  |  |   | 880    |  |
| Casualty                      |  |  |                                     |   | 11,144 |                               |  |  |  |   | 845    |  |
| Total                         |  |  |                                     | $ | 38,328 |                               |  |  |  | $ | 17,349 |  |
|                               |

Therewas an insignificant amount of return premiums in the nine months endedSeptember  30,  2005.

Ceded premiums were$13.7  million during the nine months ended September30,  2006, compared to $31.7  million for the nine monthsended September  30,  2005. The decrease in our cededpremiums written reflects the purchase of additional retrocessionprotection, including reinstatement premiums, for our property andmarine, technical risk and aviation product lines during the ninemonths ended September  30,  2005. During the nine monthsended September  30,  2006, we have not purchased as muchretrocessional protection given our reduced exposure following theexpiration and cancellation of contracts in our reinsurance lines ofbusiness. We obtained the retrocession protection to help limit our netloss exposures to natural catastrophe events. These retrocessiontreaties provide us with 

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protection on an excess of loss, quota sharetreaty and facultative basis for policies written in our reinsuranceproduct lines of business. Ceded premiums are earned over the period ofeach insured risk.

Net premiums earned of $39.3  millionfor the nine months ended September  30,  2006, compared to$156.0  million for the nine months ended September30,  2005. The decrease is due to four factors. First, itreflects the impact of writing lower net premiums as a result of theA.M. Best ratings downgrade. Second, it is due to the impact of theProperty Transaction. Third, the decrease reflects the impact of thedecision to cease underwriting or seeking new business and to place allof our remaining specialty reinsurance lines of business into orderlyrun-off. Fourth, it is due to the cancellation of policies during thenine months ended September  30,  2006. Gross premiumswritten in our specialty reinsurance run-off segment are being earnedover the periods of reinsured or underlying insured risks which aretypically one year.

Other income.    Other income was$2.5  million for the nine months ended September30,  2006, compared to $2.4  million for the nine monthsended September  30,  2005, and related to income,including fees, recognized on non-traditional reinsurancecontracts.

Net losses and loss expenses.    Net lossesand loss expenses were $32.8  million for the nine months endedSeptember  30,  2006, compared to $149.0  million forthe nine months ended September  30,  2005. The decrease innet losses and loss expenses incurred was due to the losses resultingfrom the 2005 hurricanes incurred in the nine months endedSeptember  30,  2005 and to the decrease in our netpremiums earned as discussed above. Net losses and loss expenses were afunction of our net premiums earned and our expected ultimate lossesand loss expenses for reported and unreported claims on contracts ofreinsurance underwritten.

During the nine months endedSeptember  30,  2006 we recorded adverse development on theloss estimates on contracts of reinsurance insuring claims arising fromthe 2005 hurricanes of $5.1  million, new reported non-hurricanemarine, technical risk and aviation reinsurance losses of $4.2million and adverse development on the 2004 hurricanes of $0.8million. During the nine months ended September  30,  2005we recorded $54.7  million of losses resulting from the 2005hurricanes.

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 and the non-hurricane marinereinsurance losses, as of September  30,  2006, we havereceived a limited amount of large reported losses in our specialtyreinsurance run-off 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 run-offsegment net loss ratio was 83.3% for the nine months endedSeptember  30,  2006, compared to 95.5% for the ninemonths ended September  30,  2005. The decrease in thespecialty reinsurance run-off segment net loss ratio is mainly due tothe losses resulting from the 2005 hurricanes incurred in the ninemonths ended September  30,  2005. This decrease was offsetby adverse development on the 2004 and 2005 hurricanes and thenon-hurricane marine reinsurance losses reported during the secondquarter of 2006 and reduced net premiums earned during the nine monthsended September  30,  2006 as compared to the nine monthsended September  30,  2005.

Acquisitionexpenses.    Acquisition expenses were $9.6  million forthe nine months ended September  30,  2006, compared to$39.5  million for the nine months ended September30,  2005. The decrease in acquisition expenses was due to thedecrease in our net premiums earned as described above. Theseacquisition expenses primarily represented brokerage and cedingcommissions.

Our acquisition expense ratio was 24.3% forthe nine months ended September  30,  2006, which iscomparable to 25.3% for the nine months ended September30,  2005. Deferred acquisition costs include, as ofSeptember  30,  2006, $0.8  million of acquisitionexpenses on written contracts of reinsurance that will be amortized infuture periods as the premiums written to which they relate areearned.

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General and administrativeexpenses.    Direct and allocated indirect general andadministrative expenses totaled $14.4  million for the ninemonths ended September  30,  2006 compared to $17.5million for the nine months ended September  30,  2005. Thedecrease is primarily attributable to the reduction of our workforceduring 2006. This decrease was partially offset by severance costs,increases in professional fees related to our evaluation of strategicalternatives, auditing fees and fees associated with ongoing effortsrelating to Sarbanes-Oxley Section 404 compliance allocated to ourspecialty reinsurance run-off segment. Our general and administrativeexpense ratio was 36.7% for the nine months endedSeptember  30,  2006 compared to 11.2% for the ninemonths ended September  30,  2005, the increase reflectingthe increase in severance and other allocated costs and the decrease innet premiumsearned.

Lloyd’s

|                                        |  |  |                                     |   |         |                                     |  |  |        |   |         |   |  |  |  |   |         |    |
|----------------------------------------|--|--|-------------------------------------|---|---------|-------------------------------------|--|--|--------|---|---------|---|--|--|--|---|---------|----|
|                                   |  |  | Ninemonths ended September 30, 2006 |   |         | Nine months endedSeptember 30, 2005 |  |  | Change |
|                                   |  |  | ($ inthousands)                     |
| Gross premiumswritten                  |  |  |                                     | $ | 64,608  |                                     |  |  |        | $ | 53,486  |   |  |  |  | $ | 11,122  |    |
| Premiumsceded                          |  |  |                                     |   | (21,587 | )                                   |  |  |        |   | (11,671 | ) |  |  |  |   | (9,916  | )  |
| Netpremiumswritten                     |  |  |                                     | $ | 43,021  |                                     |  |  |        | $ | 41,815  |   |  |  |  | $ | 1,206   |    |
| Netpremiumsearned                      |  |  |                                     | $ | 48,170  |                                     |  |  |        | $ | 21,676  |   |  |  |  | $ | 26,494  |    |
| Netlosses and lossexpenses             |  |  |                                     |   | (37,778 | )                                   |  |  |        |   | (12,580 | ) |  |  |  |   | (25,198 | )  |
| Acquisitionexpenses                    |  |  |                                     |   | (8,900  | )                                   |  |  |        |   | (2,901  | ) |  |  |  |   | (5,999  | )  |
| Generaland administrativeexpenses      |  |  |                                     |   | (21,451 | )                                   |  |  |        |   | (13,639 | ) |  |  |  |   | (7,812  | )  |
| Netunderwritingloss                    |  |  |                                     | $ | (19,959 | )                                   |  |  |        | $ | (7,444  | ) |  |  |  | $ | (12,515 | )  |
| Ratios:                                |
| Lossand loss expenseratio              |  |  |                                     |   | 78.4    | %                                   |  |  |        |   | 58.0    | % |  |  |  |   | (20.4   | )% |
| Acquisitionexpenseratio                |  |  |                                     |   | 18.5    | %                                   |  |  |        |   | 13.4    | % |  |  |  |   | (5.1    | )% |
| Generaland administrative expenseratio |  |  |                                     |   | 44.2    | %                                   |  |  |        |   | 62.9    | % |  |  |  |   | 18.7    | %  |
| Combinedratio                          |  |  |                                     |   | 141.1   | %                                   |  |  |        |   | 134.3   | % |  |  |  |   | (6.8    | )% |
|                                        |

Premiums.    Grossand net premiums written were $64.6  million and $43.0million for the nine months ended September  30,  2006compared to $53.5  million and $41.8  million for the ninemonths ended September  30,  2005. The increase in ourgross premiums written was largely due to the continued growth in ourLloyd’s segment, which commenced operations in December2004. This increase was offset by the adverse effects on ourLloyd’s business following A.M. Best's ratings downgradein March  2006 of other members of the Quanta group.

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The table below shows gross and netpremiums written by product line for the nine months endedSeptember  30,  2006 and 2005 whether written on atraditional insurance, programs or structuredbasis:

|                                          |  |  |                                     |   |        |                                     |  |  |                      |   |        |                     |  |  |  |   |         |  |  |  |  |   |         |  |
|------------------------------------------|--|--|-------------------------------------|---|--------|-------------------------------------|--|--|----------------------|---|--------|---------------------|--|--|--|---|---------|--|--|--|--|---|---------|--|
|                                     |  |  | Ninemonths ended September 30, 2006 |   |        | Nine monthsended September 30, 2005 |
|                                     |  |  | ($ inthousands)                     |
|                                     |  |  | Grosspremiumswritten                |   |        | Netpremiumswritten                  |  |  | Grosspremiumswritten |   |        | Netpremiums written |
| Fidelity, crime andprofessionalliability |  |  |                                     | $ | 61,022 |                                     |  |  |                      | $ | 40,360 |                     |  |  |  | $ | 53,486  |  |  |  |  | $ | 41,815  |  |
| Specieand fineart                        |  |  |                                     |   | 3,567  |                                     |  |  |                      |   | 2,656  |                     |  |  |  |   | — |  |  |  |  |   | — |  |
| Kidnapandransom                          |  |  |                                     |   | 19     |                                     |  |  |                      |   | 5      |                     |  |  |  |   | — |  |  |  |  |   | — |  |
| Total                                    |  |  |                                     | $ | 64,608 |                                     |  |  |                      | $ | 43,021 |                     |  |  |  | $ | 53,486  |  |  |  |  | $ | 41,815  |  |
|                                          |

Premiumsceded were $21.6  million during the nine months endedSeptember  30,  2006, an increase of $9.9  million,or 85.0%, compared to $11.7  million for the nine monthsended September  30,  2005. The increase in premiums cededreflects the increase in our gross premium written described above andreflects the acceleration of minimum ceded written premium relating toour Lloyd's excess of loss reinsurance treaties.

Netpremiums earned during the nine months ended September30,  2006 were $48.2  million, an increase of $26.5million, compared to $21.7  million for the nine months endedSeptember  30,  2005, representing amortization of premiumswritten and ceded during the years ended December  31,2004 and 2005 and the nine months ended September  30,2006. The increase in our net premiums earned was largely due to thegrowth of our net premiums written from our Lloyds syndicate, whichcommenced in December  2004. This increase was partially offsetby the effect of the A.M. Best's ratings downgrade and theacceleration of the minimum ceded earned premium described above. Grosspremiums written and ceded premiums are being earned over the period ofeach insured risk which is typically one year.

Net losses andloss expenses.    Net losses and loss expenses were$37.8  million for the nine months ended September30,  2006, an increase of $25.2  million, compared to$12.6  million for the nine months ended September30,  2005. Net losses and loss expenses are a function of our netpremiums earned and our expected ultimate losses and loss expenses forreported and unreported claims on contracts of insurance underwritten.The increase in net losses and loss expenses is primarily due to theincrease in our net premiums earned and to higher selected loss ratiosfor the professional insurance written in our Lloyd's syndicatein the nine months ended September  30,  2006 as comparedto loss ratios applicable to this line in the nine months endedSeptember  30,  2005.

We have received a limitedamount of large reported losses. However, we participate in lines ofbusiness where claims may not be reported for some period of time afterthose claims are incurred.

Our Lloyd’s segment net lossratio was 78.4% for the nine months ended September30,  2006 an increase of 20.4% compared to a net lossratio of 58.0% for the nine months ended September30,  2005. The increase in the Lloyd’s segment net lossratio is primarily due to the higher selected loss ratios for theprofessional insurance written in our Lloyd's syndicate and theacceleration of our ceded earned premium relating to our Lloyd’sexcess of loss reinsurance treaties in the nine months endedSeptember  30,  2006 as compared to loss ratios applicableto this line in the nine months ended September  30,2005.

Acquisition expenses.    Acquisition expenseswere $8.9  million for the nine months ended September30,  2006 an increase of $6.0  million, compared to$2.9  million for the nine months ended September30,  2005. The increase in acquisition expenses was due to theincrease in the historical number of insurance contracts we enteredinto and the associated net premiums earned. These acquisition expensesprimarily represented brokerage fees and commission fees and were netof ceding commissions earned on purchased reinsurancetreaties.

Our acquisition expense ratio was 18.5% for thenine months ended September  30,  2006, an increase of5.1%, compared to 13.4% for the nine months endedSeptember  30,  2005. The increase in 

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our acquisition expense ratio was due to theacceleration of ceded earned premium during the nine months endedSeptember  30,  2006 reducing net premiums earned. Deferredacquisition costs include, as of September  30,  2006,$4.8  million of acquisition expenses on written contracts ofinsurance that will be amortized in future periods as the premiumswritten to which they relate are earned.

General andadministrative expenses.    Direct and allocated indirectgeneral and administrative expenses totaled $21.5  million forthe nine months ended September  30  2006 an increase of$7.9  million, or 57.3%, compared to $13.6  millionfor the nine months ended September  30,  2005. Theincrease in our general and administrative expense was due to theadditional number of employees hired throughout 2005 and increases inLloyd’s central fund and managing agent expenses. The increaseis also attributed to increases in auditing fees and fees associatedwith ongoing efforts relating to Sarbanes-Oxley Section 404 complianceallocated to our Lloyd’s segment. Our general and administrativeexpense ratio decreased to 44.2% for the nine months endedSeptember  30,  2006, a decrease of 18.7%, comparedto 62.9% for the nine months ended September  30,2005 mainly due to the increase in net earned premium offsetting theincrease in general and administrativeexpenses.

Technicalservices

|                                    |  |  |                                     |   |        |                                   |  |  |        |   |         |   |  |  |  |   |        |   |
|------------------------------------|--|--|-------------------------------------|---|--------|-----------------------------------|--|--|--------|---|---------|---|--|--|--|---|--------|---|
|                               |  |  | Ninemonths ended September 30, 2006 |   |        | Nine monthsendedSeptember 30,2005 |  |  | Change |
|                               |  |  | ($ in thousands)                    |
| Technical servicesrevenues         |  |  |                                     | $ | 2,947  |                                   |  |  |        | $ | 9,793   |   |  |  |  | $ | (6,846 | ) |
| Otherincome                        |  |  |                                     |   | 215    |                                   |  |  |        |   | 1,704   |   |  |  |  |   | (1,489 | ) |
| Generaland administrativeexpenses  |  |  |                                     |   | (4,250 | )                                 |  |  |        |   | (10,573 | ) |  |  |  |   | 6,323  |   |
| Nettechnical services (loss)income |  |  |                                     | $ | (1,088 | )                                 |  |  |        | $ | 924     |   |  |  |  | $ | (2,012 | ) |
|                                    |

Technicalservices revenues.    Technical services revenues were$2.9  million for the nine months ended September30,  2006, compared to $9.8  million for the nine monthsended September  30,  2005. The decrease is due to asignificant portion of remediation of our QLT Buffalo LLC environmentalliability assumption program occurring during the second and thirdquarters of 2005. The remediation is now close to being completed and,as a result, has not generated technical services revenues to the sameextent as it did in 2005. We expect that our technical servicesrevenues will continue to decrease in future periods as the remediationis closer to completion.

Other income.    Other incometotaled $0.2  million for the nine months ended September30,  2006, compared to $1.7  million for the nine monthsended September  30,  2005. The other income during thenine months ended September  30,  2005 was primarilygenerated from our liability assumption program in Buffalo, New York.This income primarily represents the amount of consideration receivedfor the assumption of remediation liabilities in excess of the expectedenvironmental remediation liability, which is initially deferred in theconsolidated balance sheet and subsequently recognized in earnings overthe remediation period using the cost recovery or percentage ofcompletion method.

General and administrativeexpenses.    Direct and indirect allocated general andadministrative expenses were $4.3  million for the nine monthsended September  30,  2006, compared to $10.6million for the nine months ended September  30,  2005. Thedecrease is due to a significant portion of remediation of our QLTBuffalo LLC environmental liability assumption program occurring duringthe second and third quarters of 2005, and this program is now close tobeing fully remediated.

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FinancialCondition and Liquidity

Quanta Holdings is organized as aBermuda holding company, and as such, has no direct operations of itsown. Quanta Holdings' assets consist of investments in itssubsidiaries through which we have historically conducted substantiallyall of our insurance, reinsurance and technical services operations. Asof September  30,  2006, we had subsidiaries in the U.S.,Bermuda, Ireland and the U.K., including Syndicate 4000.

As aholding company, Quanta Holdings has and will continue to have fundingneeds for general corporate expenses, the payment of principal andinterest on current and future borrowings, dividends on our preferredshares, taxes, and the payment of other obligations. Funds to meetthese obligations are expected to come from dividends, interest andother statutorily permissible payments from our operating subsidiaries.We believe our operating subsidiaries have sufficient assets to paytheir respective currently foreseen insurance liabilities as theybecome due. However, the ability of our operating subsidiaries to makepayments to Quanta Holdings is limited by the applicable laws andregulations of the domiciles in which the subsidiaries operate. Theselaws and regulations subject our subsidiaries to significantrestrictions and require, among other things, the maintenance ofminimum solvency requirements and limitations regarding the amount ofdividends that these subsidiaries can pay to us. In addition, followingthe withdrawal of our A.M. Best rating, the Bermuda Monetary Authority,the regulator of our most significant subsidiary, Quanta Bermudaamended Quanta Bermuda's license to, among other things, restrictit from making any dividend payments to Quanta Holdings without theapproval of the BMA or to enter into new transactions. There are alsosignificant restrictions regarding our ability to remove the fundsdeposited to support our underwriting capacity of our Lloyd'ssyndicate. We are working with applicable regulatory authorities tofacilitate our ability, as the business we wrote expires over time, topay dividends from our insurance operating subsidiaries to the holdingcompany. The paying of dividends to the holding company will requireregulatory approval. In addition, because we have regulatedsubsidiaries which are owned by other regulated subsidiaries, which werefer to as ‘‘stacked subsidiaries,’’obtaining approval to dividend funds requires the approval of a numberof regulators before the funds actually reach Quanta Holdings. Workingwith these regulators takes a significant amount of time and we will berequired to meet many conditions.

We are also subject toconstraints under the Companies Act 1981 of Bermuda(‘‘Companies Act’’) that affect our ability topay 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. While we currently meet theserequirements, there can be no assurance that we will continue to do soin the future.

As of September  30,  2006, we hadcash and cash equivalents and investments of approximately$977.7  million. We estimate that our cash and cash equivalentsand investment balances include approximately $263.6  millionthat is pledged as collateral for letters of credit, approximately$185.5  million held in trust funds for the benefit of cedingcompanies and to fund our obligations associated with the assumption ofan environmental remediation liability, $175.0  million that isheld by Lloyd's to support our underwriting activities,$40.9  million held in trust funds that are related to ourdeposit liabilities and $32.0  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 $280.7  million,including net cash of approximately $46.2  million. Of the$280.7  million, approximately $234.5  million representsnet unrestricted investments held by our operating subsidiaries ofwhich approximately $30.0  million is held by Quanta Bermuda.Additionally, Quanta Indemnity Company, Quanta Speciality LinesInsurance Company and Quanta Reinsurance U.S. Ltd., which aresubsidiaries of Quanta Bermuda, hold approximately $204.5million of net unrestricted investments. The remaining amount of thenet unrestricted investments balance is held by Quanta Europe. Anydistributions from these subsidiaries are subject to significant legal,regulatory and compliance requirements.

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Some of our insurance and many of ourreinsurance contracts contain termination rights that are triggered bythe A.M. Best rating downgrades. Some of these insurance andreinsurance contracts also require us to post additional security.Further, the downgrade in our rating from‘‘B++’’ (very good) to‘‘B’’ (Fair) has triggered additionaltermination provisions and required the posting of additional securityin certain of our other insurance and reinsurance contracts. We wererequired 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. In addition, many ofour insurance contracts and certain of our reinsurance contractsprovide for cancellation at the option of the policyholder regardlessof our financial strength rating. Accordingly, we may also elect topost security under these other contracts.

As of September30,  2006, we had net cash and cash equivalent balances and otherinvestments of approximately $280.7  million that are availableto post as security or place in trust. We currently believe that wehave sufficient assets to pay our foreseen liabilities as they becomedue and meet our foreseen collateral requirements within oursubsidiaries. However, we cannot issue new letters of credit or borrowunder our credit agreement if we have incurred a material adverseeffect or if a default exists under the agreement.

As ofSeptember  30,  2006, we had approximately $198.4million of fully secured letters of credit issued under our creditfacility that are principally used to secure our obligations to payclaims. No borrowings were outstanding as of September30,  2006.

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 or to consummate certaincommutation agreements. Our investment portfolio currently consistsmainly of highly rated and liquid fixed income securities. However, tothe extent our insurance liabilities are correlated with an asset classoutside our minimum criteria, our investment guidelines will allow adeviation from those minimum criteria provided such deviations reduceoverall risk.

We have determined that $13.9  million ofinvestment securities, with unrealized losses of approximately$0.1  million were other-than-temporarily impaired as ofSeptember  30,  2006. The realization of these lossesrepresents the maximum amount of potential losses in our investmentsecurities if we were to sell all of these securities as ofSeptember  30,  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, we may be required to sell securities to satisfyreturn premium or loss obligations on contracts that are cancelled orcommuted. Due to this and to the continuing general uncertaintiessurrounding our business resulting from our decision to ceaseunderwriting or seeking new business and to place most of our remainingspecialty 

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insurance and reinsurance lines into orderlyrun-off, we concluded that there are no absolute assurances that wewill have the ability to hold the affected investments for a sufficientperiod of time to permit unrealized losses to recover. It is possiblethat the impairment factors evaluated by management and fair valueswill change in subsequent periods, resulting in additional materialimpairment charges.

Our investment guidelines require compliancewith applicable local regulations and laws. Without Board approval, wewill not purchase financial futures, forwards, options, swaps and otherderivatives, except for instruments that are purchased as part of ourbusiness, for purposes of hedging capital market risks (including thosewithin our structured products transactions), or as replicationtransactions, which are defined as a set of derivative, insuranceand/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 $789.9million as of September  30,  2006, compared to$699.1  million at December  31,  2005. The marketvalue of our total investment portfolio was $827.2  million, ofwhich $752.9  million related to available-for-sale fixedmaturity investments, $36.9  million related to available forsale short-term investments and $37.4  million to tradinginvestments related to deposit liabilities. The majority of ourinvestment portfolio consists of fixed maturity investments which aremanaged by the following external investment advisors: PacificInvestment Management Company LLC, JP Morgan Investment Management Inc.and Deutsche Asset Management. Custodians of our externally managedinvestment portfolios are JP Morgan Chase Bank N.A., Citibank N.A. andComerica Incorporated.

Our investment guidelines require that theaverage 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 September  30,  2006, all ofthe fixed maturity investments were investment grade, with a weightedaverage credit rating of ‘‘AA+’’ based onratings assigned by S&P. Our cash and cash equivalents totaled$150.4  million as of September  30,  2006 comparedto $260.9  million at December  31,  2005. Thedecrease in our available-for-sale investments and cash and cashequivalents is primarily due to the claims notifications and associatedloss payments we have made up to and including September30,  2006, partially offset by the collection of premiumsreceivable and losses recoverable during the nine months endedSeptember  30,  2006.

Our insurance and reinsurancepremiums receivable balances totaled $39.1  million as ofSeptember  30,  2006 compared to $115.1  million atDecember  31,  2005. The decrease in premiums receivablereflects the collection of outstanding premiums, cancellations ofpolicies, the impact of A.M. Best's downgrades on our ability towrite business and our decision to cease underwriting or seeking newbusiness and to place most of our remaining specialty insurance andreinsurance lines into orderly run-off during the second quarter of2006, offset in part by net premiums written across the specialtyinsurance run-off segment during the nine months ended September30,  2006. Included in our premiums receivable are approximately$26.4  million of written premium installments that are not yetcurrently due under the terms of the related insurance and reinsurancecontracts. As of September  30,  2006, based on our reviewof the remaining balance of $12.7  million, which representspremiums installments that are currently due, we have established aprovision for uncollectible premiums receivable of $1.3million.

Our deferred acquisition costs and unearned premiums,net of deferred reinsurance premiums, totaled $13.2  million and$105.5  million, respectively, as of September  30,2006 compared to $33.1  million and $224.5  million as ofDecember  31,  2005. The decrease in our deferredacquisition costs and in unearned premiums, net of deferredreinsurance, during the nine months ended September  30,2006 are due to lower premiums written, as a result of the A.M.Best's ratings downgrade and our decision to cease underwritingor seeking new business and to place most of our remaining specialtyinsurance and reinsurance lines into orderly run-off. These amountsrepresent premiums and acquisition expenses on written contracts ofinsurance and reinsurance that will be 

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recognized in earnings in future periods.Substantially all of these amounts will be recognized over the next 12months. However, as a result of potential premium estimate reductionsand cancellations in future periods, we may not receive all of ourpremiums receivable in cash.

Our reserves for losses and lossadjustment expenses, net of reinsurance recoverable, totaled$399.7  million as September  30,  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 nine months endedSeptember  30,  2006, including adverse development of$5.0  million resulting from the 2005 hurricanes, $4.2million related to non-hurricane related marine reinsurance losses andthe losses of $3.9  million resulting from tornadoes thatimpacted our technical risk line of business. The increase was alsodriven by the number of historical insurance contracts we entered intoand the associated net premiums earned, as well as greater reinsurancerecoveries relative to our payment of losses during the period. Ourestimate of our unpaid exposure to ultimate claim costs associated withthese losses is based on currently available information, claimnotifications received to date, industry loss estimates, output fromindustry models, a review of affected contracts and discussion withclients, cedants and brokers. The actual amount of future loss paymentsrelating to these loss events may vary significantly from thisestimate. The balance of reserves for losses and loss adjustmentexpenses as of September  30,  2006 includes our estimateof gross and net unpaid loss expenses, including incurred but notreported losses, totaling $118.0  million and $51.7million relating to Hurricanes Katrina, Rita and Wilma and $3.7million and $2.2  million relating to the environmental claimthat we incurred during the year ended December  31,  2005.During the nine months ended September  30,  2006, otherthan the tornado and non-hurricane related marine reinsurance losses,we have 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 ofSeptember  30,  2006 of $399.7  million is net ofreinsurance recoverable of $219.0  million. The increase in ourreinsurance recoverable balance reflects our losses and loss expensesrecoverable from reinsurers during the nine months endedSeptember  30,  2006. As of September  30,2006, our reinsurance recoverable balances also include our estimate ofunpaid loss expenses recoverable totaling $66.3  million relatingto Hurricanes Katrina, Rita and Wilma and $1.5  million relatingto the environmental claim that we incurred during the year endedDecember  31,  2005. Our estimate of our reinsurancerecoverable balance associated with these losses is based on currentlyavailable information, claim notifications received to date, industryloss estimates, output from industry models, a detailed review ofaffected ceded reinsurance contracts and an assessment of the creditrisk to which the Company is subject. The actual amount of future lossreceipts relating to these loss events may vary significantly from thisestimate. The average credit rating of the Company's reinsurersas of September  30,  2006 is ‘‘A’’(excellent) by A.M. Best. As of September  30,  2006, thelosses and loss adjustment expenses recoverable from reinsurers balancein the consolidated balance sheet included approximately 25.5%due from Everest Reinsurance Ltd., a reinsurer rated‘‘A+’’ (superior) by A.M. Best, andapproximately 12.3% due from Arch Reinsurance which is ratedA− (Excellent) by A.M. Best. Approximately 12.2% is duefrom various Lloyd's syndicates, which are rated‘‘A’’ (excellent) by A.M. Best. No otherreinsurers accounted for more than 10% of the losses and lossadjustment expense recoverable balance as of September30,  2006. Approximately 5.4% of the Company's lossand loss adjustment expenses recoverable from reinsurers are due fromreinsurers that are rated below ‘‘A−’’(excellent).

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The following table lists our largestreinsurers measured by the amount of losses and loss adjustmentexpenses recoverable at September  30,  2006 and thereinsurers' financial strength rating from A.M.Best:

|                                              |  |  |                                              |   |        |                 |  |  |               |
|----------------------------------------------|--|--|----------------------------------------------|---|--------|-----------------|--|--|---------------|
|                                         |  |  | Lossesand LossAdjustment ExpensesRecoverable |   |        | A.M. BestRating |
|                                         |  |  | ($ inmillions)                               |   |        |            |
| Reinsurer                                    |  |  |                                              |   |   |                 |  |  |          |
| EverestReinsuranceLtd.                       |  |  |                                              | $ | 56.4   |                 |  |  | A+            |
| ArchReinsuranceLtd.                          |  |  |                                              |   | 27.2   |                 |  |  | A−      |
| VariousLloyd'ssyndicates                     |  |  |                                              |   | 26.8   |                 |  |  | A   |
| GlacierReinsurance AG                        |  |  |                                              |   | 10.8   |                 |  |  | A−      |
| AllianzMarine & Aviation VersicherungsAG |  |  |                                              |   | 10.7   |                 |  |  | A−      |
| The Toa ReinsuranceCompany, Ltd.(Tokyo)      |  |  |                                              |   | 10.6   |                 |  |  | A   |
| AspenInsuranceLtd.                           |  |  |                                              |   | 9.4    |                 |  |  | A   |
| OdysseyAmerica ReinsuranceCorporation        |  |  |                                              |   | 8.7    |                 |  |  | A   |
| MaxRe Ltd.                                   |  |  |                                              |   | 8.3    |                 |  |  | A−      |
| TransatlanticReinsurance Company             |  |  |                                              |   | 8.2    |                 |  |  | A+            |
| XLCapital Ltd.                               |  |  |                                              |   | 7.8    |                 |  |  | A+            |
| PXRE ReinsuranceLimited                      |  |  |                                              |   | 6.0    |                 |  |  | NR            |
| Other ReinsurersRated A− orBetter      |  |  |                                              |   | 23.5   |                 |  |  | A−      |
| All OtherReinsurers                          |  |  |                                              |   | 4.6    |                 |  |  | Various       |
| Total                                        |  |  |                                              | $ | 219.0  |                 |  |  |          |
|                                              |

Asof September  30,  2006, of our gross reserves for lossesand loss adjustment expenses of $618.7  million, $149.3million related to case reserves for reported losses and loss expensesand $469.4  million related to reserves for losses and lossexpenses incurred but not reported. As of September  30,2006, of our reserves for losses and loss adjustment expenses of$399.7  million, net of reinsurance recoverable of $219.0million, $82.2  million related to case reserves for reportedlosses and loss expenses and $317.5  million related to reservesfor losses and loss expenses incurred but not reported.

Ourshareholders' equity was $335.4  million as ofSeptember  30,  2006 compared to $384.2  million asof December  31,  2005, reflecting a decrease of$48.8  million that was primarily the result of a net lossavailable to ordinary shareholders of $57.0  million for the ninemonths ended September  30,  2006 which was partiallyoffset by a net change in unrealized gains on our investment portfoliosand currency translation adjustment of $7.8  million and by astock-compensation expense credited to additional paid-in capital of$0.5  million and the issuance of common shares of $0.1million. As of September  30,  2006, we have provided a100% cumulative valuation allowance against our deferred taxassets in the amount of $37.6  million. These deferred tax assetswere generated primarily from net operating losses. As a company withlimited operating history and following our decision to place most ofour lines of business into run-off, the realization of these deferredtax assets is neither assured nor accuratelydeterminable.

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The following table shows ourcapitalization as of September  30,  2006 andDecember  31,  2005 (inthousands):

|                                                                                                                                                                                              |  |  |                         |   |          |                        |  |  |  |   |          |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|-------------------------|---|----------|------------------------|--|--|--|---|----------|---|
|                                                                                                                                                                                         |  |  | Asof September 30, 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 September  30,  2006and 3,000,000 issued and outstanding at December  31,2005) |  |  |                         |   | 74,998   |                        |  |  |  |   | 71,838   |   |
| Shareholders'equity:                                                                                                                                                                         |  |  |                         |   |     |                        |  |  |  |   |     |   |
| Common shares ($0.01par value; 200,000,000 common shares authorized; 69,981,925 issued andoutstanding at September  30,  2006 and 69,946,861 issuedand outstanding at December  31,2005)(2)  |  |  |                         |   | 700      |                        |  |  |  |   | 699      |   |
| Additionalpaid-incapital                                                                                                                                                                     |  |  |                         |   | 582,416  |                        |  |  |  |   | 581,929  |   |
| Accumulateddeficit                                                                                                                                                                           |  |  |                         |   | (256,004 | )                      |  |  |  |   | (199,010 | ) |
| Accumulatedother comprehensiveincome                                                                                                                                                         |  |  |                         |   | 8,304    |                        |  |  |  |   | 546      |   |
| Totalshareholders'equity                                                                                                                                                                     |  |  |                         | $ | 335,416  |                        |  |  |  | $ | 384,164  |   |
| Totalcapitalization                                                                                                                                                                          |  |  |                         | $ | 472,271  |                        |  |  |  | $ | 517,859  |   |
| Totaldebt to total capitalratio(3)                                                                                                                                                           |  |  |                         |   | 29       | %                      |  |  |  |   | 26       | % |
|                                                                                                                                                                                              |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Consistedof a secured letter of credit and revolving credit facility datedJuly  11,  2005. The total commitment under this facilityof $250  million was reduced to $225  million in the ninemonths ended September  30,  2006. As of September30,  2006, $198.4  million of letters of credit wereoutstanding under this facility. No revolving credit borrowings oramounts drawn under the letters of credit were outstanding as ofSeptember  30,  2006. See‘‘Liquidity’’ below for a discussion of ournew credit facility agented byING. |

|     |                                                                                                                                                            |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | This table does not give effectto warrants and options outstanding for 4,011,037 and 5,945,007 commonshares at September  30,  2006 and December31,  2005. |

|     |                                                                                                                                                                                                                                                                 |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | 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 Total Capitalization. |

Uponliquidation, dissolution or winding-up, the holders of our series Apreferred shares will be entitled to receive from our assets legallyavailable for distribution to shareholders a liquidation preference of$25 per share, plus declared but unpaid dividends and additionalamounts, if any, to the date fixed for distribution. Dividends on ourseries A preferred shares will be payable on a non-cumulative basisonly when, as and if declared by our Board of Directors, quarterly inarrears on the fifteenth day of March, June, September and December ofeach year, commencing on March  15,  2006. Dividendsdeclared on our series A preferred shares will be payable at a rateequal to 10.25% of the liquidation preference per annum(equivalent to $2.5625 per share).

On and after December15,  2010, we may redeem our series A preferred shares, in wholeor in part, at any time, at the redemption price set forth in theCertificate of Designation relating to preferred shares, plus declaredbut unpaid dividends and additional amounts, if any, to the date ofredemption. We may not redeem our series A preferred shares beforeDecember  15,  2010 except that we may redeem our series Apreferred shares before that date pursuant to certain tax redemptionprovisions described in the Certificate of Designation. If weexperience a change of control, we may be required to make offers toredeem our series A preferred shares at a price of $25.25 per share,plus declared but unpaid dividends and additional amounts, if any, tothe date of redemption 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.

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As of September  30,  2006,our capital was domiciled in direct and indirect subsidiaries that aresubject to the following jurisdictions: approximately $258.9million in Bermuda; approximately $109.4  million in the UK(Lloyd's and the Financial Services Authority); approximately$79.9  million in the United States (mainly in Colorado and inIndiana); and approximately $21.3  million in the European Unionjurisdiction unrelated to Lloyd's and subject to the jurisdictionof the Irish Financial Services Regulatory Authority. The balance ofour capital of approximately $2.7  million is held in holdingcompanies. Extraction of this capital is subject to a number ofrestrictions as describedabove.

Liquidity

OperatingCashflow; Cash and Cash Equivalents

We used net operating cashflow of approximately $53.9  million during the nine months endedSeptember  30,  2006, primarily related to our net loss forthe period and by losses and loss expenses paid and commuted and offsetby premiums received. In addition, we generated net proceeds from theissuance of our preferred shares of $3.2  million. During thesame period, we invested net cash of $79.4  million in ourinvestment assets and generated $11.5  million of cash from thesale of ESC. Our cash flows from operations for the nine months endedSeptember  30,  2006 provided us with sufficient liquidityto meet operating cash requirements during that period.

As ofSeptember  30,  2006, we had cash and cash equivalents andinvestments of approximately $977.7  million. We estimate thatour cash and cash equivalents and investment balances includeapproximately $263.6  million that is pledged as collateral forletters of credit, approximately $185.5  million held in trustfunds for the benefit of ceding companies and to fund our obligationsassociated with the assumption of an environmental remediationliability, $175.0  million that is held by Lloyd's tosupport our underwriting activities, $40.9  million held in trustfunds that are related to our deposit liabilities and $32.0million that is on deposit with, or has been pledged to, U.S. stateinsurance departments. After giving effect to these assets pledged orplaced in trust, we estimate that we presently have net unrestrictedinvestments of $280.7  million, including net cash ofapproximately $46.2  million. Of the $280.7  million,approximately $234.5  million represents net unrestrictedinvestments held by our operating subsidiaries of which approximately$30.0  million is held by Quanta Bermuda. Additionally, QuantaIndemnity Company, Quanta Speciality Lines Insurance Company and QuantaReinsurance U.S. Ltd., which are subsidiaries of Quanta Bermuda, holdapproximately $204.5  million of net unrestricted investments.The remaining amount of the net unrestricted investments balance isheld by Quanta Europe. Any distributions from these subsidiaries aresubject to significant legal, regulatory and compliance requirements.We believe our operating subsidiaries currently have sufficient assetsto pay their respective foreseen liabilities as they become due. Wewill work, over time, with applicable regulatory authorities tofacilitate dividends from our insurance subsidiaries to QuantaHoldings. Working with these regulators takes time and will require usto meet many conditions.

Sources of cash

Thesources of cash in each of our subsidiaries consist primarily ofexisting cash and cash equivalents, premiums recoverable, reinsurancerecoveries, proceeds from sales and redemptions of investment assets,investment income, capital or debt issuances, and, to a much lesserextent and our secured bank credit facility. As a result of our recentratings downgrade by A.M. Best, the resulting loss of business andbusiness opportunities, our decision to cease underwriting or seekingnew business and to place most of our remaining specialty insurance andreinsurance lines into orderly run-off and termination of our agreementwith the program manager of the HBW program, cash flows associated withthe receipt of premiums will continue to decrease substantially in 2006and 2007.

The cash flows from discontinued operations arecombined, in the statement of cash flows, with the cash flows fromcontinuing operations within each category. We do not expect theabsence of cash flows from our discontinued operations to affect ourfuture liquidity and capital resources.

The A.M. Best ratingaction discussed above caused a default under our credit facility leadby JPMorgan (the ‘‘JPMorgan creditfacility’’). The lenders have waived the default underthe JPMorgan 

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credit facility until October27,  2006 and on that date we entered into a new credit facilitydescribed below and amended the JPMorgan credit factility, as describedbelow, so that we may transition all of the outstanding letters ofcredit, which secure our claims obligations, from the JPMorgan creditfacility to the credit facility described below. As of September30,  2006, we have approximately $198.4  million of lettersof credit issued under the credit facility, which are fully secured byinvestments and cash totaling approximately $263.6  million.These letters of credit are principally used to secure our obligationsto pay claims.

On October  27,  2006, we enteredinto a Credit Agreement, dated October  27,  2006, with asyndicate of lenders and ING Bank N.V., London Branch, as the MandatedLead Arranger, providing for a secured bank letter of credit facility(the ‘‘ING credit facility’’). The INGcredit facility provides for an aggregate commitment of $240million for a period of three years terminating on October27,  2009, pursuant to which the lenders will issue from time totime, to the account of the designated subsidiary borrowers, one ormore back-to-back letters of credit naming JPMorgan Chase Bank, N.A. asbeneficiary in the face amount equal to the face amount of theoutstanding letters of credit under the JPM Credit Agreement (asdefined below), and other letters of credit in an aggregate face amountup to the aggregate commitment. The facility is secured by specifiedinvestments of the borrowers. Availability for issuances of letters ofcredit on account of any borrower is based on the amount of eligibleinvestments pledged by the applicable borrower(s) and no materialadverse change provisions. Regulatory restrictions will also limit theamount of investments that may be pledged by certain U.S. insuranceborrowers and, consequently, the amount available for letters of creditunder the facility on account of those borrowers. Quanta Holdingsunconditionally and irrevocably guaranteed all of the obligations ofour subsidiaries to the lenders under the ING Credit Facility. Weanticipate that we may need to pledge other investments and cash underthe ING credit facility for a period of time in order to support thetransition of letters of credit cancelled under the JPMorgan creditfacility to replacement letters of credit issued under the ING creditfacility.

The ING credit facility includes customaryrepresentations and warranties, affirmative and negative covenants, andevents of default. The ING credit facility has a financial covenantrequiring us to maintain a minimum consolidated tangible net worth, aswell as covenants restricting our activities, such as the incurrence ofadditional indebtedness and liens, the sale of assets, and the paymentof dividends and other restricted payments.

On October27,  2006, we also entered into a Fourth Consent and Amendment toCredit Agreement dated October  25,  2006 (the‘‘Fourth Amendment’’) to the JPMorgancredit facility.

The Fourth Amendment, among other things,permanently terminates the lenders' obligations to extend anyloan, issue any letter of credit, modify the terms of any existingletter of credit, or otherwise extend any additional credit under theJPM credit facility, releases the liens granted by us and ourdesignated subsidiary borrowers and transfers the collateral to thecollateral agent under the ING credit facility in exchange for a letterof credit issued pursuant to the ING credit vacility in a statedprincipal amount equal to 102% of the letters of creditoutstanding under the JPM credit facility. Furthermore, the FourthAmendment reduces certain fees payable under the JPM credit facilityand permanently removes most of the covenants contained in the JPMcredit facility, including the covenants mandating a maximum leverageratio, a minimum consolidated net worth, restrictions against theincurrence of additional indebtedness, liens, dividends and otherrestricted payments, and the requirement that we maintain certaininsurance ratings. As a result of the Fourth Amendment, we are nolonger in default under the JPM Credit Agreement.

Usesof cash and liquidity

As of September  30,  2006, wehad cash and cash equivalents and investments of approximately$977.7  million. We estimate that our cash and cash equivalentsand investment balances include approximately $263.6  millionthat is pledged as collateral for letters of credit, approximately$185.5  million held in trust funds for the benefit of cedingcompanies and to fund our obligations associated with the assumption ofan environmental remediation liability, $175.0  million that isheld by Lloyd's to support our underwriting activities,$40.9  million held in trust funds that are related to our

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deposit liabilities and $32.0  millionthat is on deposit with, or has been pledged to, U.S. state insurancedepartments. After giving effect to these assets pledged or placed intrust, we estimate that we presently have net unrestricted investmentsof $280.7  million, including net cash of approximately$46.2  million. Of the $280.7  million, approximately$234.5  million represents net unrestricted investments held byour operating subsidiaries of which approximately $30.0  millionis held by Quanta Bermuda. Additionally, Quanta Indemnity Company,Quanta Speciality Lines Insurance Company and Quanta Reinsurance U.S.Ltd., which are subsidiaries of Quanta Bermuda, hold approximately$204.5  million of net unrestricted investments. The remainingamount of the net unrestricted investments balance is held by QuantaEurope. Any distributions from these subsidiaries are subject tosignificant legal, regulatory and compliance requirements. We believeour operating subsidiaries currently have sufficient assets to paytheir respective foreseen liabilities as they become due. Substantiallyall of our capital has been distributed among our rated operatingsubsidiaries based on our assessment of the levels of capital that webelieve are prudent to support our business, the applicable regulatoryrequirements, and the recommendations of the insurance regulatoryauthorities and rating agencies.

Some of our insurance and manyof our reinsurance contracts contain termination rights that aretriggered by the A.M. Best rating downgrade. Some of these insuranceand reinsurance contracts also require us to post additional security.As a result, we may be required to post additional security eitherthrough 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. As of September  30,  2006, we had net cash andcash equivalent and investment balances of approximately $280.7million that are available to post as security or place intrust.

In the near term, our other principal cash requirementsare expected to be investments in operating subsidiaries, losses andloss adjustment expenses and other policy holder benefits, includingthose related to policy cancellations and commutations, brokerage andcommissions in our Lloyd’s business, expenses to implement ourrun-off plans, including severance and incentive payments, otheroperating expenses, premiums ceded, capital expenditures, the servicingof borrowing arrangements (including our trust preferred securities)and taxes.

Any dividend payments on our series A preferredshares are payable by our holding company, Quanta Holdings. QuantaHoldings is dependent on dividends and other payments from itsoperating subsidiaries to satisfy these obligations and the obligationsunder our trust preferred securities. The potential for a large claimunder one of our insurance or reinsurance contracts means that we mayneed to make substantial and unpredictable payments within relativelyshort periods of time. As a result of our decision to ceaseunderwriting or seeking new business and to place most of our remainingspecialty insurance and reinsurance lines into orderly run-off, we haveincurred substantial costs, including severance payments, in connectionwith the implementation of any changes based on such decision. Thisdecision also involve significant risks that may result inrestructuring charges and unforeseen expenses and costs associated withexiting lines of business and complications or delays, including, amongothers things, the risk of failure. During the nine months endedSeptember  30,  2006, we have incurred severance charges of$14.8  million. Additionally, in order to retain the services ofour chief financial officer, Jonathan J.R. Dodd, and a number of otherkey employees, we have entered into retention agreements with theseemployees that provide for specified severance payments in the event oftermination without cause or following a change of control. In theevent of payout to all employees covered by these retention agreements,our cash requirements would include a total payment of approximately$7.4  million to all such employees.

We paid additionalgross and net claims of $54.4  million and $24.9  millionduring the nine months ended September  30,  2006 relatingto the environmental claim and the hurricane events of 2005 and 2004.We expect that our cash requirements for the payment of these and otherclaims will be significant in future periods as we receive and settleclaims, including those relating to these specific claims and inparticular, claims related to the 2005 hurricanes.

We incurredcapital expenditures of $0.3  million during the nine monthsended September  30,  2006. As we are analyzing ourbusiness lines and our position we are unable at this time to quantifythe amount of future capital expenditures we mayincur.

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While insurance regulation differs bylocation, each jurisdiction requires that minimum levels of capital bemaintained while we run off our business. Factors that affect capitalrequirements generally include the extent and nature of loss and lossexpense reserves, the type and form of insurance and reinsurancebusiness previously underwritten and the availability of reinsuranceprotection from adequately rated retrocessionaires on terms that areacceptable to us. These regulatory requirements restrict the amount ofcapital we are able to distribute to Quanta Holdings and otherinsurance subsidiaries. For further discussion, see‘‘Adequacy of Regulatory and Rating Capital.’’Substantially all of our capital has been distributed among oursubsidiaries based on our assessment of the levels of capital that webelieved were prudent to support our expected levels of business at thetime of capitalization, the applicable regulatory requirements, and therecommendations of the insurance regulatoryauthorities.

Dividends and Redemptions

QuantaHoldings depends on future dividends and other permitted payments fromits subsidiaries to pay any dividends to our common and preferredshareholders. The 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 the INGcredit facility prohibit us from repurchasing Series A preferred shareswithout the consent of our lenders.

We will work with applicableregulatory authorities to facilitate dividends from our subsidiaries toQuanta Holdings. We anticipate that, in all cases, the paying ofdividends to Quanta Holdings will require regulatory approval. Workingwith these regulators will take time a long period of time and requiresthe Company to meet many conditions. The ING credit facility, as wellas in future credit agreements or other agreements relating to ourindebtedness, also contains provisions prohibiting or limiting thepayment of dividends on our shares under certain circumstances. If weexperience a change of control, we may be required to make offers toredeem our series A preferred shares at a price of $25.25 per share,plus declared but unpaid dividends and additional amounts, if any, tothe date of redemption 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.

For additional discussionconcerning risks relating to our dividend policy and our holdingcompany structure and its effect on our ability to receive and paydividends, see ‘‘Financial Condition andLiquidity’’ above. See also note 1 to our December31,  2005 consolidated financial statements included in our Form10-K.

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Commitments

We have contractualobligations relating to our reserves for losses and loss expenses andcommitments under the trust preferred securities, preferred shares andnon-cancelable operating leases for property and office equipmentdescribed above under ‘‘Liquidity’’ as ofSeptember  30,  2006 asfollows:

|                                         |  |  |                                      |   |         |                |  |  |           |   |         |           |  |  |                 |   |         |  |  |  |  |   |         |  |  |  |  |   |         |  |
|-----------------------------------------|--|--|--------------------------------------|---|---------|----------------|--|--|-----------|---|---------|-----------|--|--|-----------------|---|---------|--|--|--|--|---|---------|--|--|--|--|---|---------|--|
|                                    |  |  | Payments due byperiod($ inthousands) |
| Contractualobligations($000's)(2)       |  |  | Total                                |   |         | Lessthan1 year |  |  | 1-3 years |   |         | 3-5 years |  |  | Morethan5 years |
| Reserve for losses and lossexpenses     |  |  |                                      | $ | 618,660 |                |  |  |           | $ | 252,439 |           |  |  |                 | $ | 166,231 |  |  |  |  | $ | 102,552 |  |  |  |  | $ | 97,438  |  |
| Intereston long-term debtobligations(1) |  |  |                                      |   | 165,830 |                |  |  |           |   | 5,606   |           |  |  |                 |   | 11,212  |  |  |  |  |   | 11,212  |  |  |  |  |   | 137,800 |  |
| Long-termdebtobligations                |  |  |                                      |   | 61,857  |                |  |  |           |   | — |           |  |  |                 |   | — |  |  |  |  |   | — |  |  |  |  |   | 61,857  |  |
| Operatingleaseobligations               |  |  |                                      |   | 32,980  |                |  |  |           |   | 3,359   |           |  |  |                 |   | 5,353   |  |  |  |  |   | 5,402   |  |  |  |  |   | 18,866  |  |
| Total                                   |  |  |                                      | $ | 879,327 |                |  |  |           | $ | 261,404 |           |  |  |                 | $ | 182,796 |  |  |  |  | $ | 119,166 |  |  |  |  | $ | 315,961 |  |
|                                         |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                              |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (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 September  30,  2006 on thefacility. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Dividends on our10.25% series A preferred shares are based on a dividend of$2.5625 per share. We have not estimated dividends payable on ourseries A preferred shares as they are perpetual, non-cumulative andhave no fixed mandatory redemption date unless a change of controloccurs or we are able to redeem the preferred shares. We do not havethe right to redeem our series A preferred shares until on or afterDecember  15,  2010. Assuming 3,130,525 shares of ourseries A preferred shares are outstanding during any applicable period,we would be required to pay dividends, on an annual basis, of anaggregate of approximately $8.0  million. |

Our reservefor losses and loss expenses consists of case reserves and IBNR. Inassessing the adequacy of these reserves, it must be noted that theactual costs of settling claims is uncertain as it depends upon futureevents. Many of these events will be out of our control and couldpotentially affect the ultimate liability and timing of any potentialpayment. There is necessarily a range of possible outcomes and theeventual outcome will certainly differ from the projections currentlymade. This uncertainty is heightened by the short time in which we haveoperated, thereby providing limited company-specific claims lossemergence patterns. Consequently, we must use industry benchmarks, on aline by line basis, in deriving IBNR which, despite management'sand our independent actuary's care in selecting them, will differfrom actual experience.

Similarly, we have limited loss payoutpattern information specific to our experience, therefore we have usedindustry data, on a line by line basis, to estimate our expectedpayments. Consequently, despite management's care in selectingthem, the actual payment of our reserve for losses and loss expenseswill differ from estimated payouts.

Off-Balance SheetArrangements

Other than our trust preferred securities offeringsthrough the Quanta Capital Statutory Trust I and Quanta CapitalStatutory Trust II (together ‘‘Quanta Trust I andII’’), as of September  30,  2006, we have notentered into any off-balance sheet arrangements with special purposeentities or variable interest entities. We did not consolidate QuantaTrust I and II, the issuer of the trust preferred securities and avariable interest entity, since we are not the primary beneficiary ofQuanta Trust I or II. As of September  30,  2006, we haverecorded the $61.9  million of Debentures, which were issued toQuanta Trust I and II, on our consolidated balance sheet. The netproceeds of $58.4  million from the sale of the Debentures toQuanta Trust I and II were used for working capital purposes and ourbusiness. Distributions will be payable at a variable per annum rate ofinterest, reset quarterly, equal to LIBOR plus 385 basis points by theCompany to Quanta Trust I and equal to LIBOR plus 350 basis points bythe Company to Quanta Trust II as described above under‘‘Commitments.’’ The Debentures are redeemableat the Company's option at par beginning March  15,2010.

Adequacy of Regulatory Capital

While insuranceregulation differs by location, each jurisdiction requires that minimumlevels of capital be maintained in order to write new insurancebusiness. Factors that affect capital 

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requirements generally include premiumvolume, the extent and nature of loss and loss expense reserves, thetype and form of insurance and reinsurance business underwritten andthe availability of reinsurance protection from adequately ratedretrocessionaires on terms that are acceptable to us.

In all ofthe jurisdictions in which we operate insurers and reinsurers arerequired to maintain certain minimum levels of capital and risk-basedcapital, the calculation of which includes numerous factors asspecified by the respective insurance regulatory authorities and therelated insurance regulations.

As of September  30,2006, our capital was domiciled in direct and indirect subsidiariesthat are subject to the following jurisdictions: approximately$258.9  million in Bermuda, approximately $109.4  millionin the UK (Lloyd's and the Financial Services Authority),approximately $79.9  million in the United States (mainly inColorado and in Indiana), and approximately $21.3  million in theEuropean Union jurisdiction unrelated to Lloyd's and subject tothe jurisdiction of the Irish Financial Services Regulatory Authority.The balance of our capital of approximately $2.7  million is heldin holding companies. Extraction of this capital is subject to a numberof restrictions as described above.

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-Sources of Cash’’above we entered into a Credit Agreement, dated October27,  2006, with a syndicate of lenders and ING Bank N.V., LondonBranch, as the Mandated Lead Arranger, providing for a secured bankletter of credit facility. The ING Credit Facility provides for anaggregate commitment of $240  million for a period of three yearsterminating on October  27,  2009. Regulatory restrictionsalso limit 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 $193.4  million of secured lettersof credit issued and outstanding under the facility. If we fail tomaintain or enter into adequate letter of credit facilities on a timelybasis, we may be unable to provide necessary security to cedentcompanies under our existing retrocessional and reinsurance contractsthat have the right to require the posting of additional security byreason of the downgrade of our A.M. Best rating.

As ofSeptember  30,  2006, we had approximately $263.6million that is pledged as collateral for letters of credit,approximately $185.5  million held in trust funds for the benefitof ceding companies and to fund our obligations associated with theassumption of an environmental remediation liability, $175.0million that is held by Lloyd's to support our underwritingactivities (of which $115.6  million is held by Lloyd’s astrustee, $35.0  million that were held under Premium Trust Fundsfor payments and discharge of certain trust outgoings, and a further$24.4  million held on deposit pursuant to regulatoryrequirements), $40.9  million held in trust funds that arerelated to our deposit liabilities and $32.0  million that is ondeposit with, or has been pledged to, U.S. state insurancedepartments.

Some of our insurance and many of our reinsurancecontracts contain termination rights that are triggered by the A.M.Best rating downgrade. Some of these insurance and reinsurancecontracts also require us to post additional security. As a result, wemay be required to post additional security either through the issuanceof letters of credit or the placement of securities in trust under theterms of those insurance or reinsurance contracts. We may also elect topost security under other insurance contracts. As of September30,  2006, we had net cash and cash equivalent balances ofapproximately $280.7  million that are available to post assecurity or place in trust. However, the distribution of these fundsfrom each of our operating subsidiaries is subject to significantlegal, regulatory and compliance requirements.

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Critical Accounting Policies andEstimates

Our management makes certain judgments, estimates andassumptions in the application of accounting policies used to determineinherently subjective amounts reported in our condensed consolidatedfinancial statements. If management uses different assumptions andestimates than it currently does, it could produce materially differentestimates of the reported amounts. For a detailed discussion of ourcritical accounting policies, judgments, estimates and assumptionsmanagement uses please refer to the Form 10-K. There have been nosignificant changes in the application of our critical accountingpolicies and estimates subsequent to December  31,  2005other than as described below.

Accounting forstock-based compensation

The Company has a long-termstock-based employee incentive plan (the ‘‘IncentivePlan’’), which is described more fully in Note 8. Prior toJanuary  1,  2006, the Company accounted for the IncentivePlan under the recognition and measurement provisions of APB OpinionNo. 25, Accounting for Stock Issued to Employees(‘‘APB 25’’) and related Interpretations, aspermitted by FASB Statement No. 123, Accounting forStock-Based Compensation (‘‘SFAS 123’’). Nostock-based employee compensation cost was recognized in the Statementof Operations for the years ended December  31, 2005 or 2004, asall options granted under the Incentive Plan had an exercise priceequal to the market value of the underlying common stock on the date ofgrant. Effective January  1,  2006, the Company adopted thefair value recognition provisions of FASB Statement No.123(R), Share-Based Payment (‘‘SFAS123(R)’’), using the modified-prospective-transitionmethod. Under that transition method, compensation cost recognized in2006 includes: (a) compensation cost for all share-based paymentsgranted prior to, but not yet vested as of January  1,2006, based on the grant date fair value estimated in accordance withthe original provisions of SFAS 123, and (b) compensation cost for allshare-based payments granted subsequent to January  1,2006, based on the grant-date fair value estimated in accordance withthe provisions of SFAS 123(R). Results for prior periods have not beenrestated.

As a result of adopting SFAS 123(R) on January1,  2006, the Company's net income (loss) for the three andnine months ended September  30,  2006, are $(0.1) millionlower than and $0.4  million greater than if it had continued toaccount for share-based compensation under APB 25. Basic and dilutedloss per share for the three and nine months ended September30,  2006 would have been $0.04 and $(0.81), if the Company hadnot adopted SFAS 123(R), compared to reported basic and dilutedearnings per share of $0.04 and $(0.81).

As of September30,  2006, there was $1.0  million of total unrecognizedcompensation cost related to non vested share-based compensationarrangements with respect to stock options and performance share unitsgranted under the Incentive Plan. This cost is expected to berecognized over a weighted-average period of 2.0 years.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK 

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

Derivative Valuation Risk

Ourderivative policy permits the use of derivatives to manage ourportfolio's duration, yield curve, currency exposure, creditexposure, exposure to volatility and to take advantage ofinefficiencies in derivatives markets. We may also enter intoderivative transactions (1) to hedge 

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capital market risks that may be present inour contracts of insurance or reinsurance and (2) as replicationtransactions which we define as a set of derivative, insurance and/orsecurities transactions that, when combined, produce the equivalenteconomic result of an investment security or insurance or reinsurancecontract that meets our investment or underwriting guidelines.

Weutilize derivative instruments only when we believe the terms andstructure of the contracts are thoroughly understood and its totalreturn profile and risk characteristics can be fully analyzed. Also,any single derivative or group of derivatives in the aggregate cannotcreate risk characteristics that are inconsistent with our overall riskprofile and investment portfolio guidelines. As of September30,  2006, we do not have any derivativeinstruments.

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 contracts are recorded in incomein the period in which they occur. These contracts generally havematurities of three months or less. A foreign currency forward contractresults in an obligation to purchase or sell a specified currency at afuture date and price specified at the time of the contract. Foreigncurrency forward contracts will not eliminate fluctuations in the valueof our assets and liabilities denominated in foreign currencies butrather allow us to establish a rate of exchange for a future point intime. We have not and do not expect to enter into such contracts withrespect to a material amount of our assets or liabilities.

Ournon-U.S. subsidiaries maintain both assets and liabilities in theirfunctional currencies, principally Euro and sterling. Assets andliabilities denominated in foreign currencies are exposed to changes incurrency exchange rates. Exchange rate fluctuations in Euro andsterling functional currencies against our U.S. dollar reportingcurrency are reported as a separate component of other comprehensive(loss) income in shareholders' equity. Foreign exchange riskassociated with non-US dollar functional currencies of our foreignsubsidiaries is reviewed as part of our risk management process and weemploy foreign currency risk management strategies, as described above,to manage our exposure. Exchange rate fluctuations against non-U.S.dollar functional currencies may materially impact our consolidatedstatement of operations and financial position.

Our investmentguidelines limit the amount of our investment portfolio that may bedenominated in foreign currencies to 20% (as measured by marketvalue). Furthermore, our guidelines limit the amount of foreigncurrency denominated investments that can be held without acorresponding hedge against the foreign currency exposure to 5%(as measured by market value). As of September  30,  2006,our investment portfolio included zero securities that were denominatedin foreign currencies. At September  30,  2006, the netfair market value of foreign currency forward contracts relating toforeign currency denominated investments was zero.

InterestRate Risk

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

Our strategy for managing interest rate riskincludes maintaining a high quality investment portfolio that isactively managed by our managers in accordance with our investmentguidelines in 

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order to balance our exposure to interestrates with the requirement to tailor the duration, yield, currency andliquidity characteristics to the anticipated cash outflowcharacteristics of claim reserve liabilities. As of September30,  2006, assuming parallel shifts in interest rates, the impactof an immediate 100 basis point increase in market interest rates onour total investments of $827.3  million would have been anestimated decrease in market value of approximately $21.5million, or 2.6%, and the impact of an immediate 100 basis pointdecrease in market interest rates would have been an estimated increasein market value of approximately $21.5  million, or2.6%.

As of September  30,  2006, ourinvestment portfolio included AAA rated mortgage-backed securities witha market value of $218.3  million, or 27.6%, excludingtrading investments related to deposit liabilities. As with other fixedincome investments, the fair market value of these securitiesfluctuates depending on market and other general economic conditionsand the interest rate environment. Changes in interest rates can alsoexpose us to prepayment and extension risks on these investments. Inperiods of declining interest rates, the frequency of mortgageprepayments generally increase as mortgagees seek to refinance at alower interest rate cost. Mortgage prepayments result in the earlyrepayment of the underlying principal of mortgage-backed securitiesrequiring us to reinvest the 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 ofSeptember  30,  2006, the average credit quality of ourinvestment portfolio was AA+, and 99.9% of fixed incomesecurities held were investment grade.

We are also exposed to thecredit risk of our insurance and reinsurance brokers to whom we makeclaims payments for insureds and our reinsureds, as well as to thecredit risk of our reinsurers and retrocessionaires who assume businessfrom us. As of September  30,  2006, our loss and lossadjustment expenses recoverable from reinsurers balance was$219.0  million. To mitigate the risk of nonpayment of amountsdue under these arrangements, we have established business andfinancial standards for reinsurer and broker approval, incorporatingratings by major rating agencies and considering the financialcondition of the counterparty and the current market information. Inaddition, we monitor concentrations of credit risk arising from ourreinsurers, regularly review our reinsurers' financial strengthratings and obtain letters of credit to collateralize balancesdue.

We are also exposed to credit risk relating to our premiumsreceivable balance. As of September  30,  2006, ourpremiums receivable balance was $39.1  million. Included in ourpremiums receivable are approximately $26.4  million of writtenpremium installments that are not yet currently due under the terms ofthe related insurance and reinsurance contracts. As of September30,  2006, based on our review of the remaining balance of$12.7  million, which represents premiums installments that arecurrently due, we have established a provision for uncollectiblepremiums receivable of $1.3  million. As a result of potentialpremium estimate reductions and cancellations in future periods, we maynot receive all of our premiums receivable balance in cash. We believethat credit risk exposure related to these balances is mitigated byseveral factors, including but not limited to credit monitoringcontrols performed as part of the underwriting process and monitoringof aged 

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receivable balances. In addition, as themajority of our insurance and reinsurance contracts provide the rightto offset the premiums receivable against losses payable, we believethat the credit risk in this area is substantiallyreduced.

Effects of Inflation

We do not believethat inflation has had a material effect on our consolidated results ofoperations. The effects of inflation could cause the severity of claimcosts to increase in the future. Our estimates for losses and lossexpenses include assumptions, including those relating to inflation,about future payments for settlement of claims and claims handlingexpenses. To the extent inflation causes these costs to increase aboveour estimated reserves that are established for these claims, we willbe required to increase reserves for losses and loss expenses with acorresponding reduction in our earnings in the period in which thedeficiency is identified. The actual effects of inflation on ourresults cannot be accurately determined until claims are ultimatelysettled.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation ofDisclosure Controls and Procedures

In connection with thepreparation of this quarterly report, we have carried out an evaluationunder the supervision of, and with the participation of, ourmanagement, including our 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 September  30,2006.

Limitations on the Effectiveness of Controls

Thereare inherent limitations to the effectiveness of any system ofdisclosure controls and procedures, including the possibility of humanerror and the circumvention or overriding of the controls andprocedures. Accordingly, even effective disclosure controls andprocedures can only provide reasonable assurance of achieving theircontrol objectives. Our evaluation identified material weaknesses inour internal control over financial reporting as discussed in‘‘Management's Report on Internal Control OverFinancial Reporting’’ contained in our Form 10-K, all ofwhich remain unremediated at the end of the period covered by thisreport. These deficiencies in internal control over financial reportingmay also constitute deficiencies in our disclosure controls andprocedures.

Because of the material weaknesses discussed in ourForm 10-K, our Chief Executive Officer and Chief Financial Officer haveconcluded our disclosure controls and procedures were not effective asof September  30,  2006, to provide reasonable assurancethat information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in theapplicable rules and forms, and that such information is accumulatedand communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure.

Notwithstanding thesematerial weaknesses discussed in our Form 10-K, management believes thefinancial statements contained in this quarterly report are fairlypresented in all material respects, in accordance with generallyaccepted accounting principles.

Changes in Internal Control OverFinancial Reporting

In connection with the evaluation describedabove, we identified no change in our internal control over financialreporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)under the Exchange Act), that occurred during the three months endedSeptember  30,  2006, that has materially affected, or isreasonably likely to materially affect, our internal control overfinancial reporting.

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PARTII. OTHER INFORMATION

Item 1.    Legal Proceedings

Weare not a party to any pending or threatened material litigation andare not currently aware of any pending or threatened materiallitigation other than routine legal proceedings that we believe are, inthe aggregate, not material to our financial condition and results ofoperations. In the normal course of business we may become involved invarious claims and 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-Q and inPart I Item 1A, ‘‘Risk Factors’’, of our Form10-K.

Item 6.    Exhibits

|  |    |     |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--|----|-----|--|--|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | 10 | .1  |  |  |  | Credit Agreement dated as of October27,  2006 by and among Quanta Capital Holdings Ltd., variousdesignated subsidiary borrowers, the lenders party thereto, BarclaysPrivate Clients International Limited, Comerica Bank, and HSH NordbankAG, London Branch, as Co-Documentation Agents, and ING Bank, N.V.,London Branch, as Administrative Agent and Support Lender (incorporatedby reference from Exhibit 10.1 to the Company’s Current Reporton Form 8-K dated October  27,  2006). |
|  | 10 | .2  |  |  |  | Fourth Consent and Amendment to Credit Agreementdated October  25,  2006, between Quanta Capital HoldingsLtd., various designated subsidiary borrowers, the lenders partythereto, BNP Paribas, Calyon, New York Branch, Comerica Bank, andDeutsche Bank AG New York Branch, as Co-Documentation Agents, andJPMorgan Chase Bank, N.A., as Administrative Agent (incorporated byreference from Exhibit 10.1 to the Company’s Current Report onForm 8-K dated October  27,  2006).         |
|  | 10 | .3  |  |  |  | Third Waiver to Credit Agreement dated as ofSeptember  27,  2006 between Quanta Capital Holdings Ltd.,various designated subsidiary borrowers, the lenders party thereto, BNPParibas, Calyon, New York Branch, Comerica Bank, and Deutsche Bank AGNew York Branch, as Co-Documentation Agents, and JPMorgan Chase Bank,N.A., as Administrative Agent (incorporated by reference from Exhibit10.1 to the Company's Current Report on Form 8-K datedSeptember  27,  2006).                      |
|  | 10 | .4  |  |  |  | Letter Agreement dated September14,  2006 between Quanta Capital Holdings Ltd. and Peter Johnson(incorporated by reference from Exhibit 10.1 to the Company'sCurrent Report on Form 8-K dated September  11,2006).                                                                                                                                                                                                                                                                            |
|  | 10 | .5  |  |  |  | Employment Agreement datedSeptember  14,  2006 between Quanta Capital Holdings Ltd.And James J. Ritchie (incorporated by reference from Exhibit 10.2 tothe Company's Current Report on Form 8-K dated September11,  2006).                                                                                                                                                                                                                                                                    |
|  | 10 | .6  |  |  |  | Second Waiver toCredit Agreement dated as of August  11,  2006 betweenQuanta Capital Holdings Ltd., various designated subsidiary borrowers,the lenders party thereto, BNP Paribas, Calyon, New York Branch,Comerica Bank, and Deutsche Bank AG New York Branch, asCo-Documentation Agents, and JPMorgan Chase Bank, N.A., asAdministrative Agent (incorporated by reference from Exhibit 10.1 tothe Company's Current Report on Form 8-K dated August8,  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.                                                                                                                                                                                                                                                                                                                                         |
|  |

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|  |    |     |  |  |  |                                                                                                                                                         |
|--|----|-----|--|--|--|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | 32 | .1* |  |  |  | Certification of thePrincipal Executive Officer pursuant to 18 U.S.C. Section 1350, asadopted pursuant 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:    November9, 2006 |  |  | /s/ Peter D.Johnson                |
|                                         |  |  | Peter D.Johnson                    |
|                                         |  |  | (On behalf of the registrant andas |
|                                         |  |  | Principal ExecutiveOfficer)        |
| Date:    November9, 2006 |  |  | /s/ Jonathan J.R.Dodd              |
|                                         |  |  | Jonathan J.R.Dodd                  |
|                                         |  |  | (Principal FinancialOfficer)       |
|                                              |

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IndextoExhibits

|  |    |     |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--|----|-----|--|--|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | 10 | .1  |  |  |  | CreditAgreement dated as of October  27,  2006 by and amongQuanta Capital Holdings Ltd., various designated subsidiary borrowers,the lenders party thereto, Barclays Private Clients InternationalLimited, Comerica Bank, and HSH Nordbank AG, London Branch, asCo-Documentation Agents, and ING Bank, N.V., London Branch, asAdministrative Agent and Support Lender (incorporated by reference fromExhibit 10.1 to the Company’s Current Report on Form 8-K datedOctober  27,  2006). |
|  | 10 | .2  |  |  |  | FourthConsent and Amendment to Credit Agreement dated October25,  2006, between Quanta Capital Holdings Ltd., variousdesignated subsidiary borrowers, the lenders party thereto, BNPParibas, Calyon, New York Branch, Comerica Bank, and Deutsche Bank AGNew York Branch, as Co-Documentation Agents, and JPMorgan Chase Bank,N.A., as Administrative Agent (incorporated by reference from Exhibit10.1 to the Company’s Current Report on Form 8-K datedOctober  27,  2006).           |
|  | 10 | .3  |  |  |  | ThirdWaiver to Credit Agreement dated as of September  27,  2006between Quanta Capital Holdings Ltd., various designated subsidiaryborrowers, the lenders party thereto, BNP Paribas, Calyon, New YorkBranch, Comerica Bank, and Deutsche Bank AG New York Branch, asCo-Documentation Agents, and JPMorgan Chase Bank, N.A., asAdministrative Agent (incorporated by reference from Exhibit 10.1 tothe Company's Current Report on Form 8-K dated September27,  2006).                        |
|  | 10 | .4  |  |  |  | Letter Agreementdated September  14,  2006 between Quanta Capital HoldingsLtd. and Peter Johnson (incorporated by reference from Exhibit 10.1 tothe Company's Current Report on Form 8-K dated September11,  2006).                                                                                                                                                                                                                                                                           |
|  | 10 | .5  |  |  |  | Employment Agreementdated September  14,  2006 between Quanta Capital HoldingsLtd. And James J. Ritchie (incorporated by reference from Exhibit 10.2to the Company's Current Report on Form 8-K datedSeptember  11,2006).                                                                                                                                                                                                                                                                     |
|  | 10 | .6  |  |  |  | Second Waiver to CreditAgreement dated as of August  11,  2006 between QuantaCapital Holdings Ltd., various designated subsidiary borrowers, thelenders party thereto, BNP Paribas, Calyon, New York Branch, ComericaBank, and Deutsche Bank AG New York Branch, as Co-Documentation Agents,and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated byreference from Exhibit 10.1 to the Company's Current Report onForm 8-K dated August  8,2006).                              |
|  | 31 | .1* |  |  |  | Certification of the PrincipalExecutive Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuantto Section 302 of the Sarbanes-Oxley Act of2002.                                                                                                                                                                                                                                                                                                                                         |
|  | 31 | .2* |  |  |  | Certification of the 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.                                                                                                                                                                                                                                                                                                                                        |
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| * | Filedherewith. |

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