UNITEDSTATESSECURITIES AND EXCHANGECOMMISSIONWashington, D.C.20549

FORM10-Q

    QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d)                     OFTHE SECURITIES EXCHANGE ACT OF1934

For the quarterly periodended September 30,2005

    TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d)                    OFTHE SECURITIES EXCHANGE ACT OF 1934

For thetransition period from                          to                        

Commission file number000-50885

QUANTA CAPITAL HOLDINGSLTD.(Exact name of registrant as specified in itscharter)

|                                                              |  |                                     |  |  |  |  |
|--------------------------------------------------------------|--|-------------------------------------|--|--|--|--|
| Bermuda                                                      |  | N/A                                 |
| (Stateor other jurisdiction of incorporation ororganization) |  | (I.R.S. Employer IdentificationNo.) |
|                                                              |

1 Victoria Street, FourthFloorHamilton HM11Bermuda(Address of principal executiveoffices and zipcode)

441-294-6350(Registrant’s telephonenumber, including area code)

Indicate by check markwhether the registrant (1) has filed all reports required to be filedby Section 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 past 90 days. Yes  No 

Indicate by check mark whether theregistrant is an accelerated filer (as defined in Exchange Act Rule12b-2). Yes  No 

Indicate by check markwhether the registrant is a shell company (as defined in Exchange ActRule 12b-2). Yes  No 

As of November 1,2005 there were 56,810,020 common shares, $0.01 par value per share,outstanding.

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QUANTA CAPITAL HOLDINGSLTD.

INDEX TO FORM10-Q

|         |  |                                                                                                                                                                                               |  |         |        |        |  |  |  |  |
|---------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|---------|--------|--------|--|--|--|--|
|    |  |                                                                                                                                                                                          |  | PageNo. |
| PARTI.  |  | FINANCIALINFORMATION                                                                                                                                                                          |  |    |   |   |
| Item1   |  | FinancialStatements                                                                                                                                                                           |  |    |   |   |
|    |  | Condensed ConsolidatedBalance Sheets at September 30, 2005 (unaudited) and     December 31,2004                                                                           |  |    | 3      |   |
|    |  | Unaudited CondensedConsolidated Statements of Operations and     Comprehensive Loss forthe three and nine months ended September 30, 2005     and2004 |  |    | 4      |   |
|    |  | Unaudited CondensedConsolidated Statements of Changes in Shareholders’     Equityfor the nine months ended September 30, 2005 and2004                               |  |    | 5      |   |
|    |  | Unaudited CondensedConsolidated Statements of Cash Flows for the nine     months endedSeptember 30, 2005 and 2004                                                         |  |    | 6      |   |
|    |  | Notesto the Unaudited Condensed Consolidated FinancialStatements                                                                                                                              |  |    | 7      |   |
| Item2   |  | Management’s Discussion and Analysis of FinancialConditionand Results of    Operations                                                                              |  |    | 22     |   |
| Item3   |  | Quantitative and Qualitative Disclosures about MarketRisk                                                                                                                                     |  |    | 62     |   |
| Item 4  |  | Controls andProcedures                                                                                                                                                                        |  |    | 64     |   |
| PARTII. |  | OTHERINFORMATION                                                                                                                                                                              |  |    |   |   |
| Item 1  |  | LegalProceedings                                                                                                                                                                              |  |    | 66     |   |
| Item6   |  | Exhibits                                                                                                                                                                                      |  |    | 66     |   |
|         |

2

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PART 1.    FINANCIALINFORMATION

ITEM 1.    FINANCIAL STATEMENTS

QUANTACAPITAL HOLDINGS LTD.CONDENSED CONSOLIDATED BALANCESHEETS

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

|                                                                                                                                             |  |                  |           |                  |  |        |         |         |  |  |
|---------------------------------------------------------------------------------------------------------------------------------------------|--|------------------|-----------|------------------|--|--------|---------|---------|--|--|
|                                                                                                                                        |  | September30,2005 |           | December 31,2004 |
|                                                                                                                                        |  | (unaudited)      |           |             |
| **Assets**                                                                                                                                  |  |             |      |             |  |   |    |    |
| Investmentsat fair value (amortized cost: September 30, 2005, $766,902; December31, 2004, $600,161)                                         |  |             |      |             |  |   |    |    |
| Available for saleinvestments (Restricted at fair value: September 30, 2005: $405,326;December 31, 2004:$341,655)                           |  | $                | 720,426   |             |  | $      | 559,430 |    |
| Tradinginvestments related to depositliabilities                                                                                            |  |             | 38,782    |             |  |   | 40,492  |    |
| Totalinvestments at fairvalue                                                                                                               |  |             | 759,208   |             |  |   | 599,922 |    |
| Cash and cashequivalents                                                                                                                    |  |             | 99,231    |             |  |   | 32,775  |    |
| Restrictedcash and cashequivalents                                                                                                          |  |             | 45,605    |             |  |   | 42,482  |    |
| Accruedinvestmentincome                                                                                                                     |  |             | 5,127     |             |  |   | 4,719   |    |
| Premiumsreceivable                                                                                                                          |  |             | 172,119   |             |  |   | 146,784 |    |
| Lossesand loss adjustment expensesrecoverable                                                                                               |  |             | 152,834   |             |  |   | 13,519  |    |
| Otheraccountsreceivable                                                                                                                     |  |             | 9,697     |             |  |   | 11,575  |    |
| Deferredacquisition costs,net                                                                                                               |  |             | 50,723    |             |  |   | 41,496  |    |
| Deferredreinsurancepremiums                                                                                                                 |  |             | 82,267    |             |  |   | 47,416  |    |
| Property andequipment, net of accumulated depreciation of $3,946 (December 31,2004: $1,625)                                                 |  |             | 5,665     |             |  |   | 4,875   |    |
| Goodwilland other intangibleassets                                                                                                          |  |             | 20,062    |             |  |   | 20,617  |    |
| Otherassets                                                                                                                                 |  |             | 21,584    |             |  |   | 14,553  |    |
| Totalassets                                                                                                                                 |  | $                | 1,424,122 |             |  | $      | 980,733 |    |
| **Liabilities**                                                                                                                             |  |             |      |             |  |   |    |    |
| Reservefor losses and lossexpenses                                                                                                          |  | $                | 469,994   |             |  | $      | 159,794 |    |
| Unearnedpremiums                                                                                                                            |  |             | 370,982   |             |  |   | 247,936 |    |
| Environmentalliabilitiesassumed                                                                                                             |  |             | 12,182    |             |  |   | 6,518   |    |
| Reinsurancebalancespayable                                                                                                                  |  |             | 34,302    |             |  |   | 24,929  |    |
| Accountspayable and accruedexpenses                                                                                                         |  |             | 28,577    |             |  |   | 17,360  |    |
| Net payablefor investmentspurchased                                                                                                         |  |             | 16,669    |             |  |   | 3,749   |    |
| Depositliabilities                                                                                                                          |  |             | 52,564    |             |  |   | 43,365  |    |
| Deferredincome and otherliabilities                                                                                                         |  |             | 4,795     |             |  |   | 4,935   |    |
| Juniorsubordinateddebentures                                                                                                                |  |             | 61,857    |             |  |   | 41,238  |    |
| Totalliabilities                                                                                                                            |  | $                | 1,051,922 |             |  | $      | 549,824 |    |
| Commitmentsand contingencies (Note10)                                                                                                       |  |             |      |             |  |   |    |    |
| **Shareholders'equity**                                                                                                                     |  |             |      |             |  |   |    |    |
| Preferredshares                                                                                                                             |  |             |      |             |  |   |    |    |
| ($0.01 par value; 25,000,000 sharesauthorized; none issued and outstanding at September 30, 2005 andDecember 31,2004)                       |  | $                | —   |             |  | $      | — |    |
| Commonshares                                                                                                                                |  |             |      |             |  |   |    |    |
| ($0.01 par value; 200,000,000 sharesauthorized; 56,810,020 and 56,798,218 issued and outstanding atSeptember 30, 2005 and December 31,2004) |  |             | 568       |             |  |   | 568     |    |
| Additional paid-incapital                                                                                                                   |  |             | 523,843   |             |  |   | 523,771 |    |
| Accumulateddeficit                                                                                                                          |  |             | (144,256  | )           |  |   | (93,058 | )  |
| Accumulatedother comprehensiveloss                                                                                                          |  |             | (7,955    | )           |  |   | (372    | )  |
| Totalshareholders'equity                                                                                                                    |  | $                | 372,200   |             |  | $      | 430,909 |    |
| **Totalliabilities and shareholders'equity**                                                                                                |  | $                | 1,424,122 |             |  | $      | 980,733 |    |
|                                                                                                                                             |

Theaccompanying notes are an integral part of these unauditedcondensed consolidated financial statements

3

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

|                                                                                                       |  |                   |            |                   |  |                  |            |                  |  |        |            |         |  |        |            |         |  |  |
|-------------------------------------------------------------------------------------------------------|--|-------------------|------------|-------------------|--|------------------|------------|------------------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                                                                  |  | ThreeMonths Ended |            | Nine MonthsEnded  |
|                                                                                                  |  | September30,2005  |            | September 30,2004 |  | September30,2005 |            | September30,2004 |
| **Revenues**                                                                                          |  |              |       |              |  |             |       |             |  |   |       |    |  |   |       |    |
| Grosspremiumswritten                                                                                  |  | $                 | 171,542    |              |  | $                | 116,729    |             |  | $      | 512,816    |    |  | $      | 370,428    |    |
| Netpremiumswritten                                                                                    |  | $                 | 115,965    |              |  | $                | 85,969     |             |  | $      | 386,206    |    |  | $      | 312,487    |    |
| Changein net unearnedpremiums                                                                         |  |              | (15,419    | )            |  |             | (20,446    | )           |  |   | (89,166    | )  |  |   | (162,874   | )  |
| Netpremiumsearned                                                                                     |  |              | 100,546    |              |  |             | 65,523     |             |  |   | 297,040    |    |  |   | 149,613    |    |
| Technicalservicesrevenues                                                                             |  |              | 16,019     |              |  |             | 7,727      |             |  |   | 31,516     |    |  |   | 22,580     |    |
| Netinvestmentincome                                                                                   |  |              | 6,991      |              |  |             | 3,258      |             |  |   | 18,403     |    |  |   | 9,811      |    |
| Netrealized (losses) gains oninvestments                                                              |  |              | (1,168     | )            |  |             | 297        |             |  |   | (789       | )  |  |   | 665        |    |
| Netforeign exchange (losses)gains                                                                     |  |              | (311       | )            |  |             | (43        | )           |  |   | (336       | )  |  |   | 85         |    |
| Otherincome                                                                                           |  |              | 1,945      |              |  |             | 264        |             |  |   | 5,540      |    |  |   | 690        |    |
| Totalrevenues                                                                                         |  |              | 124,022    |              |  |             | 77,026     |             |  |   | 351,374    |    |  |   | 183,444    |    |
| **Expenses**                                                                                          |  |              |       |              |  |             |       |             |  |   |       |    |  |   |       |    |
| Netlosses and lossexpenses                                                                            |  |              | 121,087    |              |  |             | 77,963     |             |  |   | 241,102    |    |  |   | 126,176    |    |
| Acquisitionexpenses                                                                                   |  |              | 22,998     |              |  |             | 16,424     |             |  |   | 62,718     |    |  |   | 35,885     |    |
| Directtechnical servicescosts                                                                         |  |              | 13,133     |              |  |             | 5,231      |             |  |   | 23,993     |    |  |   | 15,442     |    |
| Generaland administrativeexpenses                                                                     |  |              | 23,574     |              |  |             | 14,294     |             |  |   | 68,427     |    |  |   | 44,700     |    |
| Interestexpense                                                                                       |  |              | 1,200      |              |  |             | —    |             |  |   | 2,971      |    |  |   | —    |    |
| Depreciationof fixed assets and amortization of intangibleassets                                      |  |              | 1,079      |              |  |             | 560        |             |  |   | 2,879      |    |  |   | 1,397      |    |
| Totalexpenses                                                                                         |  |              | 183,071    |              |  |             | 114,472    |             |  |   | 402,090    |    |  |   | 223,600    |    |
| Lossbefore incometaxes                                                                                |  |              | (59,049    | )            |  |             | (37,446    | )           |  |   | (50,716    | )  |  |   | (40,156    | )  |
| Incometaxexpense                                                                                      |  |              | 35         |              |  |             | —    |             |  |   | 482        |    |  |   | —    |    |
| **Netloss**                                                                                           |  |              | (59,084    | )            |  |             | (37,446    | )           |  |   | (51,198    | )  |  |   | (40,156    | )  |
| **Othercomprehensive (loss) income**                                                                  |  |              |       |              |  |             |       |             |  |   |       |    |  |   |       |    |
| Net unrealizedinvestment (losses) gains arising during the period, net of incometaxes                 |  |              | (7,222     | )            |  |             | 5,053      |             |  |   | (8,557     | )  |  |   | (235       | )  |
| Foreigncurrency translationadjustments                                                                |  |              | 94         |              |  |             | (19        | )           |  |   | 185        |    |  |   | (39        | )  |
| Reclassificationof net realized losses (gains) on investments included in net loss, netof incometaxes |  |              | 1,168      |              |  |             | (297       | )           |  |   | 789        |    |  |   | (665       | )  |
| Othercomprehensive (loss)income                                                                       |  |              | (5,960     | )            |  |             | 4,737      |             |  |   | (7,583     | )  |  |   | (939       | )  |
| **Comprehensiveloss**                                                                                 |  | $                 | (65,044    | )            |  | $                | (32,709    | )           |  | $      | (58,781    | )  |  | $      | (41,095    | )  |
| Weightedaverage common share and common share equivalents — Basic                          |  |              | 56,810,020 |              |  |             | 56,798,218 |             |  |   | 56,804,119 |    |  |   | 56,798,218 |    |
| Diluted                                                                                               |  |              | 56,810,020 |              |  |             | 56,798,218 |             |  |   | 56,804,119 |    |  |   | 56,798,218 |    |
| Basicloss pershare                                                                                    |  | $                 | (1.04      | )            |  | $                | (0.66      | )           |  | $      | (0.90      | )  |  | $      | (0.71      | )  |
| Dilutedloss pershare                                                                                  |  | $                 | (1.04      | )            |  | $                | (0.66      | )           |  | $      | (0.90      | )  |  | $      | (0.71      | )  |
|                                                                                                       |

Theaccompanying notes are an integral part of these unauditedcondensed consolidated financial statements

4

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

|                                                                  |  |                                           |          |                                           |  |        |         |         |  |  |
|------------------------------------------------------------------|--|-------------------------------------------|----------|-------------------------------------------|--|--------|---------|---------|--|--|
|                                                             |  | Forthe ninemonths endedSeptember 30, 2005 |          | For thenine months ended September30,2004 |
| **Share capital – preferredshares of par value $0.01each** |  | $                                         | —  |                                      |  | $      | — |    |
| **Sharecapital – common shares of par value $0.01each**    |  |                                      |     |                                      |  |   |    |    |
| Balance at beginning ofperiod                                    |  |                                      | 568      |                                      |  |   | 568     |    |
| Issued duringperiod                                              |  |                                      | —  |                                      |  |   | — |    |
| Balanceat end ofperiod                                           |  |                                      | 568      |                                      |  |   | 568     |    |
| **Additionalpaid-in capital**                                    |  |                                      |     |                                      |  |   |    |    |
| Balance at beginningof period                                    |  |                                      | 523,771  |                                      |  |   | 524,235 |    |
| Commonshares issued during period                                |  |                                      | 72       |                                      |  |   | — |    |
| Net offeringcosts                                                |  |                                      | —  |                                      |  |   | (464    | )  |
| Balanceat end ofperiod                                           |  |                                      | 523,843  |                                      |  |   | 523,771 |    |
| **Accumulateddeficit**                                           |  |                                      |     |                                      |  |   |    |    |
| Balance at beginning ofperiod                                    |  |                                      | (93,058  | )                                    |  |   | (38,477 | )  |
| Net lossforperiod                                                |  |                                      | (51,198  | )                                    |  |   | (40,156 | )  |
| Balanceat end ofperiod                                           |  |                                      | (144,256 | )                                    |  |   | (78,633 | )  |
| **Accumulatedother comprehensive loss**                          |  |                                      |     |                                      |  |   |    |    |
| Balance atbeginning of period                                    |  |                                      | (372     | )                                    |  |   | 1,157   |    |
| Netchange in unrealized losses on investments, net oftax         |  |                                      | (7,768   | )                                    |  |   | (900    | )  |
| Foreign currencytranslationadjustments                           |  |                                      | 185      |                                      |  |   | (39     | )  |
| Balanceat end ofperiod                                           |  |                                      | (7,955   | )                                    |  |   | 218     |    |
| **Totalshareholders'equity**                                     |  | $                                         | 372,200  |                                      |  | $      | 445,924 |    |
|                                                                  |

Theaccompanying notes are an integral part of these unauditedcondensed consolidated financial statements

5

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

|                                                                                  |  |                                          |            |                                           |  |        |          |         |  |  |
|----------------------------------------------------------------------------------|--|------------------------------------------|------------|-------------------------------------------|--|--------|----------|---------|--|--|
|                                                                             |  | Forthe ninemonths endedSeptember 30,2005 |            | For thenine months ended September30,2004 |
| **Cash flows from operatingactivities**                                          |  |                                     |       |                                      |  |   |     |    |
| Netloss                                                                          |  | $                                        | (51,198    | )                                    |  | $      | (40,156  | )  |
| **Adjustmentsto reconcile net loss to net cash provided by operatingactivities** |  |                                     |       |                                      |  |   |     |    |
| Depreciationof property andequipment                                             |  |                                     | 2,324      |                                      |  |   | 842      |    |
| Amortizationof intangibleassets                                                  |  |                                     | 555        |                                      |  |   | 555      |    |
| Amortizationof discounts oninvestments                                           |  |                                     | 901        |                                      |  |   | 2,751    |    |
| Netrealized losses (gains) oninvestments                                         |  |                                     | 789        |                                      |  |   | (665     | )  |
| Netchange in fair value of derivativeinstruments                                 |  |                                     | 496        |                                      |  |   | 274      |    |
| Non-cashstock compensationexpense                                                |  |                                     | 72         |                                      |  |   | —  |    |
| Changesin assets and liabilities:                                                |  |                                     |       |                                      |  |   |     |    |
| Restricted cashand cashequivalents                                               |  |                                     | (3,123     | )                                    |  |   | 2,251    |    |
| Accruedinvestmentincome                                                          |  |                                     | (408       | )                                    |  |   | (759     | )  |
| Premiumsreceivable                                                               |  |                                     | (25,335    | )                                    |  |   | (121,366 | )  |
| Lossesand loss adjustment expensesrecoverable                                    |  |                                     | (139,315   | )                                    |  |   | (2,787   | )  |
| Deferredacquisitioncosts                                                         |  |                                     | (9,227     | )                                    |  |   | (35,986  | )  |
| Deferredreinsurancepremiums                                                      |  |                                     | (34,851    | )                                    |  |   | (43,043  | )  |
| Otheraccountsreceivable                                                          |  |                                     | 1,878      |                                      |  |   | 153      |    |
| Otherassets                                                                      |  |                                     | (6,003     | )                                    |  |   | (1,849   | )  |
| Reservefor losses and loss adjustmentexpenses                                    |  |                                     | 310,200    |                                      |  |   | 120,079  |    |
| Unearnedpremiums                                                                 |  |                                     | 123,046    |                                      |  |   | 205,916  |    |
| Environmentalliabilitiesassumed                                                  |  |                                     | 5,664      |                                      |  |   | (321     | )  |
| Reinsurancebalancespayable                                                       |  |                                     | 9,373      |                                      |  |   | 22,727   |    |
| Accountspayable and accruedexpenses                                              |  |                                     | 11,217     |                                      |  |   | (6,744   | )  |
| Deferredincome and otherliabilities                                              |  |                                     | (140       | )                                    |  |   | 1,101    |    |
| Depositliabilities                                                               |  |                                     | 9,199      |                                      |  |   | —  |    |
| Netcash provided by operatingactivities                                          |  |                                     | 206,114    |                                      |  |   | 102,973  |    |
| **Cashflows used in investingactivities**                                        |  |                                     |       |                                      |  |   |     |    |
| Proceeds from sale offixed maturities and short-terminvestments                  |  |                                     | 1,023,526  |                                      |  |   | 614,638  |    |
| Purchasesof fixed maturities and short-terminvestments                           |  |                                     | (1,179,661 | )                                    |  |   | (685,419 | )  |
| Purchasesof property andequipment                                                |  |                                     | (3,114     | )                                    |  |   | (3,537   | )  |
| Netcash used in investingactivities                                              |  |                                     | (159,249   | )                                    |  |   | (74,318  | )  |
| **Cashflows used in financingactivities**                                        |  |                                     |       |                                      |  |   |     |    |
| Net offeringcosts                                                                |  |                                     | —    |                                      |  |   | (464     | )  |
| Proceeds fromjunior subordinated debentures, net of issuancecosts                |  |                                     | 19,591     |                                      |  |   | —  |    |
| Netcash provided by (used in) financingactivities                                |  |                                     | 19,591     |                                      |  |   | (464     | )  |
| Increasein cash and cashequivalents                                              |  |                                     | 66,456     |                                      |  |   | 28,191   |    |
| Cashand cash equivalents at beginning ofperiod                                   |  |                                     | 32,775     |                                      |  |   | 36,694   |    |
| Cashand cash equivalents at end ofperiod                                         |  | $                                        | 99,231     |                                      |  | $      | 64,885   |    |
|                                                                                  |

Theaccompanying notes are an integral part of these unauditedcondensed consolidated financialstatements

6

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Unaudited; expressed in thousands of USdollars except for share and per share amounts,or as otherwisestated)

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

Quanta Capital Holdings Ltd.(‘‘Quanta Holdings’’), incorporated on May23, 2003, is a holding company organized under the laws of Bermuda.Quanta Holdings and its subsidiaries, collectively referred to as the‘‘Company,’’ were formed to providespecialty insurance, reinsurance, risk assessment and risk technicalservices and products on a global basis. Quanta Holdings conducts itsinsurance and reinsurance operations principally through wholly-ownedsubsidiaries operating in Bermuda, the United States of America andEurope.

On February 22, 2005 the Company announced the openingof a London insurance branch following the receipt, by Quanta Europe,of approval to establish this branch office. The branch officeunderwrites specialty insurance lines including environmentalliability, professional liability, financial institutions and trade andpolitical risk.

|        |                                  |
|--------|----------------------------------|
|   | **Interim financialinformation** |

These unaudited condensed consolidated financialstatements include the accounts of the Company and have been preparedin conformity with generally accepted accounting principles in theUnited States of America (‘‘GAAP’’) 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 ofmanagement, the condensed consolidated financial statements include alladjustments necessary (consisting of only normal and recurringaccruals) for a fair statement of the financial position and results ofoperations as at the end of and for the interim periods presented. Theresults of operations for any interim period are not necessarilyindicative of the results that may be expected for any other interimperiod or for a full year. All significant inter-company balances andtransactions have been eliminated on consolidation.

Theseunaudited condensed consolidated financial statements should be read inconjunction with the Company's audited consolidated financialstatements for the year ended December 31, 2004, included in the Form10-K filed by the Company with the SEC on March 30, 2005.

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

|  |              |                                                  |
|--|--------------|--------------------------------------------------|
|  | •  | reserves for lossesand loss adjustment expenses; |

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

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

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

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

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

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

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

7

----

QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Unaudited; expressed in thousands of USdollars except for share and per share amounts,or as otherwisestated)

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

|          |                                |
|----------|--------------------------------|
| 2.  | Significantaccounting policies |

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, 2004 included in its Form10-K.

|        |                           |
|--------|---------------------------|
|   | Non-Traditional Contracts |

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

During the three and ninemonths ended September 30, 2005, the Company recognized in other income$0.9 million and $2.7 million of fees and revenues relating tonon-traditional contracts which were accounted for using the depositmethod. If these contracts transferred risk as determined by Statementof Financial Accounting Standards(‘‘SFAS’’) No. 113‘‘Accounting and Reporting for Reinsurance ofShort-Duration and Long-Duration Contracts’’, grosspremium relating to these contracts would totalapproximately $23.0 million and $78.2 million in the three andnine months ended September 30, 2005.

Of the $0.9 million and$2.7 million, $0.2 million and $0.5 million of other income recognizedduring the three and nine months ended September 30, 2005 relate tofees earned from a surplus relief life reinsurance arrangement with aU.S. insurance company which meets the Company’s definition of anon-traditional contract. In the fourth quarter of 2004,under this contract the Company entered into an arrangement with aclient and assumed, through novation agreements, several lifereinsurance contracts it had made. Because the Company assumedthese contracts, the client, which is subject to insurance regulationin the United States and therefore is required to maintain a certainamount of statutory capital, may reduce its statutory capitalrequirements. In exchange for the Company’s assumption of thecontracts it received a fee. The arrangement, among other things, alsoprovides that on certain dates and during specific periods, the clienthas the right but not the obligation to recapture the life reinsurancecontracts the Company has assumed, provided that the underlying cedantsdo not reasonably withhold their consent to this recapture. TheCompany believes that its client is economically incentivized toexercise the recapture provision in the future, as the amount ofexpected profit on the underlying life reinsurance contracts emergesover time.

The Company believes the arrangement, including theclient’s option to recapture, and the assumption of the lifeinsurance contracts constitute one contract with minimal mortality,credit or other insurance or economic risk which results in depositaccounting. Although the Company believes its client will exercise therecapture, it is not assured that this will be thecase. If the Company’s client does not recapture theunderlying insurance contracts in the future, the Company may be viewedas having had the risks described above and, as a result, the Companycould be deemed to have retained life reinsurance risk and, as aresult, may be required to account for some or all of the underlyinginsurance contracts as life insurance, recognizing life premiumswritten and life benefit reserves in the 

8

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Unaudited; expressed in thousands of USdollars except for share and per share amounts,or as otherwisestated)

consolidated statement of operations. Ifdeposit accounting had not been used with respect to this particulararrangement, the Company would have recognized gross life reinsurancepremiums written of approximately $7.1 million and $17.7 million forthe three and nine months ended September 30, 2005. At this time, theCompany believes that the recognition of these premiums written wouldnot have had a material effect on the Company’s financialposition and results of operations. However, as the underlying lifeinsurance contracts mature the effect on the Company’s financialcondition and results of operations may become material.

Theremaining $0.7 million and $2.2 million of other income derived fromnon-traditional contracts recognized during the three and nine monthsended September 30, 2005 relates to revenues earned from threereinsurance contracts accounted for as deposits. Although thesecontracts did possess some underwriting and timing risks as prescribedby SFAS No. 113, the Company does not believe it is exposed to areasonable possibility of significant loss.

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

In June 2005, the Financial AccountingStandards Board’s (‘‘FASB’’)Emerging Issues Task Force (‘‘EITF’’)decided not to provide additional guidance on the meaning of other thantemporary impairment and directed the staff to issue proposed FASBStaff Position (‘‘FSP’’) EITF 03-1-a‘‘Implementation Guidance for the Application ofParagraph 16 of EITF 03-1’’ as final and will beretitled FSP FAS 115-1 ‘‘The meaning of other thantemporary impairment and its Application to CertainInvestments.’’ It replaces existing guidance andclarifies that an impairment should be recognized as a loss at a dateno later than the date the impairment is deemed other-than-temporary,even if the decision to sell has not been made. The FASB decided thatFSP FAS 115-1 would be effective for other than temporary impairmentanalysis conducted in periods beginning after September 15, 2005. TheCompany anticipates that the adoption of FSP FAS 115-1 will not have amaterial effect on the Company's consolidated results ofoperations, financial position or cash flows.

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

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

9

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Unaudited; expressed in thousands of USdollars except for share and per share amounts,or as otherwisestated)

|          |                    |
|----------|--------------------|
| 4.  | Segmentinformation |

During the three months ended September 30, 2005,the Company changed the composition of its reportable segments suchthat the Lloyd’s operating segment, which was previously areportable segment, is aggregated with the company’s specialtyinsurance reportable segment. Since our Lloyd’s syndicate wasnot established until the fourth quarter of 2004, the prior yearcomparatives do not require restatement.

The following tablessummarize the Company's results before income taxes for eachreportable segment for the three and nine months ended September 30,2005 and 2004 based on the reportable segments in effect during thequarter ended September 30, 2005.

|                                                            |  |                                     |  |                      |  |                   |  |                   |  |                            |  |              |          |         |  |  |  |  |  |  |  |  |  |  |  |  |
|------------------------------------------------------------|--|-------------------------------------|--|----------------------|--|-------------------|--|-------------------|--|----------------------------|--|--------------|----------|---------|--|--|--|--|--|--|--|--|--|--|--|--|
|                                                       |  |                                |
|                                                       |  | Threemonths ended September 30,2005 |
| Statementof operations bysegment                           |  | Specialtyinsurance                  |  | Specialtyreinsurance |  | Underwritingtotal |  | Technicalservices |  | Adjustmentsandeliminations |  | Consolidated |
| Directinsurance                                            |  | $90,630                             |  | $—             |  | $90,630           |  | $—          |  | $—                   |  | $            | 90,630   |    |
| Reinsuranceassumed                                         |  | 6,718                               |  | 74,194               |  | 80,912            |  | —           |  | —                    |  |         | 80,912   |    |
| Totalgross premiumswritten                                 |  | 97,348                              |  | 74,194               |  | 171,542           |  | —           |  | —                    |  |         | 171,542  |    |
| Premiumsceded                                              |  | (35,258)                            |  | (20,319)             |  | (55,577)          |  | —           |  | —                    |  |         | (55,577  | )  |
| Netpremiumswritten                                         |  | $62,090                             |  | $53,875              |  | $115,965          |  | $—          |  | $—                   |  | $            | 115,965  |    |
| Netpremiumsearned                                          |  | $51,034                             |  | $49,512              |  | $100,546          |  | $—          |  | $—                   |  | $            | 100,546  |    |
| Technicalservicesrevenues                                  |  | —                             |  | —              |  | —           |  | 16,852            |  | (833)                      |  |         | 16,019   |    |
| Other(loss)income                                          |  | (42)                                |  | 865                  |  | 823               |  | 1,035             |  | —                    |  |         | 1,858    |    |
| Netlosses and lossexpenses                                 |  | (35,550)                            |  | (85,582)             |  | (121,132)         |  | —           |  | 45                         |  |         | (121,087 | )  |
| Directtechnical servicescosts                              |  | —                             |  | —              |  | —           |  | (13,133)          |  | —                    |  |         | (13,133  | )  |
| Acquisitionexpenses                                        |  | (9,280)                             |  | (13,718)             |  | (22,998)          |  | —           |  | —                    |  |         | (22,998  | )  |
| Generaland administrativeexpenses                          |  | (15,539)                            |  | (6,229)              |  | (21,768)          |  | (2,594)           |  | 788                        |  |         | (23,574  | )  |
| **Segment(loss)income**                                    |  | $(9,377)                            |  | $(55,152)            |  | $(64,529)         |  | $2,160            |  | $—                   |  | $            | (62,369  | )  |
| Depreciationof fixed assets and amortization ofintangibles |  |                                |  |                 |  |              |  |              |  |                       |  | $            | (1,079   | )  |
| Interestexpense                                            |  |                                |  |                 |  |              |  |              |  |                       |  |         | (1,200   | )  |
| Netinvestmentincome                                        |  |                                |  |                 |  |              |  |              |  |                       |  |         | 6,991    |    |
| Netrealized losses oninvestments                           |  |                                |  |                 |  |              |  |              |  |                       |  |         | (1,168   | )  |
| Otherincome                                                |  |                                |  |                 |  |              |  |              |  |                       |  |         | 87       |    |
| Netforeign exchangelosses                                  |  |                                |  |                 |  |              |  |              |  |                       |  |         | (311     | )  |
| **Netlosses before incometaxes**                           |  |                                |  |                 |  |              |  |              |  |                       |  | $            | (59,049  | )  |
|                                                            |

10

----

QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Unaudited; expressed in thousands of USdollars except for share and per share amounts,or as otherwisestated)

|                                                            |  |                                     |  |                      |  |                   |  |                   |  |                            |  |              |         |         |  |  |  |  |  |  |  |  |  |  |  |  |
|------------------------------------------------------------|--|-------------------------------------|--|----------------------|--|-------------------|--|-------------------|--|----------------------------|--|--------------|---------|---------|--|--|--|--|--|--|--|--|--|--|--|--|
|                                                       |  |                                |
|                                                       |  | Threemonths ended September 30,2004 |
| Statementof operations bySegment                           |  | Specialtyinsurance                  |  | Specialtyreinsurance |  | Underwritingtotal |  | Technicalservices |  | Adjustmentsandeliminations |  | Consolidated |
| Directinsurance                                            |  | $41,073                             |  | $—             |  | $41,073           |  | $—          |  | $—                   |  | $            | 41,073  |    |
| Reinsuranceassumed                                         |  | 28,445                              |  | 47,211               |  | 75,656            |  | —           |  | —                    |  |         | 75,656  |    |
| Totalgross premiumswritten                                 |  | 69,518                              |  | 47,211               |  | 116,729           |  | —           |  | —                    |  |         | 116,729 |    |
| Premiumsceded                                              |  | (28,285)                            |  | (2,475)              |  | (30,760)          |  | —           |  | —                    |  |         | (30,760 | )  |
| Netpremiumswritten                                         |  | $41,233                             |  | $44,736              |  | $85,969           |  | $—          |  | $—                   |  | $            | 85,969  |    |
| Netpremiumsearned                                          |  | $20,516                             |  | $45,007              |  | $65,523           |  | $—          |  | $—                   |  | $            | 65,523  |    |
| Technicalservicesrevenues                                  |  | —                             |  | —              |  | —           |  | 8,246             |  | (519)                      |  |         | 7,727   |    |
| Otherincome                                                |  | —                             |  | —              |  | —           |  | 74                |  | —                    |  |         | 74      |    |
| Netlosses and lossexpenses                                 |  | (12,084)                            |  | (65,879)             |  | (77,963)          |  | —           |  | —                    |  |         | (77,963 | )  |
| Directtechnical servicescosts                              |  | —                             |  | —              |  | —           |  | (5,231)           |  | —                    |  |         | (5,231  | )  |
| Acquisitionexpenses                                        |  | (5,292)                             |  | (11,132)             |  | (16,424)          |  | —           |  | —                    |  |         | (16,424 | )  |
| Generaland administrativeexpenses                          |  | (7,562)                             |  | (4,791)              |  | (12,353)          |  | (2,460)           |  | 519                        |  |         | (14,294 | )  |
| **Segment(loss)income**                                    |  | $(4,422)                            |  | $(36,795)            |  | $(41,217)         |  | $629              |  | $—                   |  | $            | (40,588 | )  |
| Depreciationof fixed assets and amortization ofintangibles |  |                                |  |                 |  |              |  |              |  |                       |  |         | (560    | )  |
| Netinvestmentincome                                        |  |                                |  |                 |  |              |  |              |  |                       |  |         | 3,258   |    |
| Netrealized gains oninvestments                            |  |                                |  |                 |  |              |  |              |  |                       |  |         | 297     |    |
| Otherincome                                                |  |                                |  |                 |  |              |  |              |  |                       |  |         | 190     |    |
| Netforeign exchangelosses                                  |  |                                |  |                 |  |              |  |              |  |                       |  |         | (43     | )  |
| **Netincome before incometaxes**                           |  |                                |  |                 |  |              |  |              |  |                       |  | $            | (37,446 | )  |
|                                                            |

11

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Unaudited; expressed in thousands of USdollars except for share and per share amounts,or as otherwisestated)

|                                                            |  |                                    |  |                      |  |                   |  |                   |  |                            |  |              |          |         |  |  |  |  |  |  |  |  |  |  |  |  |
|------------------------------------------------------------|--|------------------------------------|--|----------------------|--|-------------------|--|-------------------|--|----------------------------|--|--------------|----------|---------|--|--|--|--|--|--|--|--|--|--|--|--|
|                                                       |  |                               |
|                                                       |  | Ninemonths ended September 30,2005 |
| Statementof operations bysegment                           |  | Specialtyinsurance                 |  | Specialtyreinsurance |  | Underwritingtotal |  | Technicalservices |  | Adjustmentsandeliminations |  | Consolidated |
| Directinsurance                                            |  | $279,756                           |  | $—             |  | $279,756          |  | $—          |  | $—                   |  | $            | 279,756  |    |
| Reinsuranceassumed                                         |  | 19,303                             |  | 213,757              |  | 233,060           |  | —           |  | —                    |  |         | 233,060  |    |
| Totalgross premiumswritten                                 |  | 299,059                            |  | 213,757              |  | 512,816           |  | —           |  | —                    |  |         | 512,816  |    |
| Premiumsceded                                              |  | (94,944)                           |  | (31,666)             |  | (126,610)         |  | —           |  | —                    |  |         | (126,610 | )  |
| Netpremiumswritten                                         |  | $204,115                           |  | $182,091             |  | $386,206          |  | $—          |  | $—                   |  | $            | 386,206  |    |
| Netpremiumsearned                                          |  | $141,026                           |  | $156,014             |  | $297,040          |  | $—          |  | $—                   |  | $            | 297,040  |    |
| Technicalservicesrevenues                                  |  | —                            |  | —              |  | —           |  | 34,107            |  | (2,591)                    |  |         | 31,516   |    |
| Otherincome                                                |  | 787                                |  | 2,413                |  | 3,200             |  | 1,788             |  | —                    |  |         | 4,988    |    |
| Netlosses and lossexpenses                                 |  | (92,200)                           |  | (149,034)            |  | (241,234)         |  | —           |  | 132                        |  |         | (241,102 | )  |
| Directtechnical servicescosts                              |  | —                            |  | —              |  | —           |  | (23,993)          |  | —                    |  |         | (23,993  | )  |
| Acquisitionexpenses                                        |  | (23,213)                           |  | (39,505)             |  | (62,718)          |  | —           |  | —                    |  |         | (62,718  | )  |
| Generaland administrativeexpenses                          |  | (45,523)                           |  | (17,527)             |  | (63,050)          |  | (7,836)           |  | 2,459                      |  |         | (68,427  | )  |
| **Segment(loss)income**                                    |  | $(19,123)                          |  | $(47,639)            |  | $(66,762)         |  | $4,066            |  | $—                   |  | $            | (62,696  | )  |
| Depreciationof fixed assets and amortization ofintangibles |  |                               |  |                 |  |              |  |              |  |                       |  | $            | (2,879   | )  |
| Interestexpense                                            |  |                               |  |                 |  |              |  |              |  |                       |  |         | (2,971   | )  |
| Netinvestmentincome                                        |  |                               |  |                 |  |              |  |              |  |                       |  |         | 18,403   |    |
| Netrealized losses oninvestments                           |  |                               |  |                 |  |              |  |              |  |                       |  |         | (789     | )  |
| Otherincome                                                |  |                               |  |                 |  |              |  |              |  |                       |  |         | 552      |    |
| Netforeign exchangelosses                                  |  |                               |  |                 |  |              |  |              |  |                       |  |         | (336     | )  |
| **Netloss before incometaxes**                             |  |                               |  |                 |  |              |  |              |  |                       |  | $            | (50,716  | )  |
|                                                            |

12

----

QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Unaudited; expressed in thousands of USdollars except for share and per share amounts,or as otherwisestated)

|                                                            |  |                                    |  |                      |  |                   |  |                   |  |                            |  |              |          |         |  |  |  |  |  |  |  |  |  |  |  |  |
|------------------------------------------------------------|--|------------------------------------|--|----------------------|--|-------------------|--|-------------------|--|----------------------------|--|--------------|----------|---------|--|--|--|--|--|--|--|--|--|--|--|--|
|                                                       |  |                               |
|                                                       |  | Ninemonths ended September 30,2005 |
| Statementof operations bySegment                           |  | Specialtyinsurance                 |  | Specialtyreinsurance |  | Underwritingtotal |  | Technicalservices |  | Adjustmentsandeliminations |  | Consolidated |
| Directinsurance                                            |  | $80,333                            |  | $—             |  | $80,333           |  | $—          |  | $—                   |  | $            | 80,333   |    |
| Reinsuranceassumed                                         |  | 95,056                             |  | 195,039              |  | 290,095           |  | —           |  | —                    |  |         | 290,095  |    |
| Totalgross premiumswritten                                 |  | 175,389                            |  | 195,039              |  | 370,428           |  | —           |  | —                    |  |         | 370,428  |    |
| Premiumsceded                                              |  | (55,466)                           |  | (2,475)              |  | (57,941)          |  | —           |  | —                    |  |         | (57,941  | )  |
| Netpremiumswritten                                         |  | $119,923                           |  | $192,564             |  | $312,487          |  | $—          |  | $—                   |  | $            | 312,487  |    |
| Netpremiumsearned                                          |  | $42,148                            |  | $107,465             |  | $149,613          |  | $—          |  | $—                   |  | $            | 149,613  |    |
| Technicalservicesrevenues                                  |  | —                            |  | —              |  | —           |  | 24,123            |  | (1,543)                    |  |         | 22,580   |    |
| Otherincome                                                |  | —                            |  | —              |  | —           |  | 351               |  | —                    |  |         | 351      |    |
| Netlosses and lossexpenses                                 |  | (23,098)                           |  | (103,078)            |  | (126,176)         |  | —           |  | —                    |  |         | (126,176 | )  |
| Directtechnical servicescosts                              |  | —                            |  | —              |  | —           |  | (15,442)          |  | —                    |  |         | (15,442  | )  |
| Acquisitionexpenses                                        |  | (10,451)                           |  | (25,434)             |  | (35,885)          |  | —           |  | —                    |  |         | (35,885  | )  |
| Generaland administrativeexpenses                          |  | (23,607)                           |  | (15,364)             |  | (38,971)          |  | (7,272)           |  | 1,543                      |  |         | (44,700  | )  |
| **Segment(loss)income**                                    |  | $(15,008)                          |  | $(36,411)            |  | $(51,419)         |  | $1,760            |  | $—                   |  | $            | (49,659  | )  |
| Depreciationof fixed assets and amortization ofintangibles |  |                               |  |                 |  |              |  |              |  |                       |  |         | (1,397   | )  |
| Netinvestmentincome                                        |  |                               |  |                 |  |              |  |              |  |                       |  |         | 9,811    |    |
| Netrealized gains oninvestments                            |  |                               |  |                 |  |              |  |              |  |                       |  |         | 665      |    |
| Otherincome                                                |  |                               |  |                 |  |              |  |              |  |                       |  |         | 339      |    |
| Netforeign exchangegains                                   |  |                               |  |                 |  |              |  |              |  |                       |  |         | 85       |    |
| **Netloss before incometaxes**                             |  |                               |  |                 |  |              |  |              |  |                       |  | $            | (40,156  | )  |
|                                                            |

Itemsof revenue and expense resulting from charges between segments areeliminated on consolidation of the segments. During the three and ninemonths ended September 30, 2005, the technical services segment chargedthe underwriting segment $0.8 million and $2.6 million of revenues fortechnical services rendered which included $0.1 million and $0.1million charged by the technical services segment related to lossadjustment expenses incurred. During the three and nine months endedSeptember 30, 2004, the technical services segment charged theunderwriting segment $0.5 million and $1.5 million of revenues fortechnical services rendered.

The Company’s specialtyinsurance segment writes business both on a direct basis with insuredclients or by assuming reinsurance of underlying policies that areissued on its behalf by third party insurers and reinsurers, andincludes our Lloyd’s syndicate, which was created in December2004.

5. Hurricane losses

The Company’sresults for the three and nine months ended September 30, 2005reflect $68.5 million of underwriting loss related to HurricanesKatrina and Rita (the ‘‘2005 Hurricanes’’).The underwriting loss on the 2005 Hurricanes was comprised of $63.6million of estimated net losses and loss expenses and $4.9 million ofnet reinstatement premiums.

The Company’s estimated netlosses and loss expenses on the 2005 Hurricanes was net of estimatedreinsurance recoverables of $90.9 million. Both the gross and net lossestimates on the 2005 Hurricanes represent the Company’s bestestimate of losses based upon information currently available. TheCompany’s preliminary estimate of ultimate losses from theseevents is primarily based on claims received to date, industry lossestimates, a review of affected contracts and discussion with cedantsand brokers. There is significant uncertainty around the industry lossestimates and the impact 

13

----

QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Unaudited; expressed in thousands of USdollars except for share and per share amounts,or as otherwisestated)

of these events on the Company’scedents. Therefore, although the Company believes that its reserves forthe 2005 Hurricanes are adequate, the exact losses will be unknown forsome time given the extent and nature of the damage caused byhurricanes Katrina and Rita, limited claims data and potential legaland regulatory developments related to potential losses. As a result,the Company’s losses may vary significantly from the recordedestimates.

In addition, based on the Company’s currentestimate of losses related to Hurricane Katrina, the Company hassubstantially exhausted its reinsurance and retrocessional protectionwith respect to Hurricane Katrina. If the Company’s HurricaneKatrina losses prove to be greater than currently anticipated, it mayhave no further reinsurance and retrocessional coverage available. Inaddition, if there are further catastrophic events during our currentpolicy year, our retrocessional coverage for these events may belimited or we may have no coverage at all.

6. Stock-basedcompensation

Employee stock awards under the Company'slong term incentive compensation plan are accounted for in accordancewith APB 25. Compensation expense for stock options and stock-basedawards granted to employees is recognized using the intrinsic valuemethod to the extent that the fair value of the stock exceeds theexercise price of the option at the measurement date. Any resultingcompensation expense is recorded over the shorter of the vesting orservice period.

The Company provides the disclosure as set forthin SFAS 123 which requires pro-forma compensation expense for theCompany’s employee stock options and performance share units tobe measured as the fair value at their grant date and recorded over theshorter of the vesting or service period.

Performance ShareUnits

During the nine months ended September 30, 2005,Performance Share Units were awarded to various employees pursuant tothe Company's 2003 Long Term Incentive Plan. The number of sharesof common stock to be received under these awards at the end of theperformance period will depend on the attainment of performanceobjectives based on the Company's GAAP average return onshareholders’ equity over the three year period ending December31, 2007. The grantees will receive shares of common stock in an amountranging from zero to 300% percent of the share award (as suchamount is defined in the grant).

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

During the ninemonths ended September 30, 2005, awards for 105,185 performance shareunits were granted at a weighted average grant date fair value of$8.87. During the three months ended September 30, 2005 and the threeand nine months ended September 30, 2004, no awards for performanceshare units were granted.

The following table summarizes theCompany's stock-based compensation, net loss and loss per sharefor the three and nine months ended September 30, 2005 and 2004 had theCompany elected to recognize compensation cost based on the fair valueof the Company’s stock based awards granted at the grant date asprescribed by SFAS 123.

14

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Unaudited; expressed in thousands of USdollars except for share and per share amounts,or as otherwisestated)

|                                                                                             |  |                   |         |                    |  |                   |         |                   |  |        |         |         |  |        |         |         |  |  |
|---------------------------------------------------------------------------------------------|--|-------------------|---------|--------------------|--|-------------------|---------|-------------------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                        |  | Threemonths ended |         | Nine monthsended   |
|                                                                                        |  | September 30,2005 |         | September 30, 2004 |  | September 30,2005 |         | September 30,2004 |
| Stockcompensation expense                                                                   |  |              |         |               |  |              |         |              |
| Asreported                                                                                  |  | $                 | — |               |  | $                 | — |              |  | $      | — |    |  | $      | — |    |
| Additionalstock-based employee compensation expense determined under fair valuebased method |  |              | (642    | )             |  |              | (641    | )            |  |   | (2,283  | )  |  |   | (1,876  | )  |
| Proforma                                                                                    |  | $                 | (642    | )             |  | $                 | (641    | )            |  | $      | (2,283  | )  |  | $      | (1,876  | )  |
| Netloss                                                                                     |  |              |    |               |  |              |    |              |  |   |    |    |  |   |    |    |
| As reported                                                                                 |  | $                 | (59,084 | )             |  | $                 | (37,446 | )            |  | $      | (51,198 | )  |  | $      | (40,156 | )  |
| Additionalstock-based employee compensation expense determined under fair valuebased method |  |              | (642    | )             |  |              | (641    | )            |  |   | (2,283  | )  |  |   | (1,876  | )  |
| Proforma                                                                                    |  | $                 | (59,726 | )             |  | $                 | (38,087 | )            |  | $      | (53,481 | )  |  | $      | (42,032 | )  |
| Basicloss per share                                                                         |  |              |    |               |  |              |    |              |  |   |    |    |  |   |    |    |
| Asreported.                                                                                 |  | $                 | (1.04   | )             |  | $                 | (0.66   | )            |  | $      | (0.90   | )  |  | $      | (0.71   | )  |
| Proforma                                                                                    |  | $                 | (1.05   | )             |  | $                 | (0.67   | )            |  | $      | (0.94   | )  |  | $      | (0.74   | )  |
| Dilutedloss per share                                                                       |  |              |    |               |  |              |    |              |  |   |    |    |  |   |    |    |
| Asreported.                                                                                 |  | $                 | (1.04   | )             |  | $                 | (0.66   | )            |  | $      | (0.90   | )  |  | $      | (0.71   | )  |
| Proforma                                                                                    |  | $                 | (1.05   | )             |  | $                 | (0.67   | )            |  | $      | (0.94   | )  |  | $      | (0.74   | )  |
|                                                                                             |

7. ReinsuranceCeded

The effect of reinsurance activity on premiums written,premiums earned and losses and loss expenses incurred for the three andnine months ended September 30, 2005 and 2004 is shown below.

|                                      |  |                 |         |                 |  |                        |         |         |  |        |          |         |  |  |
|--------------------------------------|--|-----------------|---------|-----------------|--|------------------------|---------|---------|--|--------|----------|---------|--|--|
| Threemonths ended September 30, 2005 |  | PremiumsWritten |         | Premiums Earned |  | Losses andLossExpenses |
| Directinsurance                      |  | $               | 90,630  |            |  | $                      | 70,379  |    |  | $      | 77,429   |    |
| Reinsuranceassumed                   |  |            | 80,912  |            |  |                   | 77,771  |    |  |   | 158,773  |    |
| Gross                                |  |            | 171,542 |            |  |                   | 148,150 |    |  |   | 236,202  |    |
| Cededreinsurance                     |  |            | (55,577 | )          |  |                   | (47,604 | )  |  |   | (115,115 | )  |
| Net                                  |  | $               | 115,965 |            |  | $                      | 100,546 |    |  | $      | 121,087  |    |
|                                      |

|                                      |  |                 |         |                 |  |                        |        |         |  |        |        |         |  |  |
|--------------------------------------|--|-----------------|---------|-----------------|--|------------------------|--------|---------|--|--------|--------|---------|--|--|
| Threemonths ended September 30, 2004 |  | PremiumsWritten |         | Premiums Earned |  | Losses andLossExpenses |
| Directinsurance                      |  | $               | 41,073  |            |  | $                      | 11,091 |    |  | $      | 6,626  |    |
| Reinsuranceassumed                   |  |            | 75,656  |            |  |                   | 63,472 |    |  |   | 75,105 |    |
| Gross                                |  |            | 116,729 |            |  |                   | 74,563 |    |  |   | 81,731 |    |
| Cededreinsurance                     |  |            | (30,760 | )          |  |                   | (9,040 | )  |  |   | (3,768 | )  |
| Net                                  |  | $               | 85,969  |            |  | $                      | 65,523 |    |  | $      | 77,963 |    |
|                                      |

15

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Unaudited; expressed in thousands of USdollars except for share and per share amounts,or as otherwisestated)

|                                      |  |                 |          |                 |  |                        |         |         |  |        |          |         |  |  |
|--------------------------------------|--|-----------------|----------|-----------------|--|------------------------|---------|---------|--|--------|----------|---------|--|--|
| Threemonths ended September 30, 2005 |  | PremiumsWritten |          | Premiums Earned |  | Losses andLossExpenses |
| Directinsurance                      |  | $               | 279,756  |            |  | $                      | 162,109 |    |  | $      | 140,072  |    |
| Reinsuranceassumed                   |  |            | 233,060  |            |  |                   | 225,575 |    |  |   | 242,532  |    |
| Gross                                |  |            | 512,816  |            |  |                   | 387,684 |    |  |   | 382,604  |    |
| Cededreinsurance                     |  |            | (126,610 | )          |  |                   | (90,644 | )  |  |   | (141,502 | )  |
| Net                                  |  | $               | 386,206  |            |  | $                      | 297,040 |    |  | $      | 241,102  |    |
|                                      |

|                                      |  |                 |         |                 |  |                        |         |         |  |        |         |         |  |  |
|--------------------------------------|--|-----------------|---------|-----------------|--|------------------------|---------|---------|--|--------|---------|---------|--|--|
| Threemonths ended September 30, 2004 |  | PremiumsWritten |         | Premiums Earned |  | Losses andLossExpenses |
| Directinsurance                      |  | $               | 80,333  |            |  | $                      | 18,331  |    |  | $      | 10,554  |    |
| Reinsuranceassumed                   |  |            | 290,095 |            |  |                   | 144,595 |    |  |   | 121,639 |    |
| Totalgross premiumswritten           |  |            | 370,428 |            |  |                   | 162,926 |    |  |   | 132,193 |    |
| Cededreinsurance                     |  |            | (57,941 | )          |  |                   | (13,313 | )  |  |   | (6,017  | )  |
| Net                                  |  | $               | 312,487 |            |  | $                      | 149,613 |    |  | $      | 126,176 |    |
|                                      |

8. Lossper share

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

|                                                          |  |                   |            |                   |  |                  |            |                  |  |        |            |         |  |        |            |         |  |  |
|----------------------------------------------------------|--|-------------------|------------|-------------------|--|------------------|------------|------------------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                     |  | Threemonths ended |            | Nine monthsended  |
|                                                     |  | September30,2005  |            | September 30,2004 |  | September30,2005 |            | September30,2004 |
| Basicloss per share                                      |  |              |            |              |  |             |            |             |
| Netloss                                                  |  | $                 | (59,084    | )            |  | $                | (37,446    | )           |  | $      | (51,198    | )  |  | $      | (40,156    | )  |
| Weightedaverage common shares outstanding —basic   |  |              | 56,810,020 |              |  |             | 56,798,218 |             |  |   | 56,804,119 |    |  |   | 56,798,218 |    |
| Basicloss pershare                                       |  | $                 | (1.04      | )            |  | $                | (0.66      | )           |  | $      | (0.90      | )  |  | $      | (0.71      | )  |
| **Dilutedloss pershare**                                 |  |              |       |              |  |             |       |             |  |   |       |    |  |   |       |    |
| Netloss                                                  |  | $                 | (59,084    | )            |  | $                | (37,466    | )           |  | $      | (51,198    | )  |  | $      | (40,156    | )  |
| Weightedaverage common sharesoutstanding                 |  |              | 56,810,020 |              |  |             | 56,798,218 |             |  |   | 56,804,119 |    |  |   | 56,798,218 |    |
| Weightedaverage common shareequivalents                  |  |              |       |              |  |             |       |             |  |   |       |    |  |   |       |    |
| Options                                                  |  |              | —    |              |  |             | —    |             |  |   | —    |    |  |   | —    |    |
| Warrants                                                 |  |              | —    |              |  |             | —    |             |  |   | —    |    |  |   | —    |    |
| Weightedaverage common shares outstanding —diluted |  |              | 56,810,020 |              |  |             | 56,798,218 |             |  |   | 56,804,119 |    |  |   | 56,798,218 |    |
| Dilutedloss pershare                                     |  | $                 | (1.04      | )            |  | $                | (0.66      | )           |  | $      | (0.90      | )  |  | $      | (0.71      | )  |
|                                                          |

Dueto a net loss for all periods presented, the assumed net exercise ofoptions and warrants under the treasury stock method has been excluded,as the effect would have been anti-dilutive. Accordingly, for the threeand nine months ended September 30, 2005, the calculation of weightedaverage common shares outstanding on a diluted basis excludes 4,006,111options and 2,542,813 warrants and for the three and nine months endedSeptember 30, 2004, the calculation of weighted average common sharesoutstanding on a diluted basis excludes 3,013,400 options and 2,542,813warrants.

16

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Unaudited; expressed in thousands of USdollars except for share and per share amounts,or as otherwisestated)

|          |             |
|----------|-------------|
| 9.  | Derivatives |

During thethree months ended June 30, 2005, the Company sold themortality-risk-linked security that it has held since the fourthquarter of 2003. Simultaneously, it entered into a derivative totalreturn swap agreement with an unrelated third party financialinstitution with reference to the same asset. The Company also enteredinto another derivative total return swap agreement with the samefinancial institution with reference to a similar mortality-risk-linkedsecurity. As a result, the Company retains all the risks and rewards ofthese two securities without having ownership of them. Income receivedfrom the total return swaps and any fair value adjustments are includedin Other Income in the Consolidated Statement of Operations. TheCompany records total return swaps at fair value, based on quotedmarket prices. Where such valuations are not available, the Companyuses internal valuation models to estimate fair value. During the threeand nine months ended September 30, 2005 the Company recorded zero and$0.1 million in unrealized gains associated with the change in fairvalue of these derivatives.

|           |                              |
|-----------|------------------------------|
| 10.  | Commitments andcontingencies |

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

As of September 30, 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 of September 30,2005, the largest single non-U.S. government and government agenciesissuer accounted for less than 1% of the aggregate market valueof the externally managed portfolios.

The premiums receivablebalance of $172.1 million as of September 30, 2005 includesapproximately $13.9 million, or 8.1%, from one third party agentthat sources a residential builders’ and contractors’program that provides new home contractors throughout the U.S. withgeneral liability, builders’ risk and excess liability insurancecoverages as well as reinsurance for warranty coverage (known as the‘‘HBW program’’). The Company has notexperienced any losses related to premiums receivable from this thirdparty agent to date and monitors the aged premiums receivable balanceson a monthly basis.

The primary purpose of the Company’sceded reinsurance is to limit the Company’s net loss exposuresand to control its aggregate exposures to particular classes of riskincluding those related to natural catastrophe events. It is expectedthat the companies to which insurance has been ceded will honor theirobligations. Failure of the Company’s reinsurers to honor theirobligations could result in credit losses. The average credit rating ofthe Company’s reinsurers as of September 30, 2005 is A(Excellent) by A.M. Best. The largest concentration of loss and lossadjustment expenses recoverable from reinsurers at September 30, 2005was approximately 19% and is due from Everest Reinsurance Ltd.,a reinsurer rated A+ (Superior) by A.M. Best. In addition,approximately 18% of the Company’s loss and lossadjustment expenses recoverable from reinsurers are due from variousLloyd’s syndicates which are rated A (Excellent) by A.M. Best.Less than 7% of the Company’s loss and loss adjustmentexpenses recoverable from reinsurers as of September 30, 2005 are duefrom reinsurers that are rated below A− (Excellent). Less than4% of the Company’s loss and loss adjustment expensesrecoverable from reinsurers as of September 30, 2005 are due fromreinsurers that are rated below A− (Excellent) and are notcollateralized.

17

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Unaudited; expressed in thousands of USdollars except for share and per share amounts,or as otherwisestated)

|          |                                     |
|----------|-------------------------------------|
| b)  | Concentrations ofpremium production |

The Company generates its businessprimarily through brokers and to a much lesser extent directrelationships with insurance companies. During the nine months endedSeptember 30, 2005, three brokers accounted for approximately38.6%, 22.4% and 11.6% of the specialtyreinsurance segment’s gross premiums written and one brokeraccounted for approximately 11.5% of the specialty insurancesegment’s gross premiums written. No other brokers accounted formore than 10% of the specialty reinsurance or the specialtyinsurance segments’ gross written premium for the nine monthsended September 30, 2005.

During the nine months ended September30, 2004, two brokers accounted for approximately 10% and11% of the specialty insurance segment’s gross premiumswritten and four brokers accounted for approximately 12%,14%, 16% and 37% of the specialty reinsurancesegment’s gross premiums written. No other brokers accounted formore than 10% of the specialty reinsurance or the specialtyinsurance segments’ gross written premium for the nine monthsended September 30, 2004. The Company believes that all of its brokersare significant and established companies.

During the nine monthsended September 30, 2005 and 2004, the Company continued writing theHBW program. This program accounted for approximately $35.9 million, or36.9% and $129.3 million, or 43.2%, of the specialtyinsurance segment gross written premiums for the three and nine monthsended September 30, 2005. Policies underwritten in this program aresourced by one third party agent that the Company believes is a largeand established specialist in this class of business. This programaccounted for approximately $104.2 million, or 59.4%, of thespecialty insurance segment gross written premiums for the nine monthsended September 30, 2004.

c) Restrictedassets

The Company is required to maintain assets ondeposit with various regulatory authorities to support its insuranceand reinsurance operations. These requirements are generallypromulgated by the regulations of the individual locations within whichthe Company operates. These funds on deposit are available to settleinsurance and reinsurance liabilities.

The Company participatesin the Lloyd’s of London market through its Syndicate 4000 atLloyd’s and has dedicated a significant amount of its capital tothe Lloyd’s business. The regulations of the Council ofLloyd’s determine the amount of premium that may be written,also known as stamp capacity, based on the Company’s funds atLloyd’s. The Company will maintain funds at Lloyd’s forevery underwriting year in which it has business through Syndicate 4000at Lloyd’s. These funds may not be withdrawn until eachunderwriting year is closed which currently takes three years.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 typicallycloses an underwriting year by reinsuring outstanding claims on thatunderwriting year with the participants of the next underwriting year.As of September 30, 2005, cash and investments with a market value of$108.1 million are held by Lloyd’s as trustee.

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

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

18

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Unaudited; expressed in thousands of USdollars except for share and per share amounts,or as otherwisestated)

The fair values of these restrictedassets by category at September 30, 2005 are asfollows:

|                                                          |  |                         |        |             |  |        |         |        |  |  |
|----------------------------------------------------------|--|-------------------------|--------|-------------|--|--------|---------|--------|--|--|
|                                                     |  | September30, 2005       |
|                                                     |  | Cash andcashequivalents |        | Investments |
| Depositswith U.S. regulatoryauthorities                  |  | $                       | 101    |        |  | $      | 29,457  |   |
| Fundsdeposited withLloyd’s                         |  |                    | 593    |        |  |   | 107,578 |   |
| LOCpledged assets                                        |  |                    | 6,032  |        |  |   | 164,118 |   |
| Trustfunds                                               |  |                    | 24,749 |        |  |   | 104,173 |   |
| Amounts held intrust funds related to depositliabilities |  |                    | 14,130 |        |  |   | 38,782  |   |
| Total                                                    |  | $                       | 45,605 |        |  | $      | 444,108 |   |
|                                                          |

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 of September30, 2005, are asfollows:

|                            |  |        |        |        |  |  |
|----------------------------|--|--------|--------|--------|--|--|
| **Yearending September30** |  |   |   |   |
| 2006                       |  | $      | 4,712  |   |
| 2007                       |  |   | 4,608  |   |
| 2008                       |  |   | 3,543  |   |
| 2009                       |  |   | 3,252  |   |
| 2010                       |  |   | 3,047  |   |
| 2011andthereafter          |  |   | 22,826 |   |
| Total                      |  | $      | 41,988 |   |
|                            |

Totalrent expense under operating leases for the three and nine months endedSeptember 30, 2005 was approximately $1.2 million and $3.3million.

11. Junior subordinateddebentures

On February 24, 2005, the Company participated in aprivate placement of $20.0 million of floating rate capital securities(the ‘‘Trust Preferred Securities’’) issuedby Quanta Statutory Capital Trust II (‘‘Quanta TrustII’’). The Trust Preferred Securities mature on June 15,2035, are redeemable at the Company's option at par beginningJune 15, 2010, and require quarterly distributions of interest byQuanta Trust II to the holder of the Trust Preferred Securities.Distributions will be payable at a variable per annum rate of interest,reset quarterly, equal to the London Interbank Offered Rate(‘‘LIBOR’’) plus 350 basis points. QuantaTrust II simultaneously issued 619 of its common securities to theCompany for a purchase price of $0.6 million, which constitutes all ofthe issued and outstanding common securities of Quanta Trust II. TheCompany’s investment of $0.6 million in the common shares ofQuanta Trust II is recorded in other assets in the consolidated balancesheet.

Quanta Trust II used the proceeds from the sale of theTrust Preferred Securities and the issuance of its common securities topurchase $20.6 million junior subordinated debt securities, due June15, 2035, in the principal amount of $20.6 million issued by theCompany (the ‘‘Debentures’’). The netproceeds of $19.6 million from the sale of the debentures to QuantaTrust II, after the deduction of approximately $0.4 million ofcommissions paid to the placement agents in the transaction andapproximately $0.6 million representing the Company’s investmentin Quanta Trust II, will be used by the Company to grow its specialtylines businesses and for working capital purposes.

TheDebentures were issued pursuant to an Indenture (the‘‘Indenture’’), dated February 24, 2005, byand between the Company and JPMorgan Chase Bank, N.A., as trustee. Theterms of the 

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Unaudited; expressed in thousands of USdollars except for share and per share amounts,or as otherwisestated)

Debentures are substantially the same as theterms of the Trust Preferred Securities. The interest payments on theDebentures paid by the Company will be used by Quanta Trust II to paythe quarterly distributions to the holders of the Trust PreferredSecurities. The Indenture permits the Company to redeem the Debentures(and thus a like amount of the Trust Preferred Securities) on or afterJune 15, 2010. If the Company redeems any amount of the Debentures,Quanta Trust II must redeem a like amount of the Trust PreferredSecurities.

Pursuant to a Guarantee Agreement (the‘‘Guarantee Agreement’’), dated February24, 2005, by and between the Company and JPMorgan Chase Bank, N.A., astrustee, the Company has agreed to guarantee the payment ofdistributions and payments on liquidation or redemption of the TrustPreferred Securities, but only in each case to the extent of funds heldby Quanta Trust II. The obligations of the Company under the GuaranteeAgreement and the Trust Preferred Securities are subordinate to all ofthe Company's debt.

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

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

12. Credit agreement

On July 11,2005, Quanta Holdings and certain designated insurance subsidiariesentered into an amended and restated credit agreement dated July 11,2005, providing for a secured bank letter of credit facility and arevolving credit facility with a syndicate of lenders in the amount of$250 million. Up to $25 million may be borrowed under the facility on arevolving basis for general corporate purposes and working capitalrequirements. The facility is secured by specified investments of theborrowers. The availability for issuances of letters of credit andborrowings to a borrower is based on the amount of eligible investmentspledged by that borrower and the absence of material adverse changeprovisions. Regulatory restrictions will also limit the amount ofinvestments that may be pledged by our U.S. insurance borrowers and,consequently, the amount available for letters of credit and borrowingsunder the facility to those borrowers. The facility terminates on July11, 2008. The credit agreement has certain financial covenants,including maximum leverage ratio, minimum consolidated net worthprovisions and maintenance of the Company’s insurance ratings atB++ or better. In addition, the credit agreement contains certaincovenants restricting the activities of Quanta Holdings and itssubsidiaries, such as the incurrence of additional indebtedness, liensand dividends and other payments to Quanta Holdings. Quanta Holdingshas also unconditionally and irrevocably guaranteed all of theobligations of its subsidiaries to the lenders. The Company uses theletter of credit facility primarily to provide security to its insuredor reinsured clients under the terms of its insurance and reinsurancecontracts.

13. Subsequent event

On October5, 2005, A. M. Best Company, Inc. (‘‘A. M.Best’’) placed Quanta Reinsurance Ltd. and itssubsidiaries and Quanta Europe Ltd. under review with negativeimplications. The Company is working closely with A.M. Best tounderstand the different capital requirements it now has for itsvarious product lines, the capital adequacy ratio associated with theseproduct lines at the ‘‘A−’’(excellent) level, and its view of the Company’s availablecapital that includes their assessment of the 

20

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Unaudited; expressed in thousands of USdollars except for share and per share amounts,or as otherwisestated)

probable maximum loss exposures associatedwith specified lines of our business. The Company believes thesefactors are the main drivers of the capital requirements that A.M. Bestplaces on it.

Based on that understanding, the Company believesthat it has developed a plan designed to retain its current rating of"A-" (excellent) that has two key elements.The plan is intended to address A.M. Best's concerns about itsrevised capital requirements for the Company's business. Thefirst element of this plan involves the further reduction orelimination of its exposure in its technical risk property insuranceand property reinsurance lines. The Company recently discontinued thewriting of new and most renewal business in these businesses except inits program business and it intends to further reduce or eliminate itsexposure through retrocessional or reinsurance arrangements or otheralternatives. Mitigating the Company's exposure in these lines isintended to result in lower capital requirement from A.M. Best. TheCompany does not intend to discontinue, or make changes in, its programbusinesses, including the Company's home buyer's warrantyprogram, which are included in the technical risk property productline.

The second element of this plan is to seek to raisecapital, including through the issuance of debt, equity and/or othersecurities, in a private or public offering. To that end, the Companyfiled a shelf registration statement on Form S-3 with the SEC onOctober 26, 2005, which was declared effective by the SEC on November2, 2005. The Company and certain statutory trusts may issue, from timeto time, in one or more offerings up to $125 million of trust preferredsecurities or preferred securities or a combination of both. To effectany such sale from time to time, the Company will file one or moresupplements to the prospectus contained in the registration statement,which will provide details of any proposed offering.

HurricaneWilma made landfall in Florida on October 23, 2005. On the date of thisreport, the Company estimates that its total net losses from this eventwill be between $8.0 million and $15.0 million and will be included inthe consolidated statement of operations for the period ended December31, 2005.

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

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

Safe Harbor Disclosure

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

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

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | The fact that A.M. Best hasplaced our financial strength rating under review with negativeimplications. We are experiencing loss of business and businessopportunities as we continue to work with A.M. Best. A downgrade in ourrating or the continued qualification of our current rating with anegative outlook could materially and adversely affect our ability toexecute our business strategy. In addition, a downgrade in our ratingbelow "B++" could cause a default in ourcredit facility and trigger special termination provisions in certainof our insurance and reinsurancecontracts; |

|  |              |                                                                                                                                                                                                                                                                                                                                       |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | We intend to reduce oreliminate our exposure our technical risk property insurance (otherthan the program business which is included in the technical riskproperty product line) and property reinsurance lines throughretrocessional or reinsurance arrangements or other alternatives, whichmay not be available on favorableterms; |

|  |              |                                                                                                                                                                                                                                                                                                    |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | A.M. Best continues to reevaluateits capital adequacy models, which may adversely impact our ability tosuccessfully complete our plan designed to maintain our current ratingwith A.M. Best and the capital A.M. Best may require us to maintain inorder to maintain our financial strengthrating; |

|  |              |                                                                                                                                                                                                                                 |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | We will require additionalcapital, including in connection with our plan designed to retain ourcurrent rating of "A–" (excellent) withA.M. Best. Any additional capital may not be available on favorableterms or at all; |

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|--|--------------|-----------------------------------------------------------------------------------------------------------|
|  | •  | If actual claims exceedour loss reserves, our financial results could be significantlyadversely affected; |

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|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | The failure of anyof the loss limitation methods we employ could have a material adverseeffect on our financial condition or our results ofoperations; |

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

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|  |              |                                                                                                                                                                                                        |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | our estimated netlosses from catastrophes, including hurricanes Katrina, Rita and Wilma,are derived from a review of our potential exposure to these events andare not based on actual reportedlosses; |

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|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Based on our current estimate oflosses related to hurricane Katrina, we have substantially exhaustedour reinsurance and retrocessional protection with respect to hurricaneKatrina. If our Hurricane Katrina losses prove to be greater thancurrently anticipated, we may have no further reinsurance andretrocessional coverage available for that windstorm. In addition, ifthere are further catastrophic events during our current policy year,our retrocessional coverge for these events may be limted or we mayhave no coverage at all; |

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|  | •  | Changes in theavailability, cost or quality ofreinsurance; |

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|--|--------------|--------------------------------------------------------------------------|
|  | •  | The risk that we may not beable to fully implement our businessstrategy; |

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|--|--------------|-------------------------------|
|  | •  | Our limited operatinghistory; |

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

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

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

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|--|--------------|----------------------------------------------------------------------------------|
|  | •  | Our ability to hire, retainand integrate our management team and otherpersonnel; |

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|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Risks relating to ourreliance on program managers (in particular with respect to our HBWprogram), third party administrators, and supportingvendors; |

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

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

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

This list of factors is notexhaustive and should be read with the other cautionary statements thatare included in this report and in the Form 10-K filed by the Companywith the SEC on March 30, 2005.

If one or more of these or otherrisks or uncertainties materialize, or if our underlying assumptionsprove to be incorrect, our actual results may vary materially from ourprojections. Any forward-looking statements you read in this reportreflect our current views with respect to future events and are subjectto these and other risks, uncertainties and assumptions relating to,among other things, our operations, results of operations, growthstrategy and liquidity. All subsequent written and oral forward-lookingstatements attributable to us or individuals acting on our behalf areexpressly qualified in their entirety by this paragraph. You arecautioned not to place undue reliance on these forward-lookingstatements, which speak only as of their dates. We undertake noobligation to publicly update or review any forward-looking statement,whether as a result of new information, future events orotherwise.

Market data and forecasts used in or incorporated byreference into this report have been obtained from independent industrysources as well as from research reports prepared for other purposes.We have not independently verified the data obtained from these sourcesand we cannot assure you of the accuracy or completeness of the data.Forecasts and other forward-looking information obtained from thesesources are subject to the same qualifications and uncertaintiesapplicable to the other forward-looking statements in thisreport.

Overview

General

QuantaHoldings was incorporated on May 23, 2003 as a Bermuda holding companyformed to provide specialty lines insurance, reinsurance, riskassessment and technical services on a global basis 

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through its affiliated companies. Wecommenced substantive operations on September 3, 2003 when we obtainedour initial capital and purchased ESC, our predecessor for accountingpurposes. During the remainder of 2003, we wrote a small number ofinsurance and reinsurance contracts. During the year ended December 31,2004 and the nine months ended September 30, 2005 we have continued togrow and diversify our specialty lines of business significantlyincreasing the number of insurance and reinsurance contractsunderwritten.

We have incurred estimated net losses ofapproximately $68.5 million relating to hurricanes Katrina and Ritaduring the three months and nine months ended September 30, 2005. Theselosses include net reinstatement premium expense of approximately $4.9million. Of these losses, $31.7 million including reinstatementpremiums of approximately $3.1 million occurred in our specialtyreinsurance property line, $25.4 million including reinstatementpremium income of approximately $0.8 million occurred in our marine,technical risk and aviation product lines and $11.4 million includingreinstatement premium expense of approximately $2.6 million occurred inour specialty insurance technical risk property product line. Inaddition, in the three months and twelve months ended December 31,2005, we will record estimated losses related to hurricane Wilma whichwe currently estimate will be between approximately $8.0 million and$15.0 million. We believe that we will not know our exact losses forsome time given the uncertainty around the industry loss estimates, thesize and complexity of hurricanes Katrina, Rita and Wilma, limitedclaims data and potential legal and regulatory developments related topotential losses. As a result, our losses may vary significantly fromour recorded estimates.

We have recorded estimated gross lossesof approximately $145.9 million relating to hurricanes Katrina and Ritaduring the three months and nine months ended September 30, 2005. Theselosses include gross reinstatement premiums of approximately $8.6million. The difference between our estimated gross and estimated netlosses, or $77.4 million, represents the amount of reinsurance orretrocessional insurance recoveries, including ceded reinstatementpremiums of $13.5 million. We obtained this reinsurance andretrocessional insurance as part of our risk management practices tohelp limit our net loss exposures and control our aggregate exposuresto particular classes of risk including those related to naturalcatastrophe events. We expect that the companies to which insurance hasbeen ceded or reinsurance has been retroceded will honor theirobligations. The average credit rating of these entities as ofSeptember 30, 2005 is A (Excellent) by A.M. Best.

As a result ofour expected losses relating to hurricanes Katrina and Rita, on October5, 2005, A.M. Best Company, or A.M. Best, placed the financial strengthrating assigned to Quanta Bermuda and its subsidiaries and QuantaEurope, currently ‘‘A−’’(excellent), under review with negative implications. A.M. Best ratingsare based on a company's available and required rated capital tosupport its operations considering a quantitative evaluation of acompany's performance with respect to profitability, leverage,and liquidity and a qualitative evaluation of spread of risk,investments, reinsurance programs, reserves and management. Inaddition, its ratings of us take into consideration the fact that wehave recently commenced our operations and an assessment of the legaland inflationary environments within which we operate.

Webelieve A.M. Best defines available rated capital asshareholders' equity plus certain long-term debt obligations lessthe sum of intangible assets, certain other adjustments related toprobable maximum loss exposures to catastrophes and recorded reservesfor losses and unearned premiums. Credit ratings issued by A.M. Best,including our ‘‘A−’’ (excellent)rating, generally reflect the amount by which available rated capitalexceeds the required capital, which is commonly known as the capitaladequacy ratio. As a result of the nature, frequency and severity ofthe hurricanes in 2004 and 2005, we believe A.M. Best has reassessedcertain variables, including the capital adequacy ratio, that areconsidered in its quantitative analyses in assessing both required andavailable rated capital. As a result of this reassessment, capitalrequirements for property and casualty reinsurers have generally beenincreased and a number of these companies have been downgraded due totheir inability to meet A.M. Best's new requirements.

Following shortly after hurricanes Katrina and Rita we discontinuedthe writing of new and most renewal business in our technical riskproperty and property reinsurance lines of business. We did not

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discontinue or make changes in our programbusinesses, including our residential builders’ andcontractors’ program, which we refer to as the HBW program.Since then, we have been working closely with A.M. Best to understandthe different capital requirements it now has for our various productlines, the capital adequacy ratio associated with these product linesat the ‘‘A−’’ (excellent) level, andits view of our available capital that includes their assessment of theprobable maximum loss exposures associated with specified lines of ourbusiness. We believe these factors are the main drivers of the capitalrequirements that A.M. Best places on us.

Based on thatunderstanding, we believe that we have developed a plan designed toretain our current rating of "A-" (excellent)that has two key elements. The plan is intended to address A.M.Best's concerns about its revised capital requirements for ourbusiness. The first element of this plan involves the further reductionor elimination of our exposure in our technical risk property insuranceand property reinsurance lines. We recently discontinued the writing ofnew and most renewal business in these businesses except in our programbusiness and we intend to further reduce or eliminate our exposurethrough retrocessional or reinsurance arrangements or otheralternatives. Mitigating our exposure in these lines is intended toresult in lower capital requirement from A.M. Best. We do not intend todiscontinue or make changes to our program businesses, including ourhome buyer's warranty program which are included in the technicalrisk property product line.

The second element of this plan isto seek to raise capital, including through the issuance of debt,equity and/or other securities, in a private or public offering. Tothat end, we filed a shelf registration statement on Form S-3 with theSEC on October 26, 2005, which was declared effective by the SEC onNovember 2, 2005. We and certain statutory trusts may issue, from timeto time, in one or more offerings up to $125 million of trust preferredsecurities or preferred securities or a combination of both. To effectany such sale from time to time, we will file one or more supplementsto the prospectus contained in the registration statement, which willprovide details of any proposed offering.

Based on ourdiscussions with A.M. Best, we believe that upon execution of thisplan, A.M. Best will affirm our "A  -"(excellent) rating and that this affirmation will carry a negativeoutlook from A.M. Best. We will continue to work with A.M. Bestthroughout the next year to return to the"A-" (excellent) rating without anyqualifications. However, A.M. Best continues to reevaluate its capitaladequacy models, which may impact the capital A.M. Best may require usto maintain in order to maintain our financial strength rating. As aresult, we cannot assure you that these efforts taken by us will resultin A.M. Best reaffirming our rating without qualification or A.M. Bestnot downgrading our current rating. Additionally, while we willcontinue to work with A.M. Best throughout the next year to return tothe "A-" (excellent) rating without anyqualifications, we expect that the qualification of our rating with anegative outlook will adversely affect our opportunities to write newand renewal business and ability to execute our businessplan.

Through our operating subsidiaries in Bermuda, the U.S. andEurope, we focus on writing coverage for specialized classes ofinsurance and reinsurance risks through teams of experienced andtechnically qualified underwriters. We define specialty insurance andreinsurance as those lines of business that are often unusual ordifficult to place and do not fit the underwriting criteria of standardcommercial product providers. We are using our Bermuda operationsprimarily to insure U.S. risks from Bermuda on a non-admitted basis andalso to underwrite some European risks. We are also writing specialtyinsurance and reinsurance in the United States on an admitted basisthrough our subsidiary, Quanta Indemnity Company, which is a U.S.licensed insurer with licenses in 45 states and is an accreditedreinsurer in Washington, D.C. Further, we write specialty insurancefrom the United States on an excess and surplus lines basis and U.S.reinsurance on a non-admitted basis through our subsidiary, QuantaSpecialty Lines Insurance Company. Since the last quarter of 2004 weare underwriting European Union sourced specialty insurance andreinsurance business through Quanta Europe, our Irish subsidiarylocated in Dublin, Ireland, which is the headquarters of our Europeanbusiness. We are also underwriting through our wholly-ownedLloyd’s syndicate, which we call Syndicate 4000. Since February2005 we are serving our London-based clients for European insurance andreinsurance business through our Quanta Europe branch in London.

We acquired Environmental Strategies Corporation, known as ESC, onSeptember 3, 2003. ESC is our predecessor company for accounting andfinancial reporting purposes. ESC provides diversified 

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environmental risk management services toassist customers in environmental remediation, regulatory analyses,technical support for environmental claims, merger and acquisition duediligence, environmental audits and risk assessments, and engineeringand information management services. ESC also provides risk assessmentand technical services support to our environmental underwriters. Wehave also established Quanta Technical Services, which we use toprovide risk assessment and evaluation technical services in our otherspecialty lines of insurance and to third parties on a fee basis.Through Quanta Technical Services and its subsidiaries, we also provideliability assumption programs under which these subsidiaries assumespecified liabilities (which may, at times, include taking title toproperty) associated with environmental conditions in properties andagree to provide technical services and to perform the requiredremediation services. During the third quarter of 2005, our liabilityassumption program in Buffalo, New York generated revenues of $7.8million and other income of $0.9 million. The estimated remainingliabilities for this program are approximately $6.7 million, as ofSeptember 30, 2005.

We only started writing insurance andreinsurance contracts in the fourth quarter of 2003 and caution youthat, because of our limited operating history, our financialinformation is not indicative of the actual results that we expect toachieve in future periods.  This report does contain our thirdquarter to quarter comparison of our business in 2004 and 2005 and, ingeneral, reveals that our insurance business has grown and theinsurance segment has become a bigger proportion of our business in thethird quarter of 2005 as compared to the third quarter of 2004.  This trend is not expected to occur evenly during thequarters as the reinsurance business has traditionally been moreconcentrated in the first and third quarter and we have discontinuedworking certain lines of business due to catastrophe losses.

Wegenerated approximately $116.0 million and $386.2 million of netpremiums written after premiums ceded on purchased reinsuranceprotection and $100.5 million and $297.0 million of net premiums earnedduring the three months and nine months ended September 30, 2005. Thiscompares to approximately $86.0 million and $312.5 million of netpremiums written and $65.5 million and $149.6 million of net premiumsearned during the three months and nine months ended September 30,2004. During the three and nine months ended September 30, 2005, wealso purchased additional retrocessional protection in our specialtyreinsurance segment which is intended to help limit our net lossexposures to catastrophe windstorm events. This purchase resulted inapproximately $9.5 million and $15.6 million of premium ceded duringthe three and nine months ended September 30, 2005. However, based onour current estimate of losses related to hurricane Katrina, we haveexhausted our reinsurance and retrocessional protection with respect tohurricane Katrina. If our hurricane Katrina losses prove to be greaterthan currently anticipated, we will have no further reinsurance andretrocessional coverage available for that windstorm. In addition, ifthere are further catastrophic events during our current policy year,our retrocessional coverage for these events may be limited or we mayhave no coverage at all.

The primary drivers of growth in ourlines of business and net written premiums are the continueddevelopment of our relationships with important insurance andreinsurance brokers, the development of specialty insurance lines ofbusiness, including Syndicate 4000, and our success during thebeginning of 2005 in entering into reinsurance contracts.Traditionally, many reinsurance contracts are entered into at thebeginning of a calendar year and that period is often referred to asthe January renewal season. Our specialty insurance segmentdemonstrated continued premium growth during the nine months endedSeptember 30, 2005, especially through Lloyds, following receipt ofregulatory approvals during the fourth quarter of 2004. Our specialtyinsurance segment has become an increasingly significant contributor toour overall business and represented approximately 58.3% of ourtotal gross premiums written in the nine months ended September 30,2005 compared to 47.3% in the nine months ended September 30,2004.

In addition, we believe that our portfolio is notdiversified either among classes of risks or source of origination. Forexample, during the nine months ended September 30, 2005, we grew ourHBW program, which accounted for approximately 43.2% of ourspecialty insurance segment gross written premium. In addition, the HBWprogram and the other insurance programs we write, accounted for44.4% of our specialty insurance segment gross written premiumin the nine months ended September 

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30, 2005. We expect that the other insuranceprograms we write will have increasing gross written premium throughthe remainder of 2005 and that the concentration of our programsbusiness in our specialty insurance segment will continue to besignificant through the remainder of 2005 and 2006. As described below,our specialty reinsurance segment showed significant concentrationsacross certain risk classes. In addition, our specialty reinsurancesegment generated approximately 38.6%, 22.4% and11.6% of its gross written premiums through three brokers. Inconnection with our plan to maintain our rating with A.M. Best, weintend to reduce or eliminate our exposure in our technical riskproperty insurance (other than the program business which is includedin the technical risk property product line) and property reinsurancelines, which would adversely impact our diversification in our productlines and would cause the concentrations across certain of our riskclasses, including our HBW program, to increase.

A number ofinsurance companies have been subpoenaed by regulators in connectionwith investigations relating to business and accounting practices inthe insurance industry. To date, we have not been served any subpoenas.We have received, and have responded to, inquiries from the NorthCarolina Department of Insurance, the Colorado Department of Insuranceand Lloyd’s. From January 1, 2004 to September 30, 2004 we wereparty to placement service agreements, known as PSAs and market serviceagreements, known as MSAs, with Aon Corporation and Marsh Inc. and havepaid a total of $31,000 under these agreements as of September 30,2005. We have accrued approximately $1.1 million in addition to theamount we have already paid under these agreements. At this time, it isnot possible for us to determine the impact of any outcome of theseinvestigations on our future results of operations. In addition, we donot know what the ramifications of the brokers’ stated intent toformulate a different commission structure will be on our futureresults of operations, financial condition or liquidity as brokers seekour participation in this commission structure.

With respect tomarket conditions, we believe that premium rates have remained largelyunchanged in our specialty insurance segments. In the professionalliability insurance market, we believe that the rate for commercialdirectors and officers liability insurance remains competitive and thatrates may drift downward although we are seeing stability in certainrisk classes. In the reinsurance market place, we continue to seedisciplined underwriting by our major competitors. We have seen somerate deterioration in casualty reinsurance as a result of the pricingdeclines in some sectors of the direct insurance marketplace. We expectto see substantial price increases in the marine reinsurance marketsfollowing the windstorm events of this year. We will continue to seekopportunities to provide insurance and reinsurance in areas thatrequire both capacity and highly technical underwriting expertise.

We are in the process of evaluating our internal controls systems toallow management to report on, and our independent registered publicaccounting firm to audit, our internal controls over financialreporting. We will be performing the system and process evaluation andtesting (and any necessary remediation) required to comply with themanagement certification and auditor attestation requirements ofSection  404 of the Sarbanes-Oxley Act of 2002. We are requiredto comply with Section  404 by no later than December  31,2005. However, we cannot be certain as to the timing of completion ofsuch evaluation, testing and remediation actions or the impact of thesame on our operations. Furthermore, upon completion of this process,we may identify control deficiencies of varying degrees of severityunder applicable SEC and Public Company Accounting Oversight Boardrules and regulations that remain unremediated.

Segment Information

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

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|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Specialtyinsurance. Our specialty insurance segment includes ourtraditional, structured and program specialty insurance products. Ourtraditional specialty insurance products include technical riskproperty, professional liability, environmental liability, fidelity andcrime, surety, trade credit and political risk and marine and aviation.Our specialty insurance segment writes business both on a direct basiswith insured clients or by reinsuring policies that are issued on ourbehalf by third party insurers and reinsurers, and includes ourLloyd’s syndicate, which was created in December 2004. OurLloyd’s syndicate writes traditional specialty insuranceproducts including professional liability (professional indemnity anddirectors’ and officers’ coverage), and fidelity andcrime (financial institutions). We also plan to write specie, fine artand marine coverages. Our specialty insurance programs include the HBWprogram. After the end of the third quarter of 2005, we discontinuedthe writing of new and most renewal business in our technical riskproperty line of business. We did not discontinue or make changes inour program businesses, including our residential builders’ andcontractors’ program, which we refer to as the HBW program. |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Specialty reinsurance. Ourspecialty reinsurance segment includes our traditional, structured andprogram specialty reinsurance products. Our specialty reinsuranceproducts include property, casualty and marine and aviation products.We currently do not write reinsurance on a program basis. After the endof the third quarter of 2005, we discontinued the writing of new andmost renewal business in our property reinsurance of business. |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Technical services. Ourtechnical services segment provides diversified environmentalinvestigation, remediation and engineering services, assessmentservices, other technical and information management services primarilyin the environmental area in the U.S. Our technical services segmentalso provides technical and information management services to ourspecialty insurance and reinsurance segments. |

The determinationof these reportable segments reflects how we manage and monitor theperformance of our insurance and reinsurance operations and may changefrom time to time. We refer to the specialty insurance and specialtyreinsurance as our underwriting segments. We refer to our riskconsulting and management operations as our technical services segment.We evaluate each segment based on its underwriting or technicalservices results, as applicable, including items of revenue and expensethat are associated with, and directly related to, each segment.

We allocate corporate general and administrative expenses to eachsegment based upon each product line’s allocated capital for thecurrent reporting period. We allocate capital to each of our productlines 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.

During the three months ended September 30,2005, we changed the composition of our reportable segments byaggregating the Lloyd’s operating segment with the specialtyinsurance reportable segment.

Main Drivers of ourResults

Revenues

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

We recordpremiums written at the time that there is sufficient evidence ofagreement to the significant terms of the contract but no earlier thanthe effective date of the policy. The amount of our insurance andreinsurance premiums written depends on the number and type of policieswe write, the amount of reinsurance protection we provide, as well asprevailing market prices. Furthermore, the amount of net premiumsearned depends upon the type of contracts we write, the contractualperiods 

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of the contracts we write, the inception dateof the contracts, the expired portions of the contract periods and thetype of purchased reinsurance protection. Because of all these factors,the amount of premiums written and ceded may not result in acorrelative level of profitability.

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

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

Expenses

Our expenses primarilyconsist of net loss and loss expenses, general and administrativeexpenses, acquisition expenses and direct technical services costs.

Net loss and loss expenses, which are net of loss and loss expensesrecovered under our ceded reinsurance contracts, depend on the numberand type of insurance and reinsurance contracts we write and reflectour best estimate of ultimate losses and loss expenses we expect toincur on each contract written using various actuarial analyses. Actuallosses and loss expenses will depend on actual costs to settleinsurance and reinsurance claims. Our ability to accurately estimateexpected ultimate loss and loss expense at the time of pricing eachinsurance and reinsurance contract and the occurrence of unexpectedhigh loss severity catastrophe events will be critical factors indetermining our profitability.

General and administrativeexpenses consist primarily of personnel related expenses, informationtechnology, other operating overheads and professional fees. From timeto time we engage administrative service providers and legal,accounting, tax and financial advisors. General and administrativeexpenses are a function of the development of our business andinfrastructure, including the growth in personnel and the volume ofinsurance and reinsurance contracts written. These general andadministrative expenses may be incurred directly by a segment orindirectly at the corporate level.

Acquisition expenses, whichare net of expenses recovered under our ceded reinsurance contracts,consist principally of commissions, fees, brokerage and tax expensesthat are directly related to obtaining and writing insurance andreinsurance contracts. Typically, acquisition expenses are based on acertain percentage of the premiums written on contracts of insuranceand reinsurance. These expenses are a function of the number and typeof insurance and reinsurance contracts written.

We also incurexpenses directly related to and arising from our technical servicesand environmental remediation activities. These direct costs primarilyinclude expenses associated with 

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direct technical labor, subcontractors weengage on behalf of our technical services clients, and other technicalservices or remediation contract related expenses. These costs are afunction of, and are proportional to, the level of technical servicesand remediation revenues earned from the provision of technicalservices and completion of remediation activities.

Results ofOperations

The following is a discussion of our consolidatedresults of operations for the three months ended September 30, 2005 and2004.

Three months ended September 30, 2005 and2004

Results of operations for the three months ended September30, 2005 and 2004 were asfollows:

|                                                  |  |                                      |          |                                      |  |        |          |         |  |  |
|--------------------------------------------------|--|--------------------------------------|----------|--------------------------------------|--|--------|----------|---------|--|--|
|                                             |  | Threemonths ended September 30, 2005 |          | Three months endedSeptember 30, 2004 |
|                                             |  | ($ inthousands)                      |
| **Revenues**                                     |  |                                 |     |                                 |  |   |     |    |
| Grosspremiumswritten                             |  | $                                    | 171,542  |                                 |  | $      | 116,729  |    |
| Netpremiumswritten                               |  | $                                    | 115,965  |                                 |  | $      | 85,969   |    |
| Netpremiumsearned                                |  | $                                    | 100,546  |                                 |  | $      | 65,523   |    |
| Technicalservices revenues                       |  |                                 | 16,019   |                                 |  |   | 7,727    |    |
| Netinvestment income                             |  |                                 | 6,991    |                                 |  |   | 3,258    |    |
| Netrealized (losses) gains oninvestments         |  |                                 | (1,168   | )                               |  |   | 297      |    |
| Net foreignexchange losses                       |  |                                 | (311     | )                               |  |   | (43      | )  |
| Otherincome                                      |  |                                 | 1,945    |                                 |  |   | 264      |    |
| Totalrevenues                                    |  |                                 | 124,022  |                                 |  |   | 77,026   |    |
| **Expenses**                                     |  |                                 |     |                                 |  |   |     |    |
| Netlosses and lossexpenses                       |  |                                 | (121,087 | )                               |  |   | (77,963  | )  |
| Acquisitionexpenses                              |  |                                 | (22,998  | )                               |  |   | (16,424  | )  |
| Directtechnical servicescosts                    |  |                                 | (13,133  | )                               |  |   | (5,231   | )  |
| General andadministrativeexpenses                |  |                                 | (23,574  | )                               |  |   | (14,294  | )  |
| Interestexpense                                  |  |                                 | (1,200   | )                               |  |   | —  |    |
| Depreciationand amortization of intangibleassets |  |                                 | (1,079   | )                               |  |   | (560     | )  |
| Totalexpenses                                    |  |                                 | (183,071 | )                               |  |   | (114,472 | )  |
| Lossbefore incometaxes                      |  |                                 | (59,049  | )                               |  |   | (37,446  | )  |
| Incometaxes                                      |  |                                 | 35       |                                 |  |   | —  |    |
| Netloss                                          |  | $                                    | (59,084  | )                               |  | $      | (37,446  | )  |
|                                                  |

**Revenues.**

Substantiallyall of our revenues were generated by our underwriting subsidiaries inBermuda, the U.S. and Europe. Technical services revenues were derivedfrom the operations of ESC.

Premiums. Grosspremiums written were $171.5 million for the three months endedSeptember 30, 2005, an increase of $54.8 million, or 47.0%,compared to $116.7 million for the three months ended September 30,2004. The increase of $54.8 million in gross premiums written reflectscontinued growth in all of our business lines except propertyreinsurance.

In connection with our plan to maintain our ratingwith A.M. Best, we intend to reduce or eliminate our exposure in ourtechnical risk property insurance (other than the program businesswhich is included in the technical risk property product line) andproperty reinsurance lines. We expect that our gross and net premiumswritten will decline during the remainder of 2005 as a result

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of the transactions. We also expect that ourgross and net premiums written will decline during the remainder of2005 as result of the loss of business and business opportunitiesfollowing A.M. Best's rating action. We expect that ourLloyd’s syndicate will become a more significant contributor aswe focus on continuing to execute our business strategy. As ofSeptember 30, 2005, Lloyd’s represented 17.8% of ourgross premiums written.

Premiums ceded were $55.6 million forthe three months ended September 30, 2005 an increase of $24.8 millioncompared to $30.8 million for the three months ended September 30,2004. The increase in premiums ceded primarily reflects the growth ingross written premiums and approximately $20.3 million in purchasedretrocessional protection, including reinstatement premiums, in ourspecialty reinsurance segment that is intended to help limit our netloss exposures to natural catastrophe events. The increase of premiumsceded is attributable to a lesser extent to the development of thereinsurance program for our specialty lines which was restructuredduring the three months ended June 30, 2005. The restructure involvedthe commutation of our 2004 reinsurance treaty protection in two of ourproduct lines, Professional Liability and Fidelity, which was ceded onan excess of loss basis. The unexpired portions of this business werethen transferred, effective April 1, 2005, into our 2005 reinsurancetreaty, which is ceded on a proportional quota share basis.

Netpremiums earned were $100.5 million for the three months endedSeptember 30, 2005 an increase of $35.0 million, or 53.5%,compared to $65.5 million for the three months ended September 30, 2004reflecting the growth in premiums written in current and prior periods.Other than in our reinsurance business line, we expect that our netpremiums earned will increase in future periods as our existingportfolios mature. Our net premiums written are typically earned overthe risk periods of the underlying insurance policies which aregenerally twelve months. Net written premiums that are not yet earnedand are deferred as unearned premium reserves, net of deferredreinsurance premiums, totaled $288.7 million at September 30, 2005 andwill be earned and recognized in our results of operations in futureperiods. Because we only began to write insurance and reinsurancebusiness during the fourth quarter of 2003 and because ourLloyd’s syndicate commenced operations in December 2004, webelieve that our net premiums earned are not yet representative of afully developed and diversified portfolio of insurance and reinsurancecontracts.

Technical services revenues. Technicalservices revenues were $16.0 million for the three months endedSeptember 30, 2005 an increase of $8.3 million compared to $7.7 millionfor the three months ended September 30, 2004. This increase intechnical services revenues is attributable to increased remediationrevenues associated with projects in Buffalo, New York and Axis,Alabama. In each of these projects, a subsidiary assumed specifiedliabilities associated with environmental conditions in properties, aninsurance subsidiary provides insurance and our technical services teamprovides consulting and performs the required remediation servicesthrough subcontractors.

Net investment income and netrealized (losses) gains. Net investment income and netrealized (losses) gains totaled $5.8 million for the three months endedSeptember 30, 2005 an increase of $2.2 million, or 63.8%,compared to $3.6 million for the three months ended September 30, 2004.The increase is primarily due to an increase in net investment incomeof $3.7 million because of our larger amount of invested assets andrises in market interest rates, which is partly offset by an increasein net realized losses of $1.5 million.

Net investment incomewas $7.0 million for the three months ended September 30, 2005 and wasderived primarily from interest earned on fixed maturity and short terminvestments, partially offset by investment management fees andamortization of discounts on fixed maturity investments. Our averageannualized effective yield (calculated by dividing net investmentincome by the average amortized cost of invested assets, net of amountspayable or receivable for investments purchased or sold) wasapproximately 3.4% for the three months ended September 30, 2005compared to 2.4% for the three months ended September 30, 2004.Net realized losses of $1.2 million were generated primarily from thesale of foreign currency forward contracts and fixed maturitysecurities as we sought to manage our foreign currency exposures, totalinvestment returns and the duration of our investmentportfolios.

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As of September 30, 2005, the averageduration of our investment portfolio was approximately 2.8 years withan average credit rating of approximately‘‘AA+’’.

Otherincome. Other income was $1.9 million for the three monthsended September 30, 2005 as compared to $0.3 million for the threemonths ended September 30, 2004. Other income includes the amortizationof deferred revenue relating to assumed environmental liabilityprograms of $1.0 million and amounts recognized on non-traditionalinsurance and reinsurance contracts of $0.8 million. A more detaileddescription of these non-traditional contracts is provided under‘‘—Non-Traditional Contracts’’below.

**Expenses.**

Net losses and lossexpenses. Net losses and loss expenses were $121.1 millionfor the three months ended September 30, 2005 an increase of $43.1million compared to $78.0 million for the three months ended September30, 2004. The increase in net losses and loss expenses is due to theincrease in the number of insurance and reinsurance contracts weentered into, the associated net premiums earned as our insurance andreinsurance portfolios continue to mature and loss and loss expensesincurred. 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 andreinsurance underwritten. Included in our expected ultimate lossesduring the three months ended September 30, 2005 are specific lossestimates on contracts of reinsurance and insurance insuring claimsarising from hurricanes Katrina and Rita. We have received a limitednumber of claim notifications relating to these hurricanes and ourpreliminary estimate of ultimate losses from these events is primarilybased on claims received to date, industry loss estimates, a review ofaffected contracts and discussion with cedants and brokers. Ourestimate of our exposure to ultimate claim costs associated with thesehurricanes based on currently available information is $68.5 millionincluding reinstatement premiums, of which $63.6 million is included innet losses and loss expenses for the three months ended September 30,2005. The actual amount of losses from the hurricanes may varysignificantly from the estimate. In addition to the hurricanes, as ofSeptember 30, 2005, we have received a limited amount of significantreported losses. However, we participate in lines of business whereclaims may not be reported for some period of time after those claimsare incurred.

Our total net loss ratio (calculated by dividingnet losses and loss expenses by net premiums earned) was 120.4%for the three months ended September 30, 2005 an increase of1.4% compared to a total net loss ratio of 119.0% for thethree months ended September 30, 2004. The increase in the total netloss ratio is due to the greater magnitude of the natural catastrophiesthat occurred in the three months ended September 30, 2005 as comparedto those that occurred in the three months ended September 30, 2004.However, the extent of the impact of the actual catastrophes in 2005was mitigated by our purchased retrocessional protection. Changes inour net loss ratios are not unexpected because we are still developingour underwriting portfolios and as such we expect that our net lossratios may continue to be volatile.

Acquisitionexpenses. Acquisition expenses were $23.0 million for thethree months ended September 30, 2005 an increase of $6.6 million, or40.0%, compared to $16.4 million for the three months endedSeptember 30, 2004. The increase in acquisition expenses is due to theincrease in the number of insurance and reinsurance contracts weentered into and the associated net premiums earned.

Ouracquisition cost ratio (calculated by dividing acquisition expenses bynet premiums earned) for the three months ended September 30, 2005 was22.9% a decrease of 2.2% compared to our acquisition costratio of 25.1% for the three months ended September 30, 2004.The decrease is due to four factors. First, our earned premium is nowmore heavily weighted towards specialty insurance which carries loweracquisition costs than specialty reinsurance. Second, we are payingless fronting costs on our specialty insurance lines because we arelicensed in more states and no longer need to utilize frontingcompanies to the same extent in order to write our business. Third, ourceding commission income that we are recovering on our specialtyinsurance segment’s reinsurance treaties has increased as aresult of the restructuring of those treaties during the second quarterof 2005. 

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Finally, we pay less commission in our HBWprogram because the contracts contain sliding scale commissionprovisions that vary with changes in the selected loss ratio. Deferredacquisition costs include, as of September 30, 2005, $50.7 million ofacquisition expenses on written contracts of insurance and reinsurancethat will by amortized in future periods as the premiums written towhich they relate are earned.

Direct technical servicescosts. Direct technical services costs were $13.1 millionfor the three months ended September 30, 2005 an increase of $7.9million compared to $5.2 million for the three months ended September30, 2004 and were comprised of subcontractor and direct labor expenses.Direct technical services costs, as a percentage of technical servicesrevenues, was approximately 82.0% for the three months endedSeptember 30, 2005, an increase of 14.3% compared to67.7% for the three months ended September 30, 2004. Theincrease in direct technical services costs as a percentage of revenueswas attributable to a significant increase in the use of subcontractorsfor environmental projects in 2005 as compared to 2004.

General and administrative expenses. General andadministrative expenses were $23.6 million for the three months endedSeptember 30, 2005 an increase of $9.3 million, or 64.9%,compared to $14.3 million for the three months ended September 30, 2004and were comprised of $13.7 million of personnel related expenses and$9.9 million of other general and administrative expenses. The increasein general and administrative expenses is due primarily to an increasein the number of employees as we grew our lines of business, especiallyin Europe, and to a lesser extent by increases in auditing, ongoingefforts to achieve Sarbanes-Oxley Section 404 compliance for the yearending December 31, 2005 and information technology development.General and administrative expenses include $21.8 million related toour underwriting segment, including $0.8 million of expenses charged byour technical services segment for information management servicesprovided, and $2.6 million of expenses related to our technicalservices segment.

Our general and administrative expense ratio(calculated by dividing underwriting related general and administrativeexpenses by net premiums written) was 18.8% for the three monthsended September 30, 2005 an increase of 4.4% compared to14.4% for the three months ended September 30, 2004 due to theadditional number of employees hired and development of ourinfrastructure as we grew our lines of business during 2005.

Depreciation and amortization of intangibleassets. Depreciation and amortization of intangible assetswas $1.1 million for the three months ended September 30, 2005 anincrease of $0.5 million compared to $0.6 million for the three monthsended September 30, 2004 and consisted of amortization of intangibleassets related to the acquisition of ESC and depreciation of fixedassets. The increase in depreciation and amortization is due to thepurchase of additional fixed assets throughout 2004 and 2005 as we grewour lines of business.

We have not recorded any net deferredincome tax benefits or assets relating to tax operating lossesgenerated by our subsidiaries since our results of operations include a100% valuation allowance against net deferred tax assets. Forthe three months ended September 30, 2005, the net valuation allowanceincreased by approximately $3.7 million, to $18.1million.

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Nine months ended September 30, 2005 and2004

Results of operations for the nine months ended September30, 2005 and 2004 were asfollows:

|                                                  |  |                                     |          |                                     |  |        |          |         |  |  |
|--------------------------------------------------|--|-------------------------------------|----------|-------------------------------------|--|--------|----------|---------|--|--|
|                                             |  | Ninemonths ended September 30, 2005 |          | Nine months endedSeptember 30, 2004 |
|                                             |  | ($ inthousands)                     |
| **Revenues**                                     |  |                                |     |                                |  |   |     |    |
| Grosspremiumswritten                             |  | $                                   | 512,816  |                                |  | $      | 370,428  |    |
| Netpremiumswritten                               |  | $                                   | 386,206  |                                |  | $      | 312,487  |    |
| Netpremiumsearned                                |  | $                                   | 297,040  |                                |  | $      | 149,613  |    |
| Technicalservices revenues                       |  |                                | 31,516   |                                |  |   | 22,580   |    |
| Netinvestment income                             |  |                                | 18,403   |                                |  |   | 9,811    |    |
| Netrealized gains oninvestments                  |  |                                | (789     | )                              |  |   | 665      |    |
| Net foreignexchange (losses)gains                |  |                                | (336     | )                              |  |   | 85       |    |
| Otherincome                                      |  |                                | 5,540    |                                |  |   | 690      |    |
| Totalrevenues                                    |  |                                | 351,374  |                                |  |   | 183,444  |    |
| **Expenses**                                     |  |                                |     |                                |  |   |     |    |
| Netlosses and lossexpenses                       |  |                                | (241,102 | )                              |  |   | (126,176 | )  |
| Acquisitionexpenses                              |  |                                | (62,718  | )                              |  |   | (35,885  | )  |
| Directtechnical servicescosts                    |  |                                | (23,993  | )                              |  |   | (15,442  | )  |
| General andadministrativeexpenses                |  |                                | (68,427  | )                              |  |   | (44,700  | )  |
| Interestexpense                                  |  |                                | (2,971   | )                              |  |   | —  |    |
| Depreciationand amortization of intangibleassets |  |                                | (2,879   | )                              |  |   | (1,397   | )  |
| Totalexpenses                                    |  |                                | (402,090 | )                              |  |   | (223,600 | )  |
| Lossbefore incometaxes                      |  |                                | (50,716  | )                              |  |   | (40,156  | )  |
| Incometaxes                                      |  |                                | 482      |                                |  |   | —  |    |
| Netloss                                          |  | $                                   | (51,198  | )                              |  | $      | (40,156  | )  |
|                                                  |

**Revenues. **

Substantiallyall of our revenues were generated by our underwriting subsidiaries inBermuda, the U.S and Europe. Technical services revenues were derivedfrom the operations of ESC.

Premiums. Grosspremiums written were $512.8 million for the nine months endedSeptember 30, 2005, an increase of $142.4 million, or 38.4%,compared to $370.4 million for the nine months ended September 30,2004. The increase of $142.4 million in gross premiums written reflectsgrowth in all of our business lines except property reinsurance.

We expect during the remainder of 2005 and during 2006 that ourinsurance gross and net premiums written will continue to grow and thatour Lloyd’s syndicate will become a more significant contributoras we focus on continuing to execute our business strategy.

Premiums ceded were $126.6 million for the nine months endedSeptember 30, 2005 an increase of $68.6 million compared to $58.0million for the nine months ended September 30, 2004. The increase inpremiums ceded primarily reflects the increase in our gross premiumswritten and the reinsurance treaties that we have entered into for ourproduct lines in order to limit our net loss exposures to our plannednet limits and to control our aggregate exposures to particular classesof risk. These reinsurance treaties provide us with reinsuranceprotection on either a quota share, excess of loss treaty orfacultative basis for policies written in our insurance product linesof business. The increase in premiums ceded is attributable to a lesserextent to approximately $31.7 million of purchased retrocessionalprotection, including reinstatement premiums, in our specialtyreinsurance segment that is intended to limit our net loss exposures tonatural catastrophe events.

Net premiums earned were $297.0million for the nine months ended September 30, 2005 an increase of$147.4 million, or 98.5%, compared to $149.6 million for thenine months ended September 

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30, 2004 reflecting the earning of premiumson contracts written during the nine months ended September 30, 2005and during the year ended December 31, 2004. We expect that our netpremiums earned will increase in future periods as our underwritingsegments continue to grow and as our existing portfolios mature. Ournet premiums written are typically earned over the risk periods of theunderlying insurance policies which are generally twelvemonths.

Technical services revenues. Technicalservices revenues were $31.5 million for the nine months endedSeptember 30, 2005 an increase of $8.9 million, or 39.6%,compared to $22.6 million for the nine months ended September 30, 2004.This increase in technical services revenues is attributable toincreased remediation revenues associated with liability transferprojects in Buffalo, New York and Axis, Alabama and an overall increasein labor revenue from existing and new projects.

Netinvestment income and net realized (losses) gains. Netinvestment income and net realized (losses) gains totaled $17.6 millionfor the nine months ended September 30, 2005 an increase of $7.1million, or 68.1%, compared to $10.5 million for the nine monthsended September 30, 2004. The increase of $7.1 million is attributableto the larger amount of invested assets and to a lesser extent byincreases in interest rates.

Net investment income was $18.4million for the nine months ended September 30, 2005 and was derivedprimarily from interest earned on fixed maturity and short terminvestments, partially offset by investment management fees andamortization of discounts on fixed maturity investments. Our averageannualized effective yield (calculated by dividing net investmentincome by the average amortized cost of invested assets, net of amountspayable or receivable for investments purchased or sold) wasapproximately 3.3% for the nine months ended September 30, 2005.Net realized losses during the nine months ended September 30, 2005 of$0.8 million were generated primarily from the sale of foreign currencyforward contracts and fixed maturity securities as we sought to manageour foreign currency exposure, total investment returns and theduration of our investment portfolios.

Otherincome. Other income was $5.5 million for the nine monthsended September 30, 2005 and includes amounts recognized onnon-traditional insurance and reinsurance contracts of $3.2 million andthe amortization of deferred revenue relating to assumed environmentalliabilities programs of $1.1 million. A more detailed description ofthese non-traditional contracts is provided under‘‘—Non-Traditional Contracts’’below.

**Expenses.**

Net losses and lossexpenses. Net losses and loss expenses were $241.1 millionfor the nine months ended September 30, 2005 an increase of $114.9million, or 91.1%, compared to $126.2 million for the ninemonths ended September 30, 2004. The increase in net losses and lossexpenses is due to the increase in the number of insurance andreinsurance contracts we entered into and the associated net premiumsearned as our insurance and reinsurance portfolios continue to mature.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. Included in our expected ultimate losses during the ninemonths ended September 30, 2005 are specific loss estimates oncontracts of reinsurance and insurance insuring claims arising fromhurricanes Katrina and Rita. We have received a limited number of claimnotifications and our preliminary estimate of ultimate losses fromthese events is primarily based on claims received to date, industryloss estimates, a review of affected contracts and discussion withcedants and brokers. Our estimate of our exposure to ultimate claimcosts associated with these hurricanes based on currently availableinformation is $68.5 million including reinstatement premiums, of which$63.6 million is included in net losses and loss expenses for the ninemonths ended September 30, 2005. The actual amount of losses from thehurricanes may vary significantly from the estimate. Also included inour expected ultimate losses during the nine months ended September 30,2005 are reported loss estimates, including $7.5 million related todamage caused by an oil pipeline in California which ruptured during amudslide in the first quarter of 2005, for which the damage is coveredby an insurance contract issued by our environmental liability productline. In addition to the hurricanes, as of September 30, 2005, we havereceived a limited amount of significant reported losses other than

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described above. However, we participate inlines of business where claims may not be reported for some period oftime after those claims are incurred.

Our total net loss ratio(calculated by dividing net losses and loss expenses by net premiumsearned) was 81.2% for the nine months ended September 30, 2005 adecrease of 3.1% compared to a total net loss ratio of84.3% for the three months ended September 30, 2004. Thedecrease in the total net loss ratio is partially due to thereinsurance protection that we have purchased during 2005 to help limitour net loss exposures to natural catastrophes and also due to thegrowth in our net earned premiums compared to the nine months endedSeptember 30, 2004. Changes in our net loss ratios are not unexpectedbecause we are still in the developing of our underwriting portfoliosand as such we expect that our net loss ratios may continue to bevolatile.

Acquisition expenses. Acquisitionexpenses were $62.7 million for the nine months ended September 30,2005 an increase of $26.8 million, or 74.8%, compared to $35.9million for the nine months ended September 30, 2004. The increase inacquisition expenses is due to the increase in the number of insuranceand reinsurance contracts we entered into and the associated netpremiums earned.

Our acquisition cost ratio (calculated bydividing acquisition expenses by net premiums earned) for the ninemonths ended September 30, 2005 was 21.1% a decrease of2.9% compared to our acquisition cost ratio of 24.0% forthe nine months ended September 30, 2004. The decrease is due to fourfactors. First, our earned premium is now more heavily weighted towardsspecialty insurance which carries lower acquisition costs thanspecialty reinsurance. Second, we are paying less fronting costs on ourspecialty insurance lines because we are licensed in more states and nolonger need to utilize fronting companies to the same extent in orderto write our business. Third, our ceding commission income that we arerecovering on our specialty insurance segment’s reinsurancetreaties has increased as a result of the restructuring of thosetreaties during the second quarter. Finally, we pay less commission inour HBW program because the contracts contain sliding scale commissionprovisions that vary with changes in the selected loss ratio.

Direct technical services costs. Direct technicalservices costs were $24.0 million for the nine months ended September30, 2005 an increase of $8.6 million, or 55.4%, compared to$15.4 million for the nine months ended September 30, 2004 and werecomprised of subcontractor and direct labor expenses. Direct technicalservices costs, as a percentage of technical services revenues, wasapproximately 76.1% for the nine months ended September 30,2005, an increase of 7.7% compared to 68.4% for the ninemonths ended September 30, 2004. The increase in direct technicalservices costs as a percentage of revenues was primarily due to asignificant increase in the use of subcontractors for environmentalprojects in 2005 as compared to 2004.

General andadministrative expenses. General and administrative expenseswere $68.4 million for the nine months ended September 30, 2005 anincrease of $23.7 million, or 53.1%, compared to $44.7 millionfor the nine months ended September 30, 2004 and were comprised of$41.6 million of personnel related expenses and $26.8 million of othergeneral and administrative expenses. The increase in general andadministrative expenses is due primarily to an increase in the numberof employees, especially in Europe, as we grew our lines of businessand to a lesser extent the build out of our infrastructure andSarbanes-Oxley Section 404 compliance costs. General and administrativeexpenses include $63.0 million related to our underwriting segment,including $2.4 million of expenses charged by our technical servicessegment for information management services provided, and $7.8 millionof expenses related to our technical services segment.

Ourgeneral and administrative expense ratio (calculated by dividingunderwriting related general and administrative expenses by netpremiums written) was 16.3% for the nine months ended September30, 2005 an increase of 3.8% compared to 12.5% for thenine months ended September 30, 2004 due to the additional number ofemployees hired and development of our infrastructure as we grew ourlines of business during 2005.

Depreciation and amortizationof intangible assets. Depreciation and amortization ofintangible assets was $2.9 million for the nine months ended September30, 2005 an increase of $1.5 million 

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compared to $1.4 million for the nine monthsended September 30, 2004 and consisted of amortization of intangibleassets related to the acquisition of ESC and depreciation of fixedassets. The increase in depreciation and amortization is due to thepurchase of additional fixed assets throughout 2004 and 2005 as we grewour lines of business.

We have not recorded any net deferredincome tax benefits or assets relating to tax operating lossesgenerated by our subsidiaries since our results of operations include a100% valuation allowance against net deferred tax assets. Forthe nine months ended September 30, 2005, the net valuation allowancewas approximately $4.7 million.

Results by OperatingSegments

**Underwriting**

We principallyprovide insurance and reinsurance protection for risks that are oftenunusual or difficult to place, that do not fit the underwritingcriteria of standard commercial product carriers and that requireextensive technical underwriting and assessment resources in order tobe profitably underwritten. Our underwriting objective is to deploycapital to what we believe are the most attractive lines of business atthe most opportune times in order to maximize our risk-adjusted returnson capital. In measuring the performance of our specialty insurance andspecialty reinsurance segments, we consider each segment’s netunderwriting income and a number of financial ratios. Net underwritingincome is the sum of net premiums earned less net losses and lossexpenses, acquisition expenses and direct and allocated general andadministrative expenses. The financial ratios we use include the netloss and loss expense ratio, the acquisition expense ratio and thegeneral and administrative expense ratio. Our net loss and loss expenseratio is calculated as net losses and loss expenses incurred divided bynet premiums earned. Our acquisition expense ratio is calculated bydividing acquisition expenses by net premiums earned. Our net loss andloss expense ratio and acquisition expense ratio provide a measure ofthe current profitability of the earned portions of our writteninsurance and reinsurance contracts. Our general and administrativeexpense ratio is calculated by dividing underwriting related generaland administrative expenses by net premiums written and indicates thelevel of indirect costs that we incur in acquiring and writinginsurance and reinsurance business. Our combined ratio is the aggregateof our loss and loss expense, acquisition expense and general andadministrative expense ratios. We believe that these financial ratiosappropriately reflect the profitability of our underwriting segments. Acombined ratio of less than 100% indicates an underwritingprofit and over 100%, an underwriting loss. Because we have alimited operating history, our combined ratio may be subject tosignificant volatility and may not be indicative of futureprofitability.

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

During thethree months ended September 30, 2005, we changed the composition ofour reportable segments to aggregate the Lloyd’s operatingsegment with our specialty insurance reportable segment. We aggregatedthese segments to reflect that we operate these insurance businesses asone and that the Lloyd’s business is very similar to theinsurance business we write in the United States. Our Lloyd’soperations were previously reported as a separate segment. Since ourLloyd’s syndicate was not established until the fourth quarterof 2004, the previously reported segment information, and reviewthereof, for the three and nine months ended September 30, 2004 is notimpacted.

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Three months ended September 30,2005 and 2004

The following table summarizes our netunderwriting results and profitability measures for our segments forthe three months ended September 30, 2005 and2004:

Specialtyinsurance

|                                        |  |                                     |         |                                     |  |        |         |         |  |        |         |          |  |  |
|----------------------------------------|--|-------------------------------------|---------|-------------------------------------|--|--------|---------|---------|--|--------|---------|----------|--|--|
|                                   |  | Threemonthsended September 30, 2005 |         | Three monthsended September 30,2004 |  | Change |
|                                   |  | ($ inthousands)                     |
| Gross premiumswritten                  |  | $                                   | 97,348  |                                |  | $      | 69,518  |    |  | $      | 27,830  |     |
| Premiumsceded                          |  |                                | (35,258 | )                              |  |   | (28,285 | )  |  |   | (6,973  | )   |
| Netpremiumswritten                     |  | $                                   | 62,090  |                                |  | $      | 41,233  |    |  | $      | (20,857 | )   |
| Netpremiumsearned                      |  | $                                   | 51,034  |                                |  | $      | 20,516  |    |  | $      | 30,518  |     |
| Otherloss                              |  |                                | (42     | )                              |  |   | — |    |  |   | (42     | )   |
| Netlosses and lossexpenses             |  |                                | (35,550 | )                              |  |   | (12,084 | )  |  |   | (23,466 | )   |
| Acquisitionexpenses                    |  |                                | (9,280  | )                              |  |   | (5,292  | )  |  |   | (3,988  | )   |
| Generaland administrativeexpenses      |  |                                | (15,539 | )                              |  |   | (7,562  | )  |  |   | (7,977  | )   |
| Netunderwritingloss                    |  | $                                   | (9,377  | )                              |  | $      | (4,422  | )  |  | $      | (4,955  | )   |
| Ratios:                                |  |                                |    |                                |  |   |    |    |  |   |    |     |
| Lossand loss expenseratio              |  |                                | 69.7    | %                              |  |   | 58.9    | %  |  |   | (10.8   | )%  |
| Acquisitionexpenseratio                |  |                                | 18.2    | %                              |  |   | 25.8    | %  |  |   | 7.6     | %   |
| Generaland administrative expenseratio |  |                                | 25.0    | %                              |  |   | 18.3    | %  |  |   | (6.7    | )%  |
| Combinedratio                          |  |                                | 112.9   | %                              |  |   | 103.0   | %  |  |   | (9.9    | )%  |
|                                        |

Premiums. Grossand net written premiums were $97.3 million and $62.1 million for thethree months ended September 30, 2005 compared to $69.5 million and$41.2 million for the three months ended September 30, 2004. Theincrease in our specialty insurance segment’s gross and netpremiums written was due primarily to the contribution of $12.3million, or 12.6% of the specialty insurance segment’sgross written premium, from our Lloyd’s syndicate and reflectscontinued growth in nearly all of our insurance business lines. Theincrease reflects our increasing participation in the insurancemarketplace and development of our insurance portfolios.

Afterthe end of the third quarter of 2005, we discontinued the writing ofnew and most renewal business in our technical risk property line ofbusiness. We did not discontinue or make changes in our programbusinesses, including our HBW program. In addition, as part of our planto retain our A.M. Best rating, we intend to reduce or eliminate ourexposure in our technical risk property insurance (other than theprogram business which is included in the technical risk propertyproduct line) and property reinsurance lines to address A.M.Best's revised capital requirements associated with thisbusiness.

The table below shows gross and net written premiumsby product line for the three months ended September 30, 2005 and 2004whether written on a traditional insurance, programs or structuredbasis. The gross and net written premium generated by ourLloyd’s syndicate is included in the professional liabilityproduct line.

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|                               |  |                                      |        |                                     |  |                      |        |                   |  |        |         |        |  |        |         |        |  |  |
|-------------------------------|--|--------------------------------------|--------|-------------------------------------|--|----------------------|--------|-------------------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                          |  | Threemonths ended September 30, 2005 |        | Three monthsended September 30,2004 |
|                          |  | ($ inthousands)                      |
|                          |  | Grosswrittenpremium                  |        | Netwrittenpremium                   |  | Gross writtenpremium |        | Netwrittenpremium |
| Technical risk property       |  | $                                    | 41,671 |                                |  | $                    | 26,220 |              |  | $      | 38,697  |   |  | $      | 21,766  |   |
| Professionalliability         |  |                                 | 26,907 |                                |  |                 | 17,589 |              |  |   | 13,013  |   |  |   | 9,916   |   |
| Environmentalliability        |  |                                 | 17,852 |                                |  |                 | 9,847  |              |  |   | 12,607  |   |  |   | 6,545   |   |
| Surety                        |  |                                 | 3,561  |                                |  |                 | 2,928  |              |  |   | 1,677   |   |  |   | 1,246   |   |
| Fidelityandcrime              |  |                                 | 2,704  |                                |  |                 | 1,241  |              |  |   | 2,465   |   |  |   | 701     |   |
| Tradecredit and politicalrisk |  |                                 | 1,830  |                                |  |                 | 1,442  |              |  |   | — |   |  |   | — |   |
| Other                         |  |                                 | 1,822  |                                |  |                 | 1,822  |              |  |   | — |   |  |   | — |   |
| Structuredinsurance           |  |                                 | 1,001  |                                |  |                 | 1,001  |              |  |   | 1,059   |   |  |   | 1,059   |   |
| Total                         |  | $                                    | 97,348 |                                |  | $                    | 62,090 |              |  | $      | 69,518  |   |  | $      | 41,233  |   |
|                               |

Duringthe three months ended September 30, 2005 we continued to write, in ourtechnical risk property product line, the HBW program, which accountedfor approximately $35.9 million, or 86.1%, of the technical riskproperty line of business and 36.9% of total specialty insurancesegment gross written premiums in the three months ended September 30,2005. The policies in the program are underwritten by third party agentwho follows our underwriting guidelines. We believe this agent is anestablished specialist in this technical field. While we havediscontinued the writing of new and most renewal business in ourtechnical risk property line of business, we have not discontinued theprograms that are part of the technical risk property line and weexpect that the HBW program will continue to contribute substantial netwritten premiums during the remainder of 2005. We also expect that wewill experience further growth and diversification in our otherspecialty insurance lines of business.

Ceded premiums were $35.3million during the three months ended September 30, 2005 an increase of$7.0 million compared to $28.3 million for the three months endedSeptember 30, 2004. The increase in ceded premiums reflects theincrease in our gross written premiums and the reinsurance treatiesthat we have entered into for our specialty insurance product lines inorder to limit our net loss exposures to our planned net limits and tocontrol our aggregate exposures to particular classes of risk. Netpremiums earned during the three months ended September 30, 2005 were$51.0 million representing the earning and amortization of premiumswritten and ceded during the year ended December 31, 2004 and the ninemonths ended September 30, 2005. 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.

Otherloss. Other loss was negligible for the three months endedSeptember 30, 2005 and related to income, including fees, recognized onnon-traditional insurance contracts. A more detailed description ofthese non-traditional contracts is provided under‘‘—Non-Traditional Contracts’’below.

Net losses and loss expenses. Net losses andloss expenses were $35.6 million for the three months ended September30, 2005 an increase of $23.5 million compared to $12.1 million for thethree months ended September 30, 2004. The increase of $23.5 million innet losses and loss expenses incurred was due to the growth in thenumber of insurance contracts we entered into and the associated netpremiums earned. Net losses and loss expenses were a function of ournet premiums earned and our expected ultimate losses and loss expensesfor reported and unreported claims on contracts of insuranceunderwritten. Included in our expected ultimate losses during the threemonths ended September 30, 2005 are specific loss estimates oncontracts of reinsurance and insurance insuring claims arising fromhurricanes Katrina and Rita. We have received a limited number of claimnotifications and our preliminary estimate of ultimate losses fromthese events is primarily based on 

39

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claims received to date, industry lossestimates, a review of affected contracts and discussion with cedantsand brokers. Our estimate of our specialty insurance segment’sexposure to ultimate claim costs associated with these hurricanes basedon currently available information is $11.4 million includingreinstatement premiums, of which $8.8 million is included in net lossesand loss expenses for the three months ended September 30, 2005. Theactual amount of losses from the hurricanes may vary significantly fromthe estimate. In addition to the hurricanes, as of September 30, 2005,we have received a limited amount of significant reported losses.However, we participate in lines of business where claims may not bereported for some period of time after those claims are incurred.

Our speciality insurance segment net loss ratio (calculated bydividing net losses and loss expenses by net premiums earned) was69.7% for the three months ended September 30, 2005 an increaseof 10.8% compared to a net loss ratio of 58.9% for thethree months ended September 30, 2004. The increase in the specialtyinsurance segment net loss ratio is due to the loss estimates arisingfrom hurricanes Katrina and Rita described above, which are in partoffset by an increase in ceded losses that we are recovering on ourspecialty insurance segment’s reinsurance treaties. We havereceived a limited number of other less significant loss notificationsin our specialty insurance segment. However, we participate in lines ofbusiness where claims may not be reported for some period of time afterthose claims are incurred which is partially offset by reinsurancerecoveries. Changes in our net loss ratios are not unexpected becausewe are still in the early development stages of our underwritingportfolios and as such we expect that our net loss ratios may continueto be volatile.

Acquisition expenses. Acquisitionexpenses were $9.3 million for the three months ended September 30,2005 an increase of $4.0 million compared to $5.3 million for the threemonths ended September 30, 2004. The increase of $4.0 million inacquisition expenses was due to the increase in the number of insurancecontracts we entered into and the associated net premiums earned. Theseacquisition expenses primarily represented brokerage fees, commissionfees and premium tax expenses and were net of ceding commissions earnedon purchased reinsurance treaties.

Our acquisition expense ratiowas 18.2% for the three months ended September 30, 2005 adecrease of 7.6% compared to 25.8% for the three monthsended September 30, 2004. The reduction in our acquisition expenseratio in the specialty insurance segment is due to the fact that we arepaying less fronting costs because we are licensed in more states andno longer need to utilize fronting companies to the same extent inorder to write our insurance business and lower acquisition costs onour technical risk property contracts, including the HBW programdescribed above, during the three months ended September 30, 2005 as aresult of the contracts containing sliding scale commission provisionsthat vary with changes in the selected loss ratio. The reduction in ouracquisition expense ratio is also due to ceding commission income thatwe are earning on the reinsurance treaties that we have entered intofor each of our specialty insurance product lines.

Generaland administrative expenses. Direct and allocated indirectgeneral and administrative expenses totaled $15.5 million for the threemonths ended September 30, 2005 an increase of $7.9 million compared to$7.6 million for the three months ended September 30, 2004. Theincrease in our general and administrative expense ratio was due to theadditional number of employees hired throughout 2004 and 2005 and thecontinued build out of our infrastructure as we grew our specialtyinsurance lines of business. As a result, our general andadministrative expense ratio increased to 25.0% of net premiumswritten for the three months ended September 30, 2005 compared to18.3% for the three months ended September 30,2004.

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Specialtyreinsurance

|                                        |  |                                     |         |                                    |  |        |         |         |  |        |         |          |  |  |
|----------------------------------------|--|-------------------------------------|---------|------------------------------------|--|--------|---------|---------|--|--------|---------|----------|--|--|
|                                   |  | Threemonths ended September 30,2005 |         | Threemonthsended September 30,2004 |  | Change |
|                                   |  | ($ inthousands)                     |
| Gross premiumswritten                  |  | $                                   | 74,194  |                               |  | $      | 47,211  |    |  | $      | 26,983  |     |
| Premiumsceded                          |  |                                | (20,319 | )                             |  |   | (2,475  | )  |  |   | (17,844 | )   |
| Netpremiumswritten                     |  | $                                   | 53,875  |                               |  | $      | 44,736  |    |  | $      | 9,139   |     |
| Netpremiumsearned                      |  | $                                   | 49,512  |                               |  | $      | 45,007  |    |  | $      | 4,505   |     |
| Otherincome                            |  |                                | 865     |                               |  |   | — |    |  |   | 865     |     |
| Netlosses and lossexpenses             |  |                                | (85,582 | )                             |  |   | (65,879 | )  |  |   | (19,703 | )   |
| Acquisitionexpenses                    |  |                                | (13,718 | )                             |  |   | (11,132 | )  |  |   | (2,586  | )   |
| Generaland administrativeexpenses      |  |                                | (6,229  | )                             |  |   | (4,791  | )  |  |   | (1,438  | )   |
| Netunderwritingloss                    |  | $                                   | (55,152 | )                             |  | $      | (36,795 | )  |  | $      | (18,357 | )   |
| Ratios:                                |  |                                |    |                               |  |   |    |    |  |   |    |     |
| Lossand loss expenseratio              |  |                                | 172.9   | %                             |  |   | 146.4   | %  |  |   | (26.5   | )%  |
| Acquisitionexpenseratio                |  |                                | 27.7    | %                             |  |   | 24.7    | %  |  |   | (3.0    | )%  |
| Generaland administrative expenseratio |  |                                | 11.6    | %                             |  |   | 10.7    | %  |  |   | (0.9    | )%  |
| Combinedratio                          |  |                                | 212.2   | %                             |  |   | 181.8   | %  |  |   | (30.4   | )%  |
|                                        |

Premiums. Grossand net premiums written were $74.2 million and $53.9 million for thethree months ended September 30, 2005 compared to $47.2 million and$44.7 of gross and net premiums for the three months ended September30, 2004. The increase in our specialty reinsurance segment’snet written premiums reflects continued growth in our casualty andmarine reinsurance business line which was offset by a decrease in ourproperty reinsurance business line. In addition, during the threemonths ended September 30, 2005 the increase in our ceded premiumswritten reflects approximately $20.3 million of purchasedretrocessional protection, including reinstatement premiums, in ourspecialty reinsurance property and marine, technical risk and aviationproduct lines that is intended to help limit our net loss exposures toour planned net limits and to control our aggregate exposures,predominantly to natural catastophe events. These reinsurance treatiesprovide us with reinsurance protection on an excess of loss, quotashare treaty and facultative basis for policies written in ourreinsurance product lines of business.

After the end of thethird quarter of 2005, we discontinued the writing of new and mostrenewal business in our property reinsurance line of business. Inaddition, as part of our plan to retain our A.M. Best rating, we intendto reduce or eliminate our exposure in our technical risk propertyinsurance (other than the program business which is included in thetechnical risk property product line) and property reinsurance lines toaddress A.M. Best's revised capital requirements associated withthis business. We are also in the process of purchasing additionalretrocessional coverage for our marine, technical risk and aviationreinsurance product line to limit our future probable maximumlosses.

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The table below shows gross and netwritten premiums by product line whether written on a traditionalreinsurance, programs or structuredbasis:

|                                   |  |                                      |        |                                      |  |                      |        |                   |  |        |        |        |  |        |        |        |  |  |
|-----------------------------------|--|--------------------------------------|--------|--------------------------------------|--|----------------------|--------|-------------------|--|--------|--------|--------|--|--------|--------|--------|--|--|
|                              |  | Threemonths ended September 30, 2005 |        | Three monthsended September 30, 2004 |
|                              |  | ($ inthousands)                      |
|                              |  | Grosswrittenpremium                  |        | Netwrittenpremium                    |  | Gross writtenpremium |        | Netwrittenpremium |
| Casualty                          |  | $                                    | 39,964 |                                 |  | $                    | 39,964 |              |  | $      | 17,501 |   |  | $      | 17,501 |   |
| Marine,technical risk andaviation |  |                                 | 20,869 |                                 |  |                 | 8,984  |              |  |   | 10,346 |   |  |   | 7,871  |   |
| Property                          |  |                                 | 13,361 |                                 |  |                 | 4,927  |              |  |   | 19,364 |   |  |   | 19,364 |   |
| Total                             |  | $                                    | 74,194 |                                 |  | $                    | 53,875 |              |  | $      | 47,211 |   |  | $      | 44,736 |   |
|                                   |

Grossreinsurance premiums written are being earned over the periods ofreinsured or underlying insured risks which are typically one year.Gross premiums written and ceded premiums are earned over the period ofeach insured risk.

Net premiums earned of $49.5 million reflectthe earning of premiums on contracts written during the year endedDecember 31, 2004 and during the nine months ended September 30,2005.

Other income. Other income was $0.9 millionfor the three months ended September 30, 2005 and related to income,including fees, recognized on non-traditional reinsurance contracts. Amore detailed description of these non-traditional contracts isprovided under ‘‘—Non-TraditionalContracts’’ below.

Net losses and lossexpenses. Net losses and loss expenses were $85.6 millionfor the three months ended September 30, 2005 an increase of $19.7million compared to $65.9 million for the three months ended September30, 2004. This increase was due to the increase in the number ofreinsurance contracts we entered into and the associated net premiumsearned. Net losses and loss expenses are a function of our net premiumsearned and our expected ultimate losses and loss expenses for reportedand unreported claims on contracts of reinsurance underwritten.Included in our expected ultimate losses during the three months endedSeptember 30, 2005 are specific loss estimates on contracts ofreinsurance insuring claims arising from hurricanes Katrina and Rita.We have received a limited number of claim notifications and ourpreliminary estimate of ultimate losses from these events is primarilybased on claims received to date, industry loss estimates, a review ofaffected contracts and discussion with cedants and brokers. Ourestimate of our specialty reinsurance segment’s exposure toultimate claim costs associated with these hurricanes based oncurrently available information is $57.1 million includingreinstatement premiums, of which $54.7 million is included in netlosses and loss expenses for the three months ended September 30, 2005.The actual amount of losses from the hurricanes may vary significantlyfrom the estimate. In addition to the hurricanes during the threemonths ended September 30, 2005, we have received a limited amount ofsignificant reported losses. However, we participate in lines ofbusiness where claims may not be reported for some period of time afterthose claims are incurred.

Our speciality reinsurance segmentnet loss ratio (calculated by dividing net losses and loss expenses bynet premiums earned) was 172.9% for the three months endedSeptember 30, 2005 an increase of 26.5% compared to a net lossratio of 146.4% for the three months ended September 30, 2004.The increase in the specialty reinsurance segment net loss ratio is dueto the greater magnitude of the natural catastrophies that occurred inthe three months ended September 30, 2005 as compared to those thatoccurred in the three months ended September 30, 2004. However, theextent of the impact of the natural catastrophes in 2005 was mitigatedby our purchased retrocessional protection. We have received a limitednumber of other less significant loss notifications in our specialtyinsurance segment. However, we participate in lines of business whereclaims may not be reported for some period of time after those claimsare incurred. Changes in our net loss ratios are not unexpected becausewe are still developing our underwriting portfolios and as such weexpect that our net loss ratios may continue to be volatile.

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Acquisitionexpenses. Acquisition expenses were $13.7 million for thethree months ended September 30, 2005 an increase of $2.6 million, or23.2%, compared to $11.1 million for the three months endedSeptember 30, 2004. The increase in acquisition expenses was due to theincrease in the number of reinsurance contracts we entered into and theassociated net premiums earned. These acquisition expenses primarilyrepresented brokerage and ceding commissions. Our acquisition expenseratio was 27.7% for the three months ended September 30, 2005 anincrease of 3.0% compared to 24.7% for the three monthsended September 30, 2004. This increase is primarily due to changes inour mix of business and the type and nature of contracts written andthe impact of ceded reinstatement premiums reducing our net earnedpremium.

General and administrativeexpenses. Direct and allocated indirect general andadministrative expenses totaled $6.2 million for the three months endedSeptember 30, 2005, an increase of $1.4 million compared to $4.8million for the three months ended September 30, 2004. Our general andadministrative expense ratio was 11.6% of net premiums writtenfor the three months ended September 30, 2005 an increase of0.9% compared to 10.7% for the three months endedSeptember 30, 2004 and was primarily due to the additional number ofemployees hired throughout 2004 and 2005.

Technicalservices

|                                   |  |                                   |         |                                    |  |        |        |         |  |        |        |         |  |  |
|-----------------------------------|--|-----------------------------------|---------|------------------------------------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                              |  | ThreemonthsendedSeptember 30,2005 |         | Three monthsendedSeptember 30,2004 |  | Change |
|                              |  | ($ inthousands)                   |
| Technical servicesrevenues        |  | $                                 | 16,852  |                               |  | $      | 8,246  |    |  | $      | 8,606  |    |
| Otherincome                       |  |                              | 1,035   |                               |  |   | 74     |    |  |   | 961    |    |
| Directtechnical servicescosts     |  |                              | (13,133 | )                             |  |   | (5,231 | )  |  |   | (7,902 | )  |
| Generaland administrativeexpenses |  |                              | (2,594  | )                             |  |   | (2,460 | )  |  |   | (134   | )  |
| Nettechnical servicesincome       |  | $                                 | 2,160   |                               |  | $      | 629    |    |  | $      | 1,531  |    |
|                                   |

Technicalservices revenues. Technical services revenues were $16.9million for the three months ended September 30, 2005, an increase of$8.6 million compared to $8.2 million for the three months endedSeptember 30, 2004. The increase of $8.6 million in technical servicesrevenues is attributable to increased remediation revenues associatedwith liability transfer projects in Buffalo, New York and Axis,Alabama.

Other income. Other income was $1.0million for the three months ended September 30, 2005 compared to $0.1million for the three months ended September 30, 2004. Other income wasgenerated from our environmental liability assumption programs andprimarily from a new project in Buffalo, New York, under which weassume specified environmental liabilities. This income representsreimbursements and other remediation amounts relating to the servicesperformed.

Direct technical services costs. Directtechnical services costs were $13.1 million for the three months endedSeptember 30, 2005, an increase of $7.9 million, or 151.1%,compared to $5.2 million for the three months ended September 30, 2004.The increase in direct technical services costs was primarilyattributable to increased subcontractor expenses which resulted fromthe Buffalo, New York and Axis, Alabama remediation projects undertakenduring the three months ended September 30, 2005 compared to the threemonths ended September 30, 2004. Direct technical services costs, as apercentage of revenue was 77.9% for the three months endedSeptember 30, 2005 compared to 63.4% for the three months endedSeptember 30, 2004. The increase in direct technical services costs asa percentage of revenues was attributable to the significant increasein remediation revenue associated with environmental projects in 2005as compared to 2004.

General and administrativeexpenses. Direct and indirect allocated general andadministrative expenses were $2.6 million for the three months endedSeptember 30, 2005 an increase of $0.1 million, or 5.4% comparedto $2.5 million for the three months ended September 30, 2004. Theincrease is attributable to increased staffing levels and higheroverhead allocation arising from the development of our infrastructureand Sarbanes-Oxley Section 404 complianceefforts.

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Nine months ended September 30, 2005and 2004

The following table summarizes our netunderwriting results and profitability measures for our segments forthe nine months ended September 30, 2005 and 2004:

Specialtyinsurance

|                                        |  |                                  |         |                                  |  |        |         |         |  |        |         |          |  |  |
|----------------------------------------|--|----------------------------------|---------|----------------------------------|--|--------|---------|---------|--|--------|---------|----------|--|--|
|                                   |  | NinemonthsendedSeptember 30,2005 |         | Nine monthsendedSeptember30,2004 |  | Change |
|                                   |  | ($ inthousands)                  |
| Gross premiumswritten                  |  | $                                | 299,059 |                             |  | $      | 175,389 |    |  | $      | 123,670 |     |
| Premiumsceded                          |  |                             | (94,944 | )                           |  |   | (55,466 | )  |  |   | (39,478 | )   |
| Netpremiumswritten                     |  | $                                | 204,115 |                             |  | $      | 119,923 |    |  | $      | 84,192  |     |
| Netpremiumsearned                      |  | $                                | 141,026 |                             |  | $      | 42,148  |    |  | $      | 98,878  |     |
| Otherincome                            |  |                             | 787     |                             |  |   | — |    |  |   | 787     |     |
| Netlosses and lossexpenses             |  |                             | (92,200 | )                           |  |   | (23,098 | )  |  |   | (69,102 | )   |
| Acquisitionexpenses                    |  |                             | (23,213 | )                           |  |   | (10,451 | )  |  |   | (12,762 | )   |
| Generaland administrativeexpenses      |  |                             | (45,523 | )                           |  |   | (23,607 | )  |  |   | (21,916 | )   |
| Netunderwritingloss                    |  | $                                | (19,123 | )                           |  | $      | (15,008 | )  |  | $      | (4,115  | )   |
| Ratios:                                |  |                             |    |                             |  |   |    |    |  |   |    |     |
| Lossand loss expenseratio              |  |                             | 65.4    | %                           |  |   | 54.8    | %  |  |   | (10.6   | )%  |
| Acquisitionexpenseratio                |  |                             | 16.5    | %                           |  |   | 24.8    | %  |  |   | 8.3     | %   |
| Generaland administrative expenseratio |  |                             | 22.3    | %                           |  |   | 19.7    | %  |  |   | (2.6    | )%  |
| Combinedratio                          |  |                             | 104.2   | %                           |  |   | 99.3    | %  |  |   | (4.9    | )%  |
|                                        |

Premiums. Grossand net written premiums were $299.1 million and $204.1 million for thenine months ended September 30, 2005 compared to $175.4 million and$119.9 million for the nine months ended September 30, 2004. Theincrease in our specialty insurance segment’s gross and netpremiums written was due primarily to the contribution of $53.2million, or 17.8%, of the specialty insurance segment’sgross written premium, from our Lloyd’s syndicate and continuedgrowth in all of our insurance business lines. The increase reflectsour increasing participation in the insurance marketplace anddevelopment of our insurance portfolios and is consistent with ourstrategy to grow our specialty insurance product lines.

Afterthe end of the third quarter of 2005, we discontinued the writing ofnew and most renewal business in our technical risk property line ofbusiness. We did not discontinue or make changes in our programbusinesses, including our HBW program. In addition, as part of our planto retain our A.M. Best rating, we intend to reduce or eliminate ourexposure in our technical risk property insurance (other than theprogram business which is included in the technical risk propertyproduct line) and property reinsurance lines to address A.M.Best's revised capital requirements associated with thisbusiness.

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The table below shows gross writtenpremiums by product line for the nine months ended September 30, 2005and 2004 whether written on a traditional insurance, programs orstructured basis. The gross and net written premium generated by ourLloyd’s syndicate is included in the professional liabilityproductline.

|                               |  |                                    |         |                                    |  |                     |         |                   |  |        |         |        |  |        |         |        |  |  |
|-------------------------------|--|------------------------------------|---------|------------------------------------|--|---------------------|---------|-------------------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                          |  | Ninemonthsended September 30, 2005 |         | Nine monthsendedSeptember 30, 2004 |
|                          |  | ($ inthousands)                    |
|                          |  | Grosswrittenpremium                |         | Netwrittenpremium                  |  | Grosswrittenpremium |         | Netwrittenpremium |
| Technical risk property       |  | $                                  | 143,274 |                               |  | $                   | 94,646  |              |  | $      | 106,234 |   |  | $      | 75,820  |   |
| Professionalliability         |  |                               | 94,970  |                               |  |                | 70,797  |              |  |   | 28,089  |   |  |   | 20,361  |   |
| Environmentalliability        |  |                               | 33,431  |                               |  |                | 19,216  |              |  |   | 30,798  |   |  |   | 17,525  |   |
| Fidelityandcrime              |  |                               | 10,253  |                               |  |                | 5,464   |              |  |   | 6,976   |   |  |   | 3,477   |   |
| Surety                        |  |                               | 9,195   |                               |  |                | 7,046   |              |  |   | 2,233   |   |  |   | 1,681   |   |
| Tradecredit and politicalrisk |  |                               | 5,010   |                               |  |                | 4,020   |              |  |   | — |   |  |   | — |   |
| Other                         |  |                               | 1,822   |                               |  |                | 1,822   |              |  |   | — |   |  |   | — |   |
| Structuredinsurance           |  |                               | 1,104   |                               |  |                | 1,104   |              |  |   | 1,059   |   |  |   | 1,059   |   |
| Total                         |  | $                                  | 299,059 |                               |  | $                   | 204,115 |              |  | $      | 175,389 |   |  | $      | 119,923 |   |
|                               |

Duringthe nine months ended September 30, 2005 we continued to write, in ourtechnical risk property product line, the HBW program, which accountedfor approximately $129.3 million, or 90.3%, of the technicalrisk property line of business and 43.2% of total specialtyinsurance segment gross written premiums in the nine months endedSeptember 30, 2005. We are no longer writing business in our technicalrisk property line other than the programs that are part of that line,including the HBW program. The policies in the program are underwrittenthrough a third party agent which follows our underwriting guidelines.We believe that this third party is an established specialist in thistechnical field. We expect that this program will continue tocontribute substantial net written premiums during the remainder of2005 and that we will experience further growth and diversification inour other specialty insurance lines of business. Our HBW gross premiumswritten during the nine months ended September 30, 2005 are summarizedin the table below by specialty risk class.

|           |  |              |       |        |  |  |
|-----------|--|--------------|-------|--------|--|--|
|      |  | ($inmillion) |
| Casualty  |  | $            | 108.6 |   |
| Warranty* |  |         | 12.2  |   |
| Property  |  |         | 8.5   |   |
| Total     |  | $            | 129.3 |   |
|           |

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

Approximately 43.2% of ourspecialty insurance segment gross written premiums of $299.1 millionwere generated through our HBW program. The remaining 56.8% ofour specialty insurance segment gross written premiums were generatedthrough a significant number of brokers, one of which accounted for11.5% of our total specialty insurance segment gross writtenpremiums. No other brokers accounted for more than 10% of ourtotal specialty insurance segment gross written premiums.

Cededpremiums were $94.9 million during the nine months ended September 30,2005, an increase of $39.4 million compared to $55.5 million for thenine months ended September 30, 2004. The increase in ceded premiumsreflects the increase in our gross written premiums and the reinsurancetreaties that we have entered into for our specialty insurance productlines in order to limit our net loss exposures to our planned netlimits and to control our aggregate exposures to particular classes ofrisk.

Net premiums earned during the nine months ended September30, 2005 were $141.0 million representing the earning and amortizationof premiums written and ceded during the year ended 

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December 31, 2004 and the nine months endedSeptember 30, 2005. Gross premiums written and ceded premiums areearned over the period of each insured risk. The terms of our insurancecontracts range from between one and ten years with the majority of ourcontracts being for one year.

Other income. Otherincome was $0.8 million for the nine months ended September 30, 2005and related to income, including fees, recognized on non-traditionalinsurance contracts. A more detailed description of thesenon-traditional contracts is provided under‘‘—Non-Traditional Contracts’’below.

Net losses and loss expenses. Net losses andloss expenses were $92.2 million for the nine months ended September30, 2005 an increase of $69.1 million compared to $23.1 million for thenine months ended September 30, 2004. The increase of $69.1 million innet losses and loss expenses incurred was due to the increase in thenumber of insurance contracts we entered into and the associated netpremiums earned. Net losses and loss expenses were a function of ournet premiums earned and our expected ultimate losses and loss expensesfor reported and unreported claims on contracts of insuranceunderwritten. Included in our expected ultimate losses during the threemonths ended September 30, 2005 are specific loss estimates oncontracts of reinsurance and insurance insuring claims arising fromhurricanes Katrina and Rita. We have received a limited number of claimnotifications and our preliminary estimate of ultimate losses fromthese events is primarily based on claims received to date, industryloss estimates, a review of affected contracts and discussion withcedants and brokers. Our estimate of our specialty insurancesegment’s exposure to ultimate claim costs associated with thesehurricanes based on currently available information is $11.4 millionincluding reinstatement premiums, of which $8.8 million is included innet losses and loss expenses for the nine months ended September 30,2005. The actual amount of losses from the hurricanes may varysignificantly from the estimate. Also included in our expected ultimatelosses during the nine months ended September 30, 2005 is $7.5 millionrelated to damages from a ruptured oil pipeline in California whichoccurred during the first quarter of 2005 and that was covered by aninsurance contract issued by our environmental liability product line.In addition to the hurricane losses, as of September 30, 2005, we havereceived a limited amount of significant reported losses, other than asdescribed above. However, we participate in lines of business whereclaims may not be reported for some period of time after those claimsare incurred.

Our specialty insurance segment net loss ratio was65.4% for the nine months ended September 30, 2005 compared to54.8% for the nine months ended September 30, 2004. The increasein our specialty insurance loss ratio is due to the losses arising fromhurricanes Katrina and Rita and our environmental loss described above.We have received a limited number of other less significant lossnotifications in our specialty insurance segment. However, weparticipate in lines of business where claims may not be reported forsome period of time after those claims are incurred.

Acquisition expenses. Acquisition expenses were $23.2million for the nine months ended September 30, 2005 an increase of$12.7 million compared to $10.5 million for the nine months endedSeptember 30, 2004. The increase of $12.7 million in acquisitionexpenses was due to the increase in the number of insurance contractswe entered into and the associated net premiums earned. Theseacquisition expenses primarily represented brokerage fees, commissionfees and premium tax expenses and were net of ceding commissions earnedon purchased reinsurance treaties.

Our acquisition expense ratiowas 16.5% for the nine months ended September 30, 2005 adecrease of 8.3% compared to 24.8% for the nine monthsended September 30, 2004. The reduction in our acquisition expenseratio in the specialty insurance segment is primarily due to the factthat we are paying less fronting costs because we are licensed in morestates and no longer need to utilize fronting companies to the sameextent in order to write our insurance business, to the acquisitioncosts on our HBW program, being lower during the nine months endedSeptember 30, 2005 as a result of the contracts containing slidingscale commission provisions that vary with changes in the selected lossratio. The reduction in our acquisition expense ratio is also due toceding commission income that we are earning on the reinsurancetreaties that we have entered into for our specialty insurance productlines.

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General and administrativeexpenses. Direct and allocated indirect general andadministrative expenses totaled $45.5 million for the nine months endedSeptember 30, 2005, an increase of $21.9 million compared to $23.6million for the nine months ended September 30, 2004. The increase inour general and administrative expense ratio was due to the additionalnumber of employees hired throughout 2004 and 2005 as we grew ourspecialty insurance lines of business and developed ourinfrastructure.

Our general and administrative expense ratio was22.3% of net premiums written for the nine months endedSeptember 30, 2005 an increase of 2.6% compared to 19.7%for the nine months ended September 30, 2004.

Specialtyreinsurance

|                                        |  |                                   |          |                                  |  |        |          |         |  |        |         |          |  |  |
|----------------------------------------|--|-----------------------------------|----------|----------------------------------|--|--------|----------|---------|--|--------|---------|----------|--|--|
|                                   |  | Ninemonthsended September 30,2005 |          | Nine monthsendedSeptember30,2004 |  | Change |
|                                   |  | ($ inthousands)                   |
| Gross premiumswritten                  |  | $                                 | 213,757  |                             |  | $      | 195,039  |    |  | $      | 18,718  |     |
| Premiumsceded                          |  |                              | (31,666  | )                           |  |   | (2,475   | )  |  |   | (29,191 | )   |
| Netpremiumswritten                     |  | $                                 | 182,091  |                             |  | $      | 192,564  |    |  | $      | (10,473 | )   |
| Netpremiumsearned                      |  | $                                 | 156,014  |                             |  | $      | 107,465  |    |  | $      | 48,549  |     |
| Otherincome                            |  |                              | 2,413    |                             |  |   | —  |    |  |   | 2,413   |     |
| Netlosses and lossexpenses             |  |                              | (149,034 | )                           |  |   | (103,078 | )  |  |   | (45,956 | )   |
| Acquisitionexpenses                    |  |                              | (39,505  | )                           |  |   | (25,434  | )  |  |   | (14,071 | )   |
| Generaland administrativeexpenses      |  |                              | (17,527  | )                           |  |   | (15,364  | )  |  |   | (2,163  | )   |
| Netunderwritingincome                  |  | $                                 | (47,639  | )                           |  | $      | (36,411  | )  |  | $      | (11,228 | )   |
| Ratios:                                |  |                              |     |                             |  |   |     |    |  |   |    |     |
| Lossand loss expenseratio              |  |                              | 95.5     | %                           |  |   | 95.9     | %  |  |   | 0.4     | %   |
| Acquisitionexpenseratio                |  |                              | 25.3     | %                           |  |   | 23.7     | %  |  |   | (1.6    | )%  |
| Generaland administrative expenseratio |  |                              | 9.6      | %                           |  |   | 8.0      | %  |  |   | (1.6    | )%  |
| Combinedratio                          |  |                              | 130.4    | %                           |  |   | 127.6    | %  |  |   | (2.8    | %)  |
|                                        |

Premiums. Grossand net premiums written were $213.8 million and $182.1 million for thenine months ended September 30, 2005 compared to $195.0 million ofgross and $192.6 of net premiums for the nine months ended September30, 2004. The increase in our specialty reinsurance segment’sgross written premium reflects continued growth in our casualty andmarine reinsurance product line offset by an decrease in our propertyreinsurance business line. The decrease in our net written premiumreflects approximately $31.7 million in purchased retrocessionalprotection, including reinstatement premiums, that is intended to limitour net loss exposures to natural catastrophe events. These reinsurancetreaties provide us with reinsurance protection on an excess of loss,quota share treaty and facultative basis for policies written in ourreinsurance product lines of business.

After the end of the thirdquarter of 2005, we discontinued the writing of new and most renewalbusiness in our property reinsurance line of business. In addition, aspart of our plan to retain our A.M. Best rating, we intend to reduce oreliminate our exposure in our technical risk property insurance (otherthan the program business which is included in the technical riskproperty product line) and property reinsurance lines to address A.M.Best's revised capital requirements associated with thisbusiness. We are also in the process of purchasing additionalretrocessional coverage for our marine, technical risk and aviationreinsurance product line to limit our future probable maximumlosses.

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The table below shows gross and netwritten premiums by product line whether written on a traditionalreinsurance, programs or structuredbasis:

|                                   |  |                                     |         |                                    |  |                     |         |                   |  |        |         |        |  |        |         |        |  |  |
|-----------------------------------|--|-------------------------------------|---------|------------------------------------|--|---------------------|---------|-------------------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                              |  | Ninemonths ended September 30, 2005 |         | Nine monthsendedSeptember 30, 2004 |
|                              |  | ($ inthousands)                     |
|                              |  | Grosswrittenpremium                 |         | Netwrittenpremium                  |  | Grosswrittenpremium |         | Netwrittenpremium |
| Casualty                          |  | $                                   | 90,289  |                               |  | $                   | 90,289  |              |  | $      | 62,909  |   |  | $      | 62,909  |   |
| Property                          |  |                                | 78,773  |                               |  |                | 63,372  |              |  |   | 97,438  |   |  |   | 97,438  |   |
| Marine,technical risk andaviation |  |                                | 44,695  |                               |  |                | 28,430  |              |  |   | 34,236  |   |  |   | 31,761  |   |
| Structuredreinsurance             |  |                                | — |                               |  |                | — |              |  |   | 456     |   |  |   | 456     |   |
| Total                             |  | $                                   | 213,757 |                               |  | $                   | 182,091 |              |  | $      | 195,039 |   |  | $      | 192,564 |   |
|                                   |

Ourproperty reinsurance gross premiums written during the nine monthsended September 30, 2005 are summarized in the table below by riskclass.

|                                   |  |        |       |         |  |  |
|-----------------------------------|--|--------|-------|---------|--|--|
| Homeownersand commercial property |  |   | 86.7  | %  |
| Crophail                          |  |   | 13.3  | %  |
| Total                             |  |   | 100.0 | %  |
|                                   |

Ourhomeowners and commercial property risk class, which includes a singletreaty covering property risks of small regional accounts throughoutthe U.S., accounted for approximately 86.7% of our totalproperty reinsurance gross premiums written during the nine monthsended September 30, 2005. Our crop hail category covers cropsthroughout the U.S.

Our property premiums written includecontracts written on excess of loss and quota share bases. Of our totalproperty reinsurance gross premiums written for the nine months endedSeptember 30, 2005, 28.1% represents excess of loss contractsthat we believe are exposed to losses from natural catastrophe eventsworldwide. The majority of our property quota share contracts areexposed to natural perils, including natural catastrophes.

Ourcasualty reinsurance gross premiums written during the nine monthsended September 30, 2005 are summarized in the table below by riskclass.

|                                       |  |        |       |         |  |  |
|---------------------------------------|--|--------|-------|---------|--|--|
| Directorsand officers’liability |  |   | 26.4  | %  |
| Other                                 |  |   | 73.6  | %  |
| Total                                 |  |   | 100.0 | %  |
|                                       |

Ourcasualty reinsurance gross premiums written included in our‘‘other’’ casualty category, was spreadacross 22 different risk classes, none of which accounted for more than10% of our casualty reinsurance premiums written for the ninemonths ended September 30, 2005.

Our marine, technical risk andaviation reinsurance gross premiums written during the nine monthsended September 30, 2005 are summarized in the table below by riskclass.

|             |  |        |       |         |  |  |
|-------------|--|--------|-------|---------|--|--|
| Oceanmarine |  |   | 86.3  | %  |
| Aviation    |  |   | 13.7  | %  |
| Total       |  |   | 100.0 | %  |
|             |

Approximately38.6%, 22.4% and 11.6% of our reinsurance segmentgross written premiums were generated through Guy Carpenter &Company, Inc., a subsidiary of Marsh McLennan, and through BenfieldGroup and Rattner MacKenzie.

Gross reinsurance premiums writtenare being earned over the periods of reinsured or underlying insuredrisks which are typically one year. Ceded premiums were $31.7 millionduring the nine months ended September 30, 2005 under the reinsurancetreaties we purchased for our property and marine, technical risk andaviation product lines. Gross premiums written and ceded premiums areearned over the period of each insured risk.

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Net premiums earned of $156.0 millionreflect the earning of premiums on contracts written during the yearended December 31, 2004 and during the nine months ended September 30,2005.

Other income. Other income was $2.4 millionfor the nine months ended September 30, 2005 and related to income,including fees, recognized on non-traditional reinsurance contracts. Amore detailed description of these non-traditional contracts isprovided under ‘‘—Non-TraditionalContracts’’ below.

Net losses and lossexpenses. Net losses and loss expenses were $149.0 millionfor the nine months ended September 30, 2005 an increase of $45.9million, or 44.6%, compared to $103.1 million for the ninemonths ended September 30, 2004. The increase of $45.9 million in netlosses and loss expenses incurred was due to the increase in the numberof reinsurance contracts we entered into and the associated netpremiums earned. Net losses and loss expenses were a function of ournet premiums earned and our expected ultimate losses and loss expensesfor reported and unreported claims on contracts of reinsuranceunderwritten. Included in our expected ultimate losses during the ninemonths ended September 30, 2005 are specific loss estimates oncontracts of reinsurance insuring claims arising from hurricanesKatrina and Rita. We have received a limited number of claimnotifications and our preliminary estimate of ultimate losses fromthese events is primarily based on claims received to date, industryloss estimates, a review of affected contracts and discussion withcedants and brokers. Our estimate of our specialty reinsurancesegment’s exposure to ultimate claim costs associated with thesehurricanes based on currently available information is $57.1 millionincluding reinstatement premiums, of which $54.7 million is included innet losses and loss expenses for the nine months ended September 30,2005. The actual amount of losses from the hurricanes may varysignificantly from the estimate. In addition to the hurricane losses,as of September 30, 2005, we have received a limited amount ofsignificant reported losses. However, we participate in lines ofbusiness where claims may not be reported for some period of time afterthose claims are incurred.

Our speciality reinsurance segmentnet loss ratio (calculated by dividing net losses and loss expenses bynet premiums earned) was 95. 5% for the nine months endedSeptember 30, 2005 a decrease of 0.4% compared to a net lossratio of 95.9% for the nine months ended September 30, 2004. Thedecrease in the specialty reinsurance segment net loss ratio is in partdue to the reinsurance protection that we have purchased during 2005 tolimit our net loss exposures to natural catastrophes and also due tothe growth in our net earned premiums compared to the nine months endedSeptember 30, 2005. We have received a limited number of other lesssignificant loss notifications in our specialty insurance segment.However, we participate in lines of business where claims may not bereported for some period of time after those claims are incurred, whichis partially offset by reinsurance recoveries. Changes in our net lossratios are not unexpected because we are still in the early developmentstages of our underwriting portfolios and as such we expect that ournet loss ratios may continue to be volatile.

Acquisitionexpenses. Acquisition expenses were $39.5 million for thenine months ended September 30, 2005 an increase of $14.1 million, or55.3%, compared to $25.4 million for the nine months endedSeptember 30, 2004. The increase in acquisition expenses was due to theincrease in the number of reinsurance contracts we entered into and theassociated net premiums earned. These acquisition expenses primarilyrepresented brokerage and ceding commissions.

Our acquisitionexpense ratio was 25.3% for the nine months ended September 30,2005, an increase of 1.6% compared to 23.7% for the ninemonths ended September 30, 2004. The increase reflects certaincontracts with higher commission rates that were written during thesecond and third quarters of 2005 in our property and casualtyreinsurance product lines and the impact of ceded reinstatementsreducing our specialty reinsurance segment’s net earnedpremium.

General and administrativeexpenses. Direct and allocated indirect general andadministrative expenses totaled $17.5 million for the nine months endedSeptember 30, 2005 an increase of $2.1 million compared to $15.4million for the nine months ended September 30, 2004. Our general andadministrative expense ratio was 9.6% of net premiums writtenfor the nine months ended September 30, 2005 an increase of 1.6%compared to 8.0% for the nine months ended September 30, 2004and was due to the decrease in our net premiumswritten.

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Technicalservices 

Nine months ended September 30, 2005 and2004

|                                   |  |                                     |         |                                    |  |        |         |         |  |        |        |         |  |  |
|-----------------------------------|--|-------------------------------------|---------|------------------------------------|--|--------|---------|---------|--|--------|--------|---------|--|--|
|                              |  | Ninemonths ended September 30, 2005 |         | Nine monthsended September 30,2004 |  | Change |
|                              |  | ($ inthousands)                     |
| Technical servicesrevenues        |  | $                                   | 34,107  |                               |  | $      | 24,123  |    |  | $      | 9,984  |    |
| Otherincome                       |  |                                | 1,788   |                               |  |   | 351     |    |  |   | 1,437  |    |
| Directtechnical servicescosts     |  |                                | (23,993 | )                             |  |   | (15,442 | )  |  |   | (8,551 | )  |
| Generaland administrativeexpenses |  |                                | (7,836  | )                             |  |   | (7,272  | )  |  |   | (564   | )  |
| Nettechnical servicesincome       |  | $                                   | 4,066   |                               |  | $      | 1,760   |    |  | $      | 2,306  |    |
|                                   |

Technicalservices revenues. Technical services revenues were $34.1million for the nine months ended September 30, 2005, an increase of$10.0 million, or 41.4%, compared to $24.1 million for the ninemonths ended September 30, 2004. The increase of $10.0 million intechnical services revenues is primarily attributable to increasedremediation revenues associated with liability transfer projects inBuffalo, New York and Axis, Alabama and an overall increase in laborrevenue from existing and new projects.

Otherincome. Other income was $1.8 million for the nine monthsended September 30, 2005 as compared to $0.4 million for the ninemonths ended September 30, 2004. Other income was generated from ourliability assumption programs, including a new project in Buffalo, NewYork and implementation of construction in Axis, Alabama, under whichwe assume specified environmental liabilities. This income representsfees, reimbursements and other remediation amounts relating to theservices performed.

Direct technical servicescosts. Direct technical services costs were $24.0 millionfor the nine months ended September 30, 2005, an increase of $8.6million, or 55.4%, compared to $15.4 million for the nine monthsended September 30, 2004. The increase in direct technical servicescosts was primarily attributable to increased direct subcontractorexpenses which resulted from the Buffalo, New York and Axis, Alabamaremediation projects undertaken during the nine months ended September30, 2005 compared to the nine months ended September 30, 2004. Directtechnical services costs, as a percentage of revenue was 70.3%for the nine months ended September 30, 2005 compared to 64.0%for the nine months ended September 30, 2004, reflecting a significantincrease in remediation revenues associated with environmental projectsin 2005 as compared to 2004.

General and administrativeexpenses. Direct and indirect allocated general andadministrative expenses were $7.8 million for the nine months endedSeptember 30, 2005, an increase of $0.5 million, or 7.8%compared to $7.3 million for the nine months ended September 30, 2004.The increase is attributable to increased staffing levels, higheroverhead allocation arising from the development of our infrastructureand Sarbanes-Oxley Section 404 compliance efforts, and professionalfees associated with the environmental liability assumption program inBuffalo, New York.

Financial Condition andLiquidity

Quanta Holdings is organized as a Bermuda holdingcompany, and as such, has no direct operations of its own. Our assetsconsist of investments in our subsidiaries through which we conductsubstantially all of our insurance, reinsurance and technical servicesoperations. As of September 30, 2005, we had operations in Bermuda, theU.S., Ireland and the U.K., including Syndicate 4000 atLloyd’s.

As a holding company, we will have continuingfunding needs for general corporate expenses, the payment of principaland interest on current and future borrowings, taxes, and the paymentof other obligations. Funds to meet these obligations will comeprimarily from dividends, interest and other statutorily permissiblepayments from our operating subsidiaries. The ability of our operating

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subsidiaries to make these payments islimited by the applicable laws and regulations of the domiciles inwhich the subsidiaries operate. These laws and regulations subject oursubsidiaries to significant restrictions and require, among otherthings, that some of our subsidiaries maintain minimum solvencyrequirements and limit the amount of dividends that these subsidiariescan pay to us. As of September 30, 2005, Quanta Bermuda couldcontribute approximately $76 million to Quanta Holdings’ withoutregulatory approval.

Financial condition

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

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

Ourinvestment guidelines require compliance with applicable localregulations and laws. Without board approval, we will not purchasefinancial futures, forwards, options, swaps and other derivatives,except for instruments that are purchased as part of our business, forpurposes of hedging capital market risks (including those within ourstructured product transactions), or as replication transactions, whichare defined as a set of derivative, insurance and/or securitiestransactions that when combined produce the equivalent economic resultsof an investment meeting our investment guidelines. While we expectthat the majority of our investment holdings will be denominated inU.S. dollars, we may make investments in other currency denominationsdepending upon the currencies in which loss reserves are maintained, oras may be required by regulation or law.

Our available-for-saleinvestments, excluding trading investments related to depositliabilities, totaled $720.4 million as of September 30, 2005 comparedto $559.4 million at December 31, 2004. The market value of ourinvestment portfolio was $759.2 million, of which $701.8 millionrelated to available-for-sale fixed maturity investments, $18.6 millionrelated to short-term investments and $38.8 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 thatthe average credit quality of the investment portfolio is typicallyAa3/AA− and that no more than 5% of the investmentportfolio’s market value shall be invested in securities ratedbelow Baa3/BBB−. As of September 30, 2005, all of the fixedmaturity investments were investment grade, with a weighted averagecredit rating of ‘‘AA+’’ based on ratingsassigned by S&P. Our cash and cash equivalents totaled $144.8million as of September 30, 2005 compared to $75.3 million at December31, 2004. The increase in our available-for-sale investments and cashand cash equivalents is primarily due to the growth in our premiumswritten during the nine months ended September 30, 2005, the issuanceof $21.6 million of Junior Subordinated Debentures, and $20.0 millionproceeds from the sale of a mortality-risk-linked security, partiallyoffset by claims notifications and associated loss payments we havemade up to and including September 30, 2005. We expect that our fixedmaturity investments and cash and cash equivalent balances willcontinue to 

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increase during the fourth quarter of 2005subject to continuing to pay loss and loss expenses related to reportedclaims, particularly those arising from the hurricane events during thethird quarter of 2005.

We also limit our exposure to any singleissuer to 5% or less of the total portfolio’s marketvalue at the time of purchase, with the exception of U.S. governmentand agency securities. As of September 30, 2005, the largest singlenon-U.S. government and government agencies issuer accounted for lessthan 1% of the aggregate market value of the externally managedportfolios.

Included in our cash and cash equivalents andinvestments at September 30, 2005 is $108.2 million that is held byLloyd’s to support our underwriting activities, $128.9 millionheld in trust funds for the benefit of ceding companies and to fund ourobligations associated with the assumption of an environmentalremediation liability, $170.2 million that is pledged as collateral forletters of credit, $29.6 million that is on deposit with, or has beenpledged to, U.S. state insurance departments and $52.9 million held intrust funds that are related to our deposit liabilities.

AtSeptember 30, 2005, all fixed maturity investments were investmentgrade with 81.8% of the market value rated AA− or betterby an internationally recognized rating agency, with an overallweighted average rating of AA+ based on ratings assigned by Standard& Poor’s. Our risk management strategy and investment policyis to invest primarily in debt instruments of high credit qualityissuers and to limit the amount of credit exposure with respect toparticular ratings categories and any one issuer.

As ofSeptember 30, 2005, mortgage-backed securities constituted 34.5%of the market value of our investment portfolio. The fair value ofthese securities fluctuates depending on market and other generaleconomic conditions and the interest rate environment. Changes ininterest rates can expose us to prepayment or extension risks on theseinvestments. In periods of declining interest rates, mortgageprepayments generally increase and mortgage backed securities areprepaid more quickly, requiring us to invest the proceeds at the thencurrent market rates. In periods of increasing interest rates, theseinvestments are exposed to extension risk, which occurs when holders ofunderlying mortgages reduce the frequency on which they prepay theoutstanding principal before the maturity date and delay anyre-financing of the outstanding capital.

Corporate debtsecurities constitute 24.1% of our invested assets as ofSeptember 30, 2005. The principal risk associated with corporate debtsecurities is the potential loss of income and potential realized andunrealized principal losses due to insolvencies and deterioratingcredit.

At September 30, 2005, the average duration of ourinvestment portfolio was approximately 2.8 years. The duration of aninvestment is based on the maturity of the security and also reflectsthe payment of interest and the possibility of early principal paymentof such security. We seek to utilize investment benchmarks that reflectthis duration target. Management periodically revises our investmentbenchmarks based on business and economic factors, including theaverage duration of our potential liabilities.

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The amortized cost or cost, fair value andrelated gross unrealized gains and losses of fixed maturity andshort-term investments as of September 30, 2005 and December 31, 2004are as follows:

|                                        |  |                      |         |                      |  |                       |         |           |  |        |         |         |  |        |         |        |  |  |
|----------------------------------------|--|----------------------|---------|----------------------|--|-----------------------|---------|-----------|--|--------|---------|---------|--|--------|---------|--------|--|--|
| September30, 2005                      |  | Amortizedcost orcost |         | Grossunrealizedgains |  | Grossunrealizedlosses |         | Fairvalue |
| Available-for-sale                     |  |                 |    |                 |  |                  |    |      |  |   |    |    |  |   |    |   |
| Fixedmaturities:                       |  |                 |    |                 |  |                  |    |      |  |   |    |    |  |   |    |   |
| U.S. government and governmentagencies |  | $                    | 274,379 |                 |  | $                     | 105     |      |  | $      | (2,807  | )  |  | $      | 271,677 |   |
| Foreigngovernments                     |  |                 | 9,557   |                 |  |                  | 198     |      |  |   | (241    | )  |  |   | 9,514   |   |
| Tax-exemptmunicipal                    |  |                 | 4,708   |                 |  |                  | — |      |  |   | (23     | )  |  |   | 4,685   |   |
| Corporate                              |  |                 | 161,543 |                 |  |                  | 70      |      |  |   | (2,018  | )  |  |   | 159,595 |   |
| Asset-backedsecurities                 |  |                 | 28,084  |                 |  |                  | 15      |      |  |   | (360    | )  |  |   | 27,739  |   |
| Mortgage-backedsecurities              |  |                 | 231,373 |                 |  |                  | 35      |      |  |   | (2,783  | )  |  |   | 228,625 |   |
| Totalfixedmaturities                   |  | $                    | 709,644 |                 |  | $                     | 423     |      |  | $      | (8,232  | )  |  | $      | 701,835 |   |
| Short-terminvestments                  |  |                 | 18,476  |                 |  |                  | 125     |      |  |   | (10     | )  |  |   | 18,591  |   |
| Totalavailable-for-saleinvestments     |  | $                    | 728,120 |                 |  | $                     | 548     |      |  | $      | (8,242  | )  |  | $      | 720,426 |   |
| Trading                                |  |                 |    |                 |  |                  |    |      |  |   |    |    |  |   |    |   |
| Fixedmaturities:                       |  |                 |    |                 |  |                  |    |      |  |   |    |    |  |   |    |   |
| Tax exemptmunicipal                    |  | $                    | 5,269   |                 |  | $                     | — |      |  | $      | — |    |  | $      | 5,269   |   |
| Corporate                              |  |                 | 23,079  |                 |  |                  | — |      |  |   | — |    |  |   | 23,079  |   |
| Asset-backedsecurities                 |  |                 | 4,833   |                 |  |                  | — |      |  |   | — |    |  |   | 4,833   |   |
| Mortgage-backedsecurities              |  |                 | 5,355   |                 |  |                  | — |      |  |   | — |    |  |   | 5,355   |   |
| Totalfixedmaturities                   |  | $                    | 38,536  |                 |  | $                     | — |      |  | $      | — |    |  | $      | 38,536  |   |
| Short-terminvestments                  |  |                 | 246     |                 |  |                  | — |      |  |   | — |    |  |   | 246     |   |
| Totaltradinginvestments                |  | $                    | 38,782  |                 |  | $                     | — |      |  | $      | — |    |  | $      | 38,782  |   |
| Totalinvestments                       |  | $                    | 766,902 |                 |  | $                     | 548     |      |  | $      | (8,242  | )  |  | $      | 759,208 |   |
|                                        |

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|                                        |  |                      |         |                      |  |                       |         |           |  |        |         |         |  |        |         |        |  |  |
|----------------------------------------|--|----------------------|---------|----------------------|--|-----------------------|---------|-----------|--|--------|---------|---------|--|--------|---------|--------|--|--|
| December31, 2004                       |  | Amortizedcost orcost |         | Grossunrealizedgains |  | Grossunrealizedlosses |         | Fairvalue |
| Available-for-sale                     |  |                 |    |                 |  |                  |    |      |  |   |    |    |  |   |    |   |
| Fixedmaturities:                       |  |                 |    |                 |  |                  |    |      |  |   |    |    |  |   |    |   |
| U.S. government and governmentagencies |  | $                    | 227,024 |                 |  | $                     | 641     |      |  | $      | (860    | )  |  | $      | 226,805 |   |
| Foreigngovernments                     |  |                 | 16,704  |                 |  |                  | 735     |      |  |   | (10     | )  |  |   | 17,429  |   |
| Tax-exemptmunicipal                    |  |                 | 4,116   |                 |  |                  | 121     |      |  |   | (3      | )  |  |   | 4,234   |   |
| Corporate                              |  |                 | 134,221 |                 |  |                  | 833     |      |  |   | (1,152  | )  |  |   | 133,902 |   |
| Asset-backedsecurities                 |  |                 | 20,315  |                 |  |                  | 6       |      |  |   | (170    | )  |  |   | 20,151  |   |
| Mortgage-backedsecurities              |  |                 | 152,727 |                 |  |                  | 399     |      |  |   | (618    | )  |  |   | 152,508 |   |
| Totalfixedmaturities                   |  | $                    | 555,107 |                 |  | $                     | 2,735   |      |  | $      | (2,813  | )  |  | $      | 555,029 |   |
| Short-terminvestments                  |  |                 | 4,562   |                 |  |                  | 115     |      |  |   | (276    | )  |  |   | 4,401   |   |
| Totalavailable-for-saleinvestments     |  | $                    | 559,669 |                 |  | $                     | 2,850   |      |  | $      | (3,089  | )  |  | $      | 559,430 |   |
| Trading                                |  |                 |    |                 |  |                  |    |      |  |   |    |    |  |   |    |   |
| Fixedmaturities:                       |  |                 |    |                 |  |                  |    |      |  |   |    |    |  |   |    |   |
| Tax-exemptmunicipal                    |  | $                    | 538     |                 |  | $                     | — |      |  | $      | — |    |  | $      | 538     |   |
| Corporate                              |  |                 | 31,309  |                 |  |                  | — |      |  |   | — |    |  |   | 31,309  |   |
| Asset-backedsecurities                 |  |                 | 1,382   |                 |  |                  | — |      |  |   | — |    |  |   | 1,382   |   |
| Mortgage-backedsecurities              |  |                 | 6,759   |                 |  |                  | — |      |  |   | — |    |  |   | 6,759   |   |
| Totalfixedmaturities                   |  | $                    | 39,988  |                 |  | $                     | — |      |  | $      | — |    |  | $      | 39,988  |   |
| Short-terminvestments                  |  |                 | 504     |                 |  |                  | — |      |  |   | — |    |  |   | 504     |   |
| Totaltradinginvestments                |  | $                    | 40,492  |                 |  | $                     | — |      |  | $      | — |    |  | $      | 40,492  |   |
| Totalinvestments                       |  | $                    | 600,161 |                 |  | $                     | 2,850   |      |  | $      | (3,089  | )  |  | $      | 599,922 |   |
|                                        |

Contractualmaturities of our fixed maturities as of September 30, 2005 andDecember 31, 2004 are shown below. Actual maturities may differ fromcontractual maturities because borrowers may have the right to call orprepay obligations with or without call or prepaymentpenalties.

|                                     |  |                      |         |            |  |        |         |        |  |  |
|-------------------------------------|--|----------------------|---------|------------|--|--------|---------|--------|--|--|
| September30, 2005                   |  | Amortizedcost orcost |         | Fair value |
| Fixedmaturities:                    |  |                 |    |       |  |   |    |   |
| Due in one year orless              |  | $                    | 64,559  |       |  | $      | 64,332  |   |
| Dueafter one year through fiveyears |  |                 | 305,086 |       |  |   | 301,473 |   |
| Dueafter five years through 10years |  |                 | 93,317  |       |  |   | 92,691  |   |
| Due after10years                    |  |                 | 34,295  |       |  |   | 34,160  |   |
| Totalfixedmaturities                |  | $                    | 497,257 |       |  | $      | 492,656 |   |
| Mortgageand asset-backedsecurities  |  |                 | 269,645 |       |  |   | 266,552 |   |
| Total                               |  | $                    | 766,902 |       |  | $      | 759,208 |   |
|                                     |

|                                     |  |                      |         |            |  |        |         |        |  |  |
|-------------------------------------|--|----------------------|---------|------------|--|--------|---------|--------|--|--|
| December31, 2004                    |  | Amortizedcost orcost |         | Fair value |
| Fixedmaturities:                    |  |                 |    |       |  |   |    |   |
| Due in one year orless              |  | $                    | 58,428  |       |  | $      | 73,050  |   |
| Dueafter one year through fiveyears |  |                 | 309,500 |       |  |   | 294,700 |   |
| Dueafter five years through 10years |  |                 | 41,793  |       |  |   | 42,041  |   |
| Due after10years                    |  |                 | 9,257   |       |  |   | 9,331   |   |
| Totalfixedmaturities                |  | $                    | 418,978 |       |  | $      | 419,122 |   |
| Mortgageand asset-backedsecurities  |  |                 | 181,183 |       |  |   | 180,800 |   |
| Total                               |  | $                    | 600,161 |       |  | $      | 599,922 |   |
|                                     |

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Credit ratings of our fixed maturities asof September 30, 2005 and December 31, 2004 are shown below.

|          |  |                      |         |                  |  |                      |       |            |  |        |         |        |  |        |       |         |  |  |
|----------|--|----------------------|---------|------------------|--|----------------------|-------|------------|--|--------|---------|--------|--|--------|-------|---------|--|--|
|     |  | September30, 2005    |         | December 31,2004 |
| Ratings* |  | Amortizedcost orcost |         | Percentage       |  | Amortizedcost orcost |       | Percentage |
| AAA      |  | $                    | 580,960 |             |  |                 | 75.8  | %     |  | $      | 425,209 |   |  |   | 70.8  | %  |
| AA       |  |                 | 45,997  |             |  |                 | 6.0   | %     |  |   | 17,793  |   |  |   | 3.0   | %  |
| A        |  |                 | 104,623 |             |  |                 | 13.6  | %     |  |   | 78,743  |   |  |   | 13.1  | %  |
| BBB      |  |                 | 35,322  |             |  |                 | 4.6   | %     |  |   | 78,416  |   |  |   | 13.1  | %  |
| Total    |  | $                    | 766,902 |             |  |                 | 100.0 | %     |  | $      | 600,161 |   |  |   | 100.0 | %  |
|          |

|  |
|--|
|  |  |
|  |

|   |                                                              |
|---|--------------------------------------------------------------|
| * | ratingsas assigned by Standard & Poor’sCorporation |

The components of net investment income forthe period to September 30, 2005 and the year ended December 31, 2004were derived from the following sources:

|                                                 |  |                                  |        |                           |  |        |        |         |  |  |
|-------------------------------------------------|--|----------------------------------|--------|---------------------------|--|--------|--------|---------|--|--|
|                                            |  | NinemonthsendedSeptember 30,2005 |        | YearendedDecember 31,2004 |
| Fixedmaturities                                 |  | $                                | 19,206 |                      |  | $      | 16,862 |    |
| Cash,cash equivalents and short-terminvestments |  |                             | 1,198  |                      |  |   | 1,494  |    |
| Grossinvestment income                          |  |                             | 20,404 |                      |  |   | 18,356 |    |
| Netamortization of discount /premium            |  |                             | (901   | )                    |  |   | (2,949 | )  |
| Investmentexpenses                              |  |                             | (1,100 | )                    |  |   | (1,100 | )  |
| Netinvestmentincome                             |  | $                                | 18,403 |                      |  | $      | 14,307 |    |
|                                                 |

Ourinsurance and reinsurance premiums receivable balances totaled $172.1million as of September 30, 2005 compared to $146.8 million at December31, 2004. The increase in premiums receivable reflects our growthacross the specialty insurance segment during the nine months endedSeptember 30, 2005 and the associated increase in the level of premiumswritten. Included in our premiums receivable are approximately $135.7million of written premium installments that are not yet currently dueunder the terms of the related insurance and reinsurance contracts. Asof September  30, 2005, based on our review of the remainingbalance of $36.4 million, which represents premiums installments thatare currently due, there are no individually significant balances thatare delinquent or uncollectible.

Our deferred acquisition costsand unearned premiums, net of deferred reinsurance premiums, totaled$50.7 million and $288.7 million, as of September 30, 2005 compared to$41.5 million and $200.5 million as of December 31, 2004. Theseincreases are due to the growth in our premiums written during the ninemonths ended September 30, 2005. These amounts represent premiums andacquisition expenses on written contracts of insurance and reinsurancethat will be recognized in earnings in future periods. Substantiallyall of these amounts will be recognized over the next 12months.

Our reserves for losses and loss adjustment expenses, netof reinsurance recoverable, totaled $317.2 million as of September 30,2005 compared to $146.3 million as of December 31, 2004. The increasein our net loss and loss expense reserves reflects the growth in ourbusiness, the associated insured risks we assumed during the ninemonths ended September 30, 2005 and include our initial estimate ofunpaid loss expenses totaling $63.6 million relating to hurricanesKatrina and Rita, our remaining unpaid loss expenses totaling $7.6million relating to hurricanes Charley, Frances, Ivan and Jeanne and$1.8 million relating to the environmental claim that we incurredduring the nine months ended September 30, 2005. Our estimate of ourunpaid exposure to ultimate claim costs associated with these losses isbased on currently available information, claim notifications receivedto date, industry loss estimates, output from industry models, adetailed review of affected contracts and 

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discussion with clients, cedants and brokers.The actual amount of future loss payments relating to these loss eventsmay vary significantly from this estimate. As of September 30, 2005 wehave received a limited amount of other reported losses. However, weparticipate in lines of business where claims may not be reported forsome period of time after those claims are incurred.

Ourestimate of our reserves for losses and loss adjustment expenses of$317.2 million is net of reinsurance recoverable of $152.8 million. Theincrease in our reinsurance recoverable balance reflects the growth inour business, and include our initial estimate of unpaid loss expensesrecoverable totaling $90.9 million relating to hurricanes Katrina andRita and $2.0 million recoverable from reinsurers relating to theenvironmental claim that we incurred during the nine months endedSeptember 30, 2005. Our estimate of our reinsurance recoverable balanceassociated with these losses is based on currently availableinformation, claim notifications received to date, industry lossestimates, output from industry models, a detailed review of affectedceded reinsurance contracts and an assessment of the credit risk theCompany is subject to. The actual amount of future loss paymentsrelating to these loss events may vary significantly from thisestimate. The average credit rating of the Company’s reinsurersas of September 30, 2005 is A (Excellent) by A.M. Best. The largestconcentration of loss and loss adjustment expenses recoverable fromreinsurers at September 30, 2005 was approximately 19% and isdue from Everest Reinsurance Ltd., a reinsurer rated A+ (Superior) byA.M. Best. In addition, approximately 18% of theCompany’s loss and loss adjustment expenses recoverable fromreinsurers are due from various Lloyd’s syndicates which arerated A (Excellent) by A.M. Best. Less than 7% of theCompany’s loss and loss adjustment expenses recoverable fromreinsurers are due from reinsurers that are rated below A−(Excellent). Less than 4% of the Company’s loss and lossadjustment expenses recoverable from reinsurers are due from reinsurersthat are rated below A− (Excellent) and are notcollateralized.

Our shareholders’ equity was $372.2million as of September 30, 2005 compared to $430.9 million as ofDecember 31, 2004, reflecting an decrease of $58.7 million that wasprimarily related to our net loss of $51.2 million for the nine monthsended September 30, 2005 and a net change in unrealized losses on ourinvestment portfolios of $7.8 million during the nine months endedSeptember 30, 2005. As of September 30, 2005, we have provided a100% cumulative valuation allowance against our deferred taxassets in the amount of $18.1 million. These deferred tax assets weregenerated primarily from net operating losses. As a company withlimited operating history, the realization of these deferred tax assetsis neither assured nor accurately determinable.

    Liquidity 

    **OperatingCashflow**

We generated net operating cash flow ofapproximately $206.1 million during the nine months ended September 30,2005, primarily related to premiums and investment income received andoffset by loss and loss expenses as well as general and administrativeexpenses paid. In addition, we also generated net proceeds from theissuance of Junior Subordinated Debentures of $19.6 million. During thesame period, we invested net cash of $159.2 million in our investmentassets and, as of September 30, 2005, had net cash and cash equivalentbalances of $99.2 million. Included in our cash and cash equivalentsand investments is $108.2 million that is held by Lloyd’s tosupport our underwriting activities, $128.9 million held in trust fundsfor the benefit of ceding companies and to fund our obligationsassociated with the assumption of an environmental remediationliability, $170.2 million that is pledged as collateral for letters ofcredit, $29.6 million that is on deposit with, or has been pledged to,U.S. state insurance departments and $52.9 million held in trust fundsthat are related to our deposit liabilities. Our cash flows fromoperations for the nine months ended September 30, 2005 provided uswith sufficient liquidity to meet operating cash requirements duringthat period.

    **Sources of cash**

Our sources ofcash consist primarily of existing cash and cash equivalents, premiumswritten, proceeds from sales and redemptions of investment assets,capital or debt issuances, investment income, reinsurance recoveries,and, to a lesser extent, our secured bank credit facility andcollections of receivables for technical services rendered to thirdparties.

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On July 11, 2005, Quanta Holdings andcertain designated insurance subsidiaries entered into an amended andrestated credit agreement, dated July 11, 2005, providing for a securedbank letter of credit facility and a revolving credit facility with asyndicate of lenders in the amount of $250 million. Up to $25 millionmay be borrowed under the facility on a revolving basis for generalcorporate purposes and working capital requirements. The facility issecured by specified investments of the borrowers. As of September 30,2005, we had $170.2 million of secured letters of credit issued andoutstanding under the facility. As of September 30, 2005, we have notmade any borrowings under the revolving credit facility. Theavailability to a borrower is based on the amount of eligibleinvestments pledged by that borrower and the absence of materialadverse change provisions. Regulatory restrictions will also limit theamount of investments that may be pledged by our U.S. insuranceborrowers and, consequently, the amount available for letters of creditand borrowings under the facility to those borrowers.

The creditagreement has certain financial covenants, including a leverage ratio(consolidated indebtedness to consolidated total capital) of notgreater than 0.35 to 1, a minimum consolidated net worth of at least$301 million which shall be increased immediately following the lastday of each fiscal quarter by an amount equal to 50% of the netincome of the Company and its Subsidiaries and maintenance of theCompany’s insurance ratings. In addition, the credit agreementcontains certain covenants restricting the activities of QuantaHoldings and its subsidiaries, such as the incurrence of additionalindebtedness, liens and dividends and other payments to QuantaHoldings. A ratings downgrade below B++ would also create an event ofdefault under the credit agreement which would requirecollateralization of a portion or all of the secured letter of creditwe issued. Quanta Holdings has also unconditionally and irrevocablyguaranteed all of the obligations of its subsidiaries to the lenders.The facility terminates on July 11, 2008. We may also enter into othercredit facilities to support portions of our business.

OnFebruary 24, 2005, we participated in a private placement of $20.0million of floating rate capital securities (the ‘‘TrustPreferred Securities’’) issued by Quanta CapitalStatutory Trust II (‘‘Quanta Trust II’’), asubsidiary Delaware trust formed on February 24, 2004. The TrustPreferred Securities mature on September 15, 2035, are redeemable atour option at par beginning September 15, 2010, and require quarterlydistributions of interest by Quanta Trust II to the holder of the TrustPreferred Securities. Distributions will be payable at a variable perannum rate of interest, reset quarterly, equal to the London InterbankOffered Rate (‘‘LIBOR’’) plus 350 basispoints. Quanta Trust II used the proceeds from the sale of the TrustPreferred Securities and the issuance of its common securities topurchase $20.6 million of junior subordinated debt securities, dueMarch 15, 2035, in the principal amount of $20.6 million issued by us(the ‘‘Trust II Debentures’’). We are usingthe net proceeds of $19.6 million, after the deduction of approximately$0.4 million of commissions paid to the placement agents in thetransaction, from the sale of the Trust II Debentures to Quanta TrustII for working capital purposes and to support the growth of ourbusiness.

    **Uses of cash**

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

We paid additional gross claims of$11.6 million during the first nine months of 2005 relating to theenvironmental claim and the hurricane events of 2004. We expect thatour cash requirements for 

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the payment of these and other claims will besignificant in future periods as we receive and settle claims,including those relating to these specific claims and in particular,claims related to the hurricanes that occurred in 2005.

Weincurred capital expenditures of $3.1 million during the nine monthsended September 30, 2005 related primarily to the purchase anddevelopment of information technology assets. During the remainder of2005, we expect capital expenditures principally relating toinformation systems, furniture and fixtures and leasehold improvementsto be less than $10 million. We expect to fund these capitalexpenditures through cash provided by our operating activities.

In addition to these cash requirements, under the purchase agreementwith ESC, we will be required to pay ESC's former shareholders anearn-out payment if ESC achieves specified EBITDA targets. EBITDAgenerally is defined to mean earnings before interest, taxes,depreciation and amortization. Under the earn-out arrangements, ifEBITDA for the two-year period ending December 31, 2005 is $7.5 millionor greater, we will be required to pay an earn-out payment of $5.0million. If EBITDA is greater than $7.0 million and less than $7.5million, then we will be required to pay a pro rata portion of the $5.0million. Although we will not be able to determine whether ESC willachieve these EBITDA targets until after December 31, 2005, wecurrently anticipate that the earn-out payment will be $5.0million.

We may also have substantial liabilities to clients,third parties and government authorities for property damage, personalinjuries, breach of contract or breach of warranty claims, fines andpenalties and regulatory action that could adversely affect ourbusiness arising from the assessment, analysis and assumption ofenvironmental liabilities, and the management, remediation, andengineering of environmental conditions constitute a significantportion of our technical services business. From time to time, we mayoffer a liability assumption program under which a special-purposeentity assumes specified liabilities (at times including taking titleto property) associated with environmental conditions for which weprovide technical services, which may be insured or guaranteed by us.These businesses involve significant risks, including the possibilitythat we may have substantial liabilities to clients, third parties andgovernmental authorities for property damage, personal injuries, breachof contract or breach of warranty claims, fines and penalties andregulatory action that could adversely affect our business.

Whilewe had sufficient liquidity to pay the losses we experienced in thepast hurricane season, we intend to raise additional funds to meet A.M.Best’s capital requirements, to further expand our businessstrategy, enter new lines of business and to a lesser extent to manageour expected growth. To that end, we have filed a shelf registrationstatement on Form S-3 with the SEC on October 26, 2005, which wasdeclared effective by the SEC on November 2, 2005. Quanta Holdings andcertain statutory trusts may issue, from time to time, in one or moreofferings up to $125 million of trust preferred securities or preferredsecurities or a combination of both. To effect any such sale from timeto time, we will file one or more supplements to the prospectuscontained in the registration statement, which will provide details ofany proposed offering. As part of our plan to retain our A.M. Bestrating, we would seek to raise capital to increase our available ratedcapital, which may be accomplished by various methods, including theissuance of debt, equity and/or other securities, in a private orpublic offering. At this time, we are not able to quantify the amountof additional capital we may raise or will require in the future orpredict the timing of any other future capital needs. Any future equityor debt financing, if available at all, may be on terms that are notfavorable to us. If we raise capital through equity financings, yourinterest in our company will be diluted, and the securities we issuemay have rights, preferences and privileges that are senior to those ofthe shares that are currently issued and outstanding. If we cannotmaintain or obtain adequate capital to manage our business strategy andexpected growth targets, our business, results of operations andfinancial condition may be adversely affected. No assurance can begiven that we will be able to obtain any additional financing onfavorable terms, if at all. If we cannot obtain adequate capital on atimely basis, our business, financial condition and results ofoperations will be adversely affected.

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Commitments

We have contractualobligations relating to commitments under the trust preferredsecurities and non-cancelable operating leases for property and officeequipment described above under‘‘Liquidity’’ as of September 30, 2005 asfollows:

|                                          |  |                       |         |                |  |           |         |           |  |                 |         |        |  |        |         |        |  |        |         |        |  |  |
|------------------------------------------|--|-----------------------|---------|----------------|--|-----------|---------|-----------|--|-----------------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                                     |  | Paymentsdue by period |
| Contractualobligations($000’s)     |  | Total                 |         | Less than1year |  | 1-3 years |         | 3-5 years |  | More than5years |
| Long-term debtobligations                |  | $                     | 61,857  |           |  | $         | — |      |  | $               | — |   |  | $      | — |   |  | $      | 61,857  |   |
| Intereston long-term debt obligations(1) |  |                  | 135,125 |           |  |      | 4,419   |      |  |            | 8,837   |   |  |   | 8,837   |   |  |   | 113,032 |   |
| Operatingleaseobligations                |  |                  | 41,988  |           |  |      | 4,712   |      |  |            | 8,151   |   |  |   | 6,299   |   |  |   | 22,826  |   |
| Total                                    |  | $                     | 238,970 |           |  | $         | 9,131   |      |  | $               | 16,988  |   |  | $      | 15,136  |   |  | $      | 197,715 |   |
|                                          |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                            |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (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, 2005 on thefacility. |

Off-balance sheet arrangements

Other thanas described under ‘‘Liquidity’’ related toour Trust Preferred Securities offerings through the Quanta CapitalStatutory Trust I (‘‘Quanta Trust I’’) andQuanta Trust II (together ‘‘Quanta Trust I andII’’), as of September 30, 2005, we have not entered intoany off-balance sheet arrangements with special purpose entities orvariable interest entities. We did not consolidate Quanta Trust I andII, the issuers of the Trust Preferred Securities and variable interestentities, since we are not the primary beneficiary of Quanta Trust I orII. As of September 30, 2005, we have recorded the $61.9 million ofDebentures, which were issued to Quanta Trust I and II, on ourconsolidated balance sheet. The net proceeds of $58.4 million from thesale of the Debentures to Quanta Trust I and II will be used forworking capital purposes and to support the growth of our business.Distributions will be payable at a variable per annum rate of interest,reset quarterly, equal to LIBOR plus 385 basis points by the Company toQuanta Trust I and equal to LIBOR plus 350 basis points by the Companyto Quanta Trust II as described above under‘‘Commitments.’’ The Debentures areredeemable at the Company’s option at par beginning March 15,2010.

Adequacy of Regulatory and Rating Capital

Whileinsurance regulation differs by location, each jurisdiction requiresthat minimum levels of capital be maintained in order to write newinsurance business. Factors that affect capital requirements generallyinclude premium volume, the extent and nature of loss and loss expensereserves, the type and form of insurance and reinsurance businessunderwritten and the availability of reinsurance protection fromadequately rated retrocessionaires on terms that are acceptable tous.

In all of the jurisdictions in which we operate insurers andreinsurers are required to maintain certain minimum levels of capitaland risk-based capital, the calculation of which includes numerousfactors as specified by the respective insurance regulatory authoritiesand the related insurance regulations. We capitalize our insuranceoperations in excess of the minimum regulatory requirements so that wemay maintain adequate financial ratings. Generally, a higher financialrating creates a higher demand for insurance products. A higherfinancial rating will enable us both to write more business and to bemore selective in the business we underwrite. Accordingly, allocationof capital sufficient to achieve business objectives is a criticalaspect of any insurance organization, particularly an insuranceoperation with a limited operating history such asours.

Substantially all of our capital has been distributed amongour rated operating subsidiaries based on our assessment of the levelsof capital that we believe are prudent to support our expected levelsof business, the applicable regulatory requirements, and therecommendations of the insurance regulatory authorities and ratingagencies.

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A. M. Best placed Quanta Reinsurance Ltd.and its subsidiaries and Quanta Europe Ltd. under review with negativeimplications. We have been working closely with A.M. Best to understandthe different capital requirements it now has for our various productlines, the capital adequacy ratio associated with these product linesat the ‘‘A−’’ (excellent) level, andits view of our available capital that includes their assessment of theprobable maximum loss exposures associated with specified lines of ourbusiness. We believe these factors are the main drivers of the capitalrequirements that A.M. Best places on us. Based on that understanding,we believe we have developed a plan designed to retain our currentrating of ‘‘A−’’ (excellent) whichhas two key elements as described above. Upon implementation of theplan, based on our discussions with A.M. Best, we believe that A.M.Best will conclude its review and initially ascribe a negative outlookto the affirmation of our current "A–"(excellent) rating.

Posting of Security by Our Non-U.S.Operating Subsidiaries

Our Bermuda, United Kingdom, and Irishoperating subsidiaries are not licensed, accredited or otherwiseapproved as reinsurers anywhere in the United States. Many U.S.jurisdictions do not permit insurance companies to take credit on theirU.S. statutory financial statements for reinsurance to cover unpaidliabilities, such as loss and loss adjustment expense and unearnedpremium reserves, obtained from unlicensed or non-admitted insurerswithout appropriate security acceptable to U.S. insurancecommissioners. Typically, this type of security will take the form of aletter of credit issued by an acceptable bank, the establishment of atrust, funds withheld or a combination of these elements.

Asdescribed under ‘‘Liquidity’’ above weentered into a secured bank credit facility with a syndicate of lendersthat allows us to provide to our insured clients up to $250 million inletters of credit as security under the terms of insurance andreinsurance contracts. The availability to a borrower is based on theamount of eligible investments pledged by that borrower and no materialadverse change provisions. Regulatory restrictions will also limit theamount of investments that may be pledged by our U.S. insuranceborrowers and, consequently, the amount available for letters of creditand borrowings under the facility to those borrowers. As of September30, 2005, we had $170.2 million of secured letters of credit issued andoutstanding under the facility.

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

Ratings

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

We have received a rating of‘‘A−’’ (excellent) from A.M. Best,which is the fourth highest of fifteen rating levels and indicates A.M.Best's opinion of our financial strength and ability to meetongoing obligations to our future policyholders. We have not been ratedby any rating agency other than A.M. Best.

On October 5, 2005,A.M. Best placed Quanta Reinsurance Ltd. and its subsidiaries andQuanta Europe under review with negative implications. Although webelieve we have developed a plan based on our understanding of A.M.Best’s requirement as more fully described above, we cannot

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assure you that we will be able to maintainthis rating. A ratings downgrade would result in a substantial loss ofbusiness and business opportunities as insureds and ceding companiespurchase insurance from companies with higher claims-paying andfinancial strength ratings instead of from us and our access toreinsurance could be limited, which factors would have a materialadverse effect on business.

Critical Accounting Policies andEstimates

Our management makes certain judgments, estimates andassumptions in the application of accounting policies used to determineinherently subjective amounts reported in our condensed consolidatedfinancial statements. If management uses different assumptions andestimates than it currently does, it could produce materially differentestimates of the reported amounts. For a detailed discussion of ourcritical accounting policies, judgments, estimates and assumptionsmanagement uses please refer to the Form 10-K for the year endedDecember 31, 2004 as filed with the SEC on March 30, 2005. There havebeen no significant changes in the application of our criticalaccounting policies and estimates subsequent to December 31,2004.

Non-Traditional Contracts

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

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

During thethree and nine months ended September 30, 2005, we recognized in‘‘other income’’ $0.9 million and $2.7million of fees and revenues relating to non-traditionalcontracts which we accounted for using the deposit method. If thesecontracts transferred risk as determined by Statement of FinancialAccounting Standards (‘‘SFAS’’) No. 113‘‘Accounting and Reporting for Reinsurance ofShort-Duration and Long-Duration Contracts’’, grosspremium relating to these contracts would totalapproximately $23.0 million and $78.2 million in the three andnine months ended September 30, 2005.

Of the $0.9 millionand $2.7 million recognized, $0.2 million and $0.5 million of otherincome recognized during the three and nine months endedSeptember 30, 2005, relates to fees earned from a surplus relief lifereinsurance arrangement with a U.S. insurance company which meets ourdefinition of a non-traditional contract. In the fourthquarter of 2004, under this contract we made an arrangement withour client and assumed, through novation agreements, several lifereinsurance contracts it had made. Because we assumed these contracts,our client, which is subject to insurance 

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regulation in the United States andtherefore is required to maintain a certain amount of statutorycapital, may reduce its statutory capital requirements. In exchange forour assumption of the contracts we received a fee. The arrangement,among other things, also provides that on certain dates and duringspecific periods, our client has the right but not the obligation torecapture the life reinsurance contracts we have assumed, provided thatthe underlying cedants do not reasonably withhold their consent to thisrecapture. The Company believes that its client is economicallyincentivized to exercise the recapture provision in the future, as theamount of expected profit on the underlying life reinsurance contractsemerges over time.

We believe the arrangement, including ourclient’s option to recapture, and the assumption of the lifeinsurance contracts constitute one contract with minimal mortality,credit or other insurance or economic risk which leads us to the use ofdeposit accounting. Although we believe our client will exercise therecapture, we cannot assure you that this will be thecase. If our client does not recapture the underlying insurancecontracts in the future, we may be viewed as having had the risksdescribed above and, as a result, we could become the life reinsurerand may be required to account for some or all of the underlyinginsurance contracts as life insurance, recognizing life premiumswritten and life benefit reserves in our consolidated statement ofoperations. If deposit accounting had not been used with respect tothis particular arrangement, we would have recognized gorss lifereinsurance premiums written of approximately $7.1 million and $17.7million for the three and nine months ended September 30, 2005.At this time, we believe that the recognition of these premiums wouldnot have had a material effect on our financial position and results ofoperations. However, as the underlying life insurance contracts maturethe effect on our financial condition and results of operations maybecome material.

The remaining $0.7 million and $2.2 million ofother income derived from non-traditional contracts recognized duringthe three and nine months ended September 30, 2005 relates torevenues earned from three reinsurance contracts accounted for asdeposits. Although these contracts did possess some underwriting andtiming risks as prescribed by SFAS No. 113, we do not believe we areexposed to a reasonable possibility of significant loss.

ITEM3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK

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

Derivative Valuation Risk

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 capital market risks that may bepresent in our contracts of insurance or reinsurance and (2) asreplication transactions which we define as a set of derivative,insurance and/or securities transactions that, when combined, producethe equivalent economic result of an investment security or insuranceor reinsurance contract that meets our investment or underwritingguidelines.

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

Foreign Currency Risk and FunctionalCurrency

Our reporting currency is the U.S. dollar.Although we have not experienced any significant net exposures toforeign currency risk, we expect that in the future our exposure tomarket risk for 

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changes in foreign exchange rates will beconcentrated in our investment assets, investments in foreignsubsidiaries, premiums receivable and insurance reserves arising fromknown or probable losses that are denominated in foreign currencies. Wegenerally manage our foreign currency risk by maintaining assetsdenominated in the same currency as our insurance liabilities resultingin a natural hedge or by entering into foreign currency forwardderivative contracts in an effort to hedge against movements in thevalue of foreign currencies against the U.S. dollar. These contractsare not designated as specific hedges for financial reporting purposesand therefore realized and unrealized gains and losses on thesecontracts are recorded in income in the period in which they occur.These contracts generally have maturities of three months or less. Aforeign currency forward contract results in an obligation to purchaseor sell a specified currency at a future date and price specified atthe time of the contract. Foreign currency forward contracts will noteliminate fluctuations in the value of our assets and liabilitiesdenominated in foreign currencies but rather allow us to establish arate of exchange for a future point in time. We have not and do notexpect to enter into such contracts with respect to a material amountof our assets or liabilities.

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

Our investment guidelines limit the amount ofour investment portfolio that may be denominated in foreign currenciesto 20% (as measured by market value). Furthermore, ourguidelines limit the amount of foreign currency denominated investmentsthat can be held without a corresponding hedge against the foreigncurrency exposure to 5% (as measured by market value). As ofSeptember 30, 2005, our investment portfolio included $4.2 million, or0.6%, of our total net invested assets, of securities that weredenominated in foreign currencies and were purchased by our investmentmanagers for the purpose of improving overall portfolio yield. Thesesecurities were rated AAA, and were substantially hedged into U.S.dollars according to our investment guidelines by entering into foreigncurrency forward contracts. At September 30, 2005, the net fair marketvalue of foreign currency forward contracts relating to foreigncurrency denominated investments was negligible.

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 order to balance our exposure to interest rates with therequirement to tailor the duration, yield, currency and liquiditycharacteristics to the anticipated cash outflow characteristics ofclaim reserve liabilities. As of September 30, 2005, assuming parallelshifts in interest rates, the impact of an immediate 100 basis pointincrease in market interest rates on our net invested assets, includingcash and cash equivalents, under management by third party investmentmanagers of approximately $731.6 million would have been an estimateddecrease in market value of approximately $24.2 million, or3.3%, and the impact on our net invested assets, including cashand cash equivalents, under management by third party investmentmanagers of an immediate 100 basis point decrease in market interestrates would have been an estimated increase in market value ofapproximately $15.8 million, or 2.2%.

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As of September 30, 2005, our investmentportfolio included AAA rated mortgage-backed securities with a marketvalue of $239.7 million, or 31.6%, excluding trading investmentsrelated to deposit liabilities. As with other fixed income investments,the fair market value of these securities fluctuates depending onmarket and other general economic conditions and the interest rateenvironment. Changes in interest rates can also expose us to prepaymentand extension risks on these investments. In periods of declininginterest rates, the frequency of mortgage prepayments generallyincrease as mortgagees seek to refinance at a lower interest rate cost.Mortgage prepayments result in the early repayment of the underlyingprincipal of mortgage-backed securities requiring us to reinvest theproceeds at the then current market rates. When interest ratesincrease, these assets are exposed to extension risk, which occurs whenholders of underlying mortgages reduce the frequency on which theyprepay the outstanding principal before the maturity date and delay anyrefinancing of the outstanding principal.

CreditRisk

We have exposure to credit risk primarily as a holderof fixed income securities. This risk is defined as the default or thepotential loss in market value resulting from adverse changes in theborrower's ability to repay the debt. Our risk managementstrategy and investment policy is to invest in debt instruments of highcredit quality issuers and to limit the amount of credit exposure withrespect to particular ratings categories and to any one issuer. Weattempt to limit our overall credit exposure by purchasing fixed incomesecurities that are generally rated investment grade by Moody'sInvestors Service, Inc. and/or S&P. Our investment guidelinesrequire that the average credit quality of our portfolio will beAa3/AA− and that no more than 5% of our investmentportfolio's market value shall be invested in securities ratedbelow BBB−/Baa3. We also limit our exposure to any single issuerto 5% or less of our portfolio's market value at the timeof purchase, with the exception of U.S. government and agencysecurities. As of September 30, 2005, the average credit quality of ourinvestment portfolio was AA+, and all fixed income securities held wereinvestment grade.

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

We are also exposed to creditrisk relating to our premiums receivable balance. As of September 30,2005, our premiums receivable balance was $172.1 million. 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 receivable balances. In addition, as the majority of ourinsurance and reinsurance contracts provide the right to offset thepremiums receivable against losses payable, we believe that the creditrisk in this area is substantially reduced.

Effects ofInflation

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

ITEM4.    CONTROLS AND PROCEDURES

Evaluation of DisclosureControls and Procedures

As of the end of the period covered bythis report, we evaluated under the supervision and with theparticipation of management, including our Chief Executive Officer andthe Interim Chief 

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Financial Officer, the effectiveness of thedesign and operation of our disclosure controls and procedures pursuantto Rules 13a-15 and 15d-15 under the Securities and Exchange Act of1934 (the ‘‘Exchange Act’’). Based uponthat evaluation, the Chief Executive Officer and Interim ChiefFinancial Officer concluded that our disclosure controls and procedureswere.

Current Status of Material Weakness in Internal ControlOver Financial Reporting

During the period ended June 30, 2005,in connection with our routine monthly closing process for our books atthe April 2005 month-end, we discovered a mathematical error in thecalculation of policy acquisition expenses used in the reporting of ourfirst quarter 2005 results. This mathematical error only affected ourfirst quarter results and did not affect any of our financialstatements for prior periods. As a result of the error discovered as apart of this process, we restated our financial statements for thequarter ended March 31, 2005 as reflected in our Quarterly Report onForm 10-Q/A filed with the Securities and Exchange Commission on May16, 2005. In response to our discovery of this error, we added staffingand implemented enhanced analytics and control processes over thecalculation of acquisition expenses. We have evaluated theeffectiveness of our internal controls for the calculation ofacquisition expenses as of the end of the period covered by thisquarterly report, and have determined that the material weakness ininternal control over financial reporting with respect to thecalculation of acquisition expenses has beenremedied.

Limitations on the Effectiveness ofControls

As a non-accelerated registrant, we are currentlyin the process of reviewing and formalizing our internal controls overfinancial reporting in accordance with the Securities and ExchangeCommission's rules implementing the internal control reportingrequirements included in Section 404 of the Sarbanes-Oxley Act of 2002(‘‘Section 404’’). Changes have been andwill continue to be made to our internal controls over financialreporting as a result of these efforts. We are dedicating significantresources to our ongoing Section 404 assessment. We will continue towork to improve our controls and procedures and to educate and trainour employees on our existing controls and procedures in connectionwith our efforts to maintain an effective controlsinfrastructure.

We believe that a control system, no matter howwell designed and operated, cannot provide absolute assurance that theobjectives of the control system are met, and no evaluation of controlscan provide absolute assurance that all control issues and instances offraud, if any, within a company have been detected. Our disclosurecontrols and procedures are designed to provide reasonable assurance ofachieving their objectives and our Chief Executive Officer and InterimChief Financial Officer have concluded that such controls andprocedures are effective at the ‘‘reasonableassurance’’ level.

Changes in InternalControls

There were no changes in our internal control overfinancial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act), that occurred during the threemonths ended September 30, 2005, that has materially affected, or isreasonably likely to materially affect, our internal control overfinancial reporting.

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PARTII.    OTHER INFORMATION

ITEM 1. LEGALPROCEEDINGS

We are not a party to any pending or threatenedmaterial litigation and are not currently aware of any pending orthreatened material litigation other than routine legal proceedingsthat we believe are, in the aggregate, not material to our financialcondition and results of operations. In the normal course of businesswe may become involved in various claims and legalproceedings.

ITEM6.    EXHIBITS

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

|  |            |                                                                                                                                                           |
|--|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | 31.2  | Certification of theinterim Chief Financial Officer required by Rule 13a-14(a) or Rule15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of2002. |

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

|  |            |                                                                                                                                                            |
|--|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | 32.2  | Certification of theinterim Chief Financial Officer pursuant to 18 U.S.C Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002. |

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SIGNATURES

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

|                             |  |                                                                                                                                                                                                                                            |  |  |  |  |
|-----------------------------|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
|                        |  | **QuantaCapital HoldingsLtd.**                                                                                                                                                                                                             |
| Date: November14, 2005 |  |             /s/ Tobey J.Russ            Tobey J. Russ(On behalf of theregistrant and asPrincipal ExecutiveOfficer) |
| Date: November14, 2005 |  |        /s/ Jonathan J.R.Dodd        Jonathan J.R. Dodd(Principal FinancialOfficer)                                                                              |
|                             |

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Indexto Exhibits

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

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

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

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

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