UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.20549

FORM 10-Q

|        |  |                                                                                            |  |  |  |  |
|--------|--|--------------------------------------------------------------------------------------------|--|--|--|--|
|   |  | **QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**  |
|   |  | **Forthe quarterly period ended June 30,2005**                                             |
|   |  | **TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934** |
|        |

For the transition period from                   to                  

Commission file number000-50885

QUANTA CAPITAL HOLDINGS LTD.(Exact name ofregistrant 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 90days.   Yes       No   

Indicate bycheck mark whether the registrant is an accelerated filer (as definedin Exchange Act Rule12b-2).   Yes       No   

As ofAugust 8, 2005 there were 56,810,020 common shares, $0.01 par value pershare, outstanding.

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QUANTA CAPITAL HOLDINGSLTD.

INDEX TO FORM10-Q

|              |  |                                                                                                                                                  |  |         |    |        |  |  |  |  |
|--------------|--|--------------------------------------------------------------------------------------------------------------------------------------------------|--|---------|----|--------|--|--|--|--|
|         |  |                                                                                                                                             |  | PageNo. |
| **PARTI.**   |  | **FINANCIALINFORMATION**                                                                                                                         |  |
| Item1        |  | Financial Statements                                                                                                                             |  |
|         |  | CondensedConsolidated Balance Sheets at June 30, 2005 (unaudited) and December31, 2004                                                           |  |    | 3  |   |
|         |  | Unaudited CondensedConsolidated Statements of Operations and Comprehensive (Loss) Incomefor the three and six months ended June 30, 2005 and2004 |  |    | 4  |   |
|         |  | Unaudited CondensedConsolidated Statements of Changes in Shareholders' Equity forthe six months ended June 30, 2005 and 2004                     |  |    | 5  |   |
|         |  | Unaudited Condensed Consolidated Statements of CashFlows for the six months ended June 30, 2005 and2004                                          |  |    | 6  |   |
|         |  | Notes to the UnauditedCondensed Consolidated Financial Statements                                                                                |  |    | 7  |   |
| Item 2       |  | Management's Discussion and Analysis ofFinancial Condition and Results ofOperations                                                              |  |    | 21 |   |
| Item 3       |  | Quantitative and Qualitative Disclosures aboutMarket Risk                                                                                        |  |    | 53 |   |
| Item 4       |  | Controls andProcedures                                                                                                                           |  |    | 55 |   |
| **PART II.** |  | **OTHERINFORMATION**                                                                                                                             |  |
| Item 1       |  | LegalProceedings                                                                                                                                 |  |    | 57 |   |
| Item 2       |  | UnregisteredSales of Equity Securities and Use of Proceeds                                                                                       |  |    | 57 |   |
| Item 4       |  | Submission of Matters to a Vote of SecurityHolders                                                                                               |  |    | 57 |   |
| Item6        |  | Exhibits                                                                                                                                         |  |    | 57 |   |
|              |

2

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PART 1. FINANCIALINFORMATION

ITEM 1. FINANCIAL STATEMENTS

QUANTACAPITAL HOLDINGS LTD. CONDENSED CONSOLIDATED BALANCE SHEETS(Expressed in thousands of U.S. dollars except for share and pershareamounts)

|                                                                                                                                                      |  |             |           |                 |  |        |         |         |  |  |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--|-------------|-----------|-----------------|--|--------|---------|---------|--|--|
|                                                                                                                                                 |  | June30,2005 |           | December31,2004 |
|                                                                                                                                                 |  | (unaudited) |           |            |
| **Assets**                                                                                                                                           |  |        |      |            |  |   |    |    |
| Investmentsat fair value (amortized cost: June 30, 2005, $716,853; December 31,2004, $600,161)                                                       |  |        |      |            |  |   |    |    |
| Availablefor sale investments (Restricted at fair value: June 30, 2005:$385,549; December 31, 2004:$341,655)                                         |  | $           | 675,035   |            |  | $      | 559,430 |    |
| Tradinginvestments related to depositliabilities                                                                                                     |  |        | 39,898    |            |  |   | 40,492  |    |
| Totalinvestments at fairvalue                                                                                                                        |  |        | 714,933   |            |  |   | 599,922 |    |
| Cash and cashequivalents                                                                                                                             |  |        | 61,719    |            |  |   | 32,775  |    |
| Restrictedcash and cashequivalents                                                                                                                   |  |        | 35,441    |            |  |   | 42,482  |    |
| Accruedinvestmentincome                                                                                                                              |  |        | 5,223     |            |  |   | 4,719   |    |
| Premiumsreceivable                                                                                                                                   |  |        | 202,560   |            |  |   | 146,784 |    |
| Lossesand loss adjustment expensesrecoverable                                                                                                        |  |        | 37,584    |            |  |   | 13,519  |    |
| Otheraccountsreceivable                                                                                                                              |  |        | 9,136     |            |  |   | 11,575  |    |
| Deferredacquisition costs,net                                                                                                                        |  |        | 45,484    |            |  |   | 41,496  |    |
| Deferredreinsurancepremiums                                                                                                                          |  |        | 74,353    |            |  |   | 47,416  |    |
| Property andequipment, net of accumulated depreciation of $3,055 (December 31,2004: $1,625)                                                          |  |        | 5,830     |            |  |   | 4,875   |    |
| Goodwilland other intangibleassets                                                                                                                   |  |        | 20,247    |            |  |   | 20,617  |    |
| Otherassets                                                                                                                                          |  |        | 30,005    |            |  |   | 14,553  |    |
| Totalassets                                                                                                                                          |  | $           | 1,242,515 |            |  | $      | 980,733 |    |
| **Liabilities**                                                                                                                                      |  |        |      |            |  |   |    |    |
| Reservefor losses and lossexpenses                                                                                                                   |  | $           | 260,314   |            |  | $      | 159,794 |    |
| Unearnedpremiums                                                                                                                                     |  |        | 348,036   |            |  |   | 247,936 |    |
| Environmentalliabilitiesassumed                                                                                                                      |  |        | 20,805    |            |  |   | 6,518   |    |
| Reinsurancebalancespayable                                                                                                                           |  |        | 36,037    |            |  |   | 24,929  |    |
| Accountspayable and accruedexpenses                                                                                                                  |  |        | 20,356    |            |  |   | 17,360  |    |
| Net payablefor investmentspurchased                                                                                                                  |  |        | 8,515     |            |  |   | 3,749   |    |
| Depositliabilities                                                                                                                                   |  |        | 42,946    |            |  |   | 43,365  |    |
| Deferredincome and otherliabilities                                                                                                                  |  |        | 6,405     |            |  |   | 4,935   |    |
| Juniorsubordinateddebentures                                                                                                                         |  |        | 61,857    |            |  |   | 41,238  |    |
| Totalliabilities                                                                                                                                     |  | $           | 805,271   |            |  | $      | 549,824 |    |
| Commitmentsand contingencies (Note9)                                                                                                                 |  |        |      |            |  |   |    |    |
| **Shareholders'equity**                                                                                                                              |  |        |      |            |  |   |    |    |
| Preferred shares($0.01 par value; 25,000,000 shares authorized; none issued andoutstanding at June 30, 2005 and December 31,2004)                    |  | $           | —   |            |  | $      | — |    |
| Commonshares ($0.01 par value; 200,000,000 shares authorized; 56,810,020and 56,798,218 issued and outstanding at June 30, 2005 and December 31,2004) |  |        | 568       |            |  |   | 568     |    |
| Additional paid-incapital                                                                                                                            |  |        | 523,843   |            |  |   | 523,771 |    |
| Accumulateddeficit                                                                                                                                   |  |        | (85,171   | )          |  |   | (93,058 | )  |
| Accumulatedother comprehensiveloss                                                                                                                   |  |        | (1,996    | )          |  |   | (372    | )  |
| Totalshareholders'equity                                                                                                                             |  | $           | 437,244   |            |  | $      | 430,909 |    |
| **Totalliabilities and shareholders'equity**                                                                                                         |  | $           | 1,242,515 |            |  | $      | 980,733 |    |
|                                                                                                                                                      |

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

3

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QUANTA CAPITAL HOLDINGS LTD.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE INCOME (LOSS)(Expressed in thousands of U.S.dollars except for share and per shareamounts)

|                                                                                                                |  |                   |            |                 |  |               |            |              |  |        |            |         |  |        |            |         |  |  |
|----------------------------------------------------------------------------------------------------------------|--|-------------------|------------|-----------------|--|---------------|------------|--------------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                                                                           |  | ThreeMonths Ended |            | Six MonthsEnded |
|                                                                                                           |  | June 30,2005      |            | June 30, 2004   |  | June 30, 2005 |            | June 30,2004 |
| **Revenues**                                                                                                   |  |              |       |            |  |          |       |         |  |   |       |    |  |   |       |    |
| Grosspremiumswritten                                                                                           |  | $                 | 168,548    |            |  | $             | 134,971    |         |  | $      | 341,274    |    |  | $      | 253,700    |    |
|                                                                                                           |  |              |       |            |  |          |       |         |  |   |       |    |  |   |       |    |
| Netpremiumswritten                                                                                             |  | $                 | 127,364    |            |  | $             | 114,063    |         |  | $      | 270,241    |    |  | $      | 226,518    |    |
| Changein net unearnedpremiums                                                                                  |  |              | (22,355    | )          |  |          | (57,208    | )       |  |   | (73,747    | )  |  |   | (142,428   | )  |
| Netpremiumsearned                                                                                              |  |              | 105,009    |            |  |          | 56,855     |         |  |   | 196,494    |    |  |   | 84,090     |    |
|                                                                                                           |  |
| Technicalservicesrevenues                                                                                      |  |              | 7,176      |            |  |          | 8,346      |         |  |   | 14,327     |    |  |   | 14,853     |    |
| Netinvestmentincome                                                                                            |  |              | 6,187      |            |  |          | 3,318      |         |  |   | 11,412     |    |  |   | 6,553      |    |
| Netrealized gains (losses) oninvestments                                                                       |  |              | 862        |            |  |          | (827       | )       |  |   | 379        |    |  |   | 368        |    |
| Netforeign exchange gains(losses)                                                                              |  |              | 88         |            |  |          | (96        | )       |  |   | (24        | )  |  |   | 128        |    |
| Otherincome                                                                                                    |  |              | 3,068      |            |  |          | 235        |         |  |   | 4,755      |    |  |   | 426        |    |
| Totalrevenues                                                                                                  |  |              | 122,390    |            |  |          | 67,831     |         |  |   | 227,343    |    |  |   | 106,418    |    |
| **Expenses**                                                                                                   |  |
| Netlosses and lossexpenses                                                                                     |  |              | 62,519     |            |  |          | 32,325     |         |  |   | 120,015    |    |  |   | 48,220     |    |
| Acquisitionexpenses                                                                                            |  |              | 19,243     |            |  |          | 12,837     |         |  |   | 39,720     |    |  |   | 19,454     |    |
| Directtechnical servicescosts                                                                                  |  |              | 5,999      |            |  |          | 5,827      |         |  |   | 10,860     |    |  |   | 10,211     |    |
| Generaland administrativeexpenses                                                                              |  |              | 23,976     |            |  |          | 14,577     |         |  |   | 44,847     |    |  |   | 30,406     |    |
| Interestexpense                                                                                                |  |              | 944        |            |  |          | —    |         |  |   | 1,771      |    |  |   | —    |    |
| Depreciationof fixed assets and amortization of intangibleassets                                               |  |              | 959        |            |  |          | 450        |         |  |   | 1,801      |    |  |   | 837        |    |
| Totalexpenses                                                                                                  |  |              | 113,640    |            |  |          | 66,016     |         |  |   | 219,014    |    |  |   | 109,128    |    |
| Income(loss) before incometaxes                                                                                |  |              | 8,750      |            |  |          | 1,815      |         |  |   | 8,329      |    |  |   | (2,710     | )  |
| Incometaxexpense                                                                                               |  |              | 220        |            |  |          | —    |         |  |   | 442        |    |  |   | —    |    |
| **Netincome(loss)**                                                                                            |  |              | 8,530      |            |  |          | 1,815      |         |  |   | 7,887      |    |  |   | (2,710     | )  |
| **Othercomprehensive income (loss)**                                                                           |  |
| Net unrealizedinvestment gains (losses) arising during the period, net of incometaxes                          |  |              | 6,427      |            |  |          | (9,250     | )       |  |   | (1,336     | )  |  |   | (5,288     | )  |
| Foreigncurrency translationadjustments                                                                         |  |              | 96         |            |  |          | (7         | )       |  |   | 91         |    |  |   | (20        | )  |
| Reclassificationof net realized (gains) losses on investments included in net income(loss), net of incometaxes |  |              | (862       | )          |  |          | 827        |         |  |   | (379       | )  |  |   | (368       | )  |
| Othercomprehensive income(loss)                                                                                |  |              | 5,661      |            |  |          | (8,430     | )       |  |   | (1,624     | )  |  |   | (5,676     | )  |
| **Comprehensiveincome(loss)**                                                                                  |  | $                 | 14,191     |            |  | $             | (6,615     | )       |  | $      | 6,263      |    |  | $      | (8,386     | )  |
|                                                                                                           |  |              |       |            |  |          |       |         |  |   |       |    |  |   |       |    |
| Weightedaverage common share and common share equivalents –basic                                         |  |              | 56,801,890 |            |  |          | 56,798,218 |         |  |   | 56,800,054 |    |  |   | 56,798,218 |    |
| diluted                                                                                                        |  |              | 56,801,890 |            |  |          | 57,528,692 |         |  |   | 56,800,054 |    |  |   | 56,798,218 |    |
| Basicincome (loss) pershare                                                                                    |  | $                 | 0.15       |            |  | $             | 0.03       |         |  | $      | 0.14       |    |  | $      | (0.05      | )  |
| Dilutedincome (loss) pershare                                                                                  |  | $                 | 0.15       |            |  | $             | 0.03       |         |  | $      | 0.14       |    |  | $      | (0.05      | )  |
|                                                                                                                |

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

4

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QUANTA CAPITAL HOLDINGS LTD.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES INSHAREHOLDERS' EQUITY(Expressed in thousands of U.S.dollars except for share and per shareamounts)

|                                                                  |  |                                     |         |                                       |  |        |         |         |  |  |
|------------------------------------------------------------------|--|-------------------------------------|---------|---------------------------------------|--|--------|---------|---------|--|--|
|                                                             |  | Forthe sixmonths endedJune 30, 2005 |         | For the sixmonths ended June 30, 2004 |
| **Share capital– preferred shares of par value $0.01each** |  | $                                   | — |                                  |  | $      | — |    |
|                                                             |  |                                |    |                                  |  |   |    |    |
| **Sharecapital – common shares of par value $0.01each**    |  |                                |    |                                  |  |   |    |    |
| Balance at beginning ofperiod                                    |  |                                | 568     |                                  |  |   | 568     |    |
| Issued duringperiod                                              |  |                                | — |                                  |  |   | — |    |
| Balanceat end ofperiod                                           |  |                                | 568     |                                  |  |   | 568     |    |
|                                                             |  |                                |    |                                  |  |   |    |    |
| **Additionalpaid-in capital**                                    |  |                                |    |                                  |  |   |    |    |
| Balance atbeginning ofperiod                                     |  |                                | 523,771 |                                  |  |   | 524,235 |    |
| Common sharesissued during period                                |  |                                | 72      |                                  |  |   | — |    |
| Netofferingcosts                                                 |  |                                | — |                                  |  |   | (472    | )  |
| Balanceat end ofperiod                                           |  |                                | 523,843 |                                  |  |   | 523,763 |    |
|                                                             |  |                                |    |                                  |  |   |    |    |
| **Accumulateddeficit**                                           |  |                                |    |                                  |  |   |    |    |
| Balance at beginningof period                                    |  |                                | (93,058 | )                                |  |   | (38,477 | )  |
| Netincome (loss) forperiod                                       |  |                                | 7,887   |                                  |  |   | (2,710  | )  |
| Balanceat end ofperiod                                           |  |                                | (85,171 | )                                |  |   | (41,187 | )  |
|                                                             |  |                                |    |                                  |  |   |    |    |
| **Accumulatedother comprehensiveloss**                           |  |                                |    |                                  |  |   |    |    |
| Balance at beginning ofperiod                                    |  |                                | (372    | )                                |  |   | 1,157   |    |
| Net change inunrealized losses on investments, net oftax         |  |                                | (1,715  | )                                |  |   | (5,656  | )  |
| Foreign currencytranslationadjustments                           |  |                                | 91      |                                  |  |   | (20     | )  |
| Balanceat end ofperiod                                           |  |                                | (1,996  | )                                |  |   | (4,519  | )  |
|                                                             |  |                                |    |                                  |  |   |    |    |
| **Totalshareholders'equity**                                     |  | $                                   | 437,244 |                                  |  | $      | 478,625 |    |
|                                                                  |

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

5

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QUANTA CAPITAL HOLDINGS LTD.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Expressed in thousands of U.S.dollars)

|                                                                                           |  |                                      |          |                                    |  |        |          |         |  |  |
|-------------------------------------------------------------------------------------------|--|--------------------------------------|----------|------------------------------------|--|--------|----------|---------|--|--|
|                                                                                      |  | Forthe sixmonths ended June 30, 2005 |          | For thesixmonths endedJune 30,2004 |
| **Cash flows from operatingactivities**                                                   |  |                                 |     |                               |  |   |     |    |
| Net income(loss)                                                                          |  | $                                    | 7,887    |                               |  | $      | (2,710   | )  |
| **Adjustmentsto reconcile net income (loss) to net cash provided by operatingactivities** |  |                                 |     |                               |  |   |     |    |
| Depreciationof property andequipment                                                      |  |                                 | 1,431    |                               |  |   | 467      |    |
| Amortization ofintangibleassets                                                           |  |                                 | 370      |                               |  |   | 370      |    |
| Amortization ofdiscounts oninvestments                                                    |  |                                 | 716      |                               |  |   | 1,834    |    |
| Net realized(gains) losses oninvestments                                                  |  |                                 | (379     | )                             |  |   | (368     | )  |
| Net changein fair value of derivativeinstruments                                          |  |                                 | 408      |                               |  |   | (8       | )  |
| Non-cash stockcompensationexpense                                                         |  |                                 | 72       |                               |  |   | —  |    |
|                                                                                      |  |                                 |     |                               |  |   |     |    |
| Changesin assets andliabilities:                                                          |  |                                 |     |                               |  |   |     |    |
| Restricted cash andcash equivalents                                                       |  |                                 | 7,041    |                               |  |   | 3,941    |    |
| Accruedinvestmentincome                                                                   |  |                                 | (504     | )                             |  |   | (1,238   | )  |
| Premiumsreceivable                                                                        |  |                                 | (55,776  | )                             |  |   | (143,790 | )  |
| Lossesand loss adjustment expensesrecoverable                                             |  |                                 | (24,065  | )                             |  |   | 979      |    |
| Deferredacquisitioncosts                                                                  |  |                                 | (3,988   | )                             |  |   | (31,879  | )  |
| Deferredreinsurancepremiums                                                               |  |                                 | (26,937  | )                             |  |   | (21,331  | )  |
| Otheraccountsreceivable                                                                   |  |                                 | 2,439    |                               |  |   | (1,405   | )  |
| Otherassets                                                                               |  |                                 | (14,424  | )                             |  |   | (2,928   | )  |
| Reserve forlosses and loss adjustmentexpenses                                             |  |                                 | 100,520  |                               |  |   | 47,091   |    |
| Unearnedpremiums                                                                          |  |                                 | 100,100  |                               |  |   | 163,705  |    |
| Environmentalliabilitiesassumed                                                           |  |                                 | 14,287   |                               |  |   | (256     | )  |
| Reinsurancebalancespayable                                                                |  |                                 | 11,108   |                               |  |   | 15,988   |    |
| Accountspayable and accruedexpenses                                                       |  |                                 | 2,996    |                               |  |   | (5,826   | )  |
| Deferredincome and otherliabilities                                                       |  |                                 | 1,470    |                               |  |   | 5,841    |    |
| Depositliabilities                                                                        |  |                                 | (419     | )                             |  |   | —  |    |
| Netcash provided by operatingactivities                                                   |  |                                 | 124,353  |                               |  |   | 28,477   |    |
| **Cashflows used in investingactivities**                                                 |  |                                 |     |                               |  |   |     |    |
| Proceeds from saleof fixed maturities and short-terminvestments                           |  |                                 | 736,508  |                               |  |   | 477,965  |    |
| Purchasesof fixed maturities and short-terminvestments                                    |  |                                 | (849,122 | )                             |  |   | (498,686 | )  |
| Purchasesof property andequipment                                                         |  |                                 | (2,386   | )                             |  |   | (2,472   | )  |
| Netcash used in investingactivities                                                       |  |                                 | (115,000 | )                             |  |   | (23,193  | )  |
| **Cashflows used in financingactivities**                                                 |  |                                 |     |                               |  |   |     |    |
| Net offeringcosts                                                                         |  |                                 | —  |                               |  |   | (472     | )  |
| Proceeds fromjunior subordinated debentures, net of issuancecosts                         |  |                                 | 19,591   |                               |  |   | —  |    |
| Netcash provided by (used in) financingactivities                                         |  |                                 | 19,591   |                               |  |   | (472     | )  |
| Increasein cash and cashequivalents                                                       |  |                                 | 28,944   |                               |  |   | 4,812    |    |
| Cash andcash equivalents at beginning ofperiod                                            |  |                                 | 32,775   |                               |  |   | 36,694   |    |
| Cashand cash equivalents at end ofperiod                                                  |  | $                                    | 61,719   |                               |  | $      | 41,506   |    |
|                                                                                      |  |                                 |     |                               |  |   |     |    |
|                                                                                           |

|  |                                                                                                         |
|--|---------------------------------------------------------------------------------------------------------|
|  | Theaccompanying notes are an integral part of these unaudited condensedconsolidated financialstatements |

6

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QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; expressedin thousands of US dollars except for share and per share amounts,or as otherwise stated)

1.    Descriptionof business and basis of presentation

Quanta Capital HoldingsLtd. ("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 provide specialtyinsurance, reinsurance, risk assessment and risk technical services andproducts on a global basis. Quanta Holdings conducts its insurance andreinsurance operations principally through subsidiaries operating inBermuda, the United States of America and Europe.

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

Interimfinancial information

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

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

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

|  |              |                                                 |
|--|--------------|-------------------------------------------------|
|  | •  | reserves for lossesand loss adjustmentexpenses; |

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

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

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

|  |              |                                  |
|--|--------------|----------------------------------|
|  | •  | environmentalliabilitiesassumed; |

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

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

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

7

----

QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; expressedin thousands of US dollars except for share and per share amounts,or as otherwise stated)

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 six months periodsended June 30, 2004, have been renamed technical service revenues anddirect technical service costs.

2.    Significant accountingpolicies

A detailed discussion and analysis of theCompany's significant accounting policies is provided in thenotes to the Company's audited consolidated financial statementsas of and for the year ended December 31, 2004 included in its Form10-K.

Non-Traditional Contracts

The Companywrites non-traditional contracts of insurance and reinsurance. TheCompany may account for these transactions as deposits held on behalfof 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 sixmonths ended June 30, 2005, the Company recognized in other income $0.8million and $1.8 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 total approximately$27.2 million and $55.2 million in the three and six months ended June30, 2005.

Of the $0.8 million and $1.8 million, $0.1 million and$0.3 million of other income recognized during the three and six monthsended June 30, 2005 relate to fees earned from a surplus relief lifereinsurance arrangement with a U.S. insurance company which meets theCompany's definition of a non-traditional contract.   Inthe fourth quarter  of 2004, under this contract the Company madean arrangement with a client and assumed, through novation agreements,several life reinsurance  contracts it had made. Because theCompany assumed these contracts, the client, which is subject toinsurance regulation in the United States and therefore is required tomaintain a certain amount of statutory capital, may reduce itsstatutory capital requirements. In exchange for the Company'sassumption of the contracts it received a fee. The arrangement, amongother things, also provides that on certain dates and during specificperiods, the client has the right but not the obligation to recapturethe life reinsurance contracts the Company has 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.

The Company believes the arrangement,including the client's option to recapture, and the assumption ofthe life insurance contracts constitute one contract with minimalmortality, credit or other insurance or economic risk which results indeposit accounting. Although the Company believes its client willexercise the recapture, 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 consolidated statement ofoperations. With respect to this particular arrangement, at this time,the Company believes that the gross life reinsurance premiums written,of approximately $5.0 million and $10.6 million for the three and sixmonths ended June 30, 2005, that would have been recognized had depositaccounting not been appropriate, would not have had a material effecton the Company's financial position and 

8

----

QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; expressedin thousands of US dollars except for share and per share amounts,or as otherwise stated)

results of operations. However, as theunderlying life insurance contracts mature the effect on theCompany's financial condition and results of operations maybecome material.

The remaining $0.7 million and $1.5 million ofother income recognized during the three and six months ended June 30,2005 relates to revenues earned from three reinsurance contractsaccounted for as deposits. Although these contracts did possess someunderwriting and timing risks as prescribed by SFAS No. 113, theCompany does not believe it is exposed to a reasonable possibility ofsignificant loss.

3.    Recent accounting pronouncements

In June 2005, the Financial Accounting Standards Board's("FASB") Emerging Issues Task Force("EITF") decided not to provide additionalguidance on the meaning of other than temporary impairment and directedthe staff to issue proposed FASB Staff 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 impairment is deemed other-than-temporary, even ifthe decision to sell has not been made. The FASB decided that FSP FAS115-1 would be effective for other than temporary impairment analysisconducted in periods beginning after September 15, 2005. The Companyanticipates that the adoption of FSP FAS 115-1 will not have a materialeffect on the Company's consolidated results of operations,financial position or cash flows.

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

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

4.    Segmentinformation

The following tables summarize the Company'sresults before income taxes for each reportable segment for the threeand six months ended June 30, 2005 and 2004 based on the reportablesegments in effect during the year ended December 31, 2004.

9

----

QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; expressedin thousands of US dollars except for share and per share amounts,or as otherwise stated)

|                                                            |  |                                 |         |                      |  |         |         |                   |  |                   |         |                             |  |              |         |         |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------------------------|--|---------------------------------|---------|----------------------|--|---------|---------|-------------------|--|-------------------|---------|-----------------------------|--|--------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                       |  | Threemonths ended June 30, 2005 |
| Statement ofoperationsbysegment                            |  | Specialtyinsurance              |         | Specialtyreinsurance |  | Lloyd's |         | Underwritingtotal |  | Technicalservices |         | Adjustments andeliminations |  | Consolidated |
|                                                       |  |                            |    |                 |  |    |    |              |  |              |    |                        |  |         |    |    |  |   |    |    |  |   |    |    |  |   |    |    |
| Directinsurance                                            |  | $                               | 82,038  |                 |  | $       | — |              |  | $                 | 24,666  |                        |  | $            | 106,704 |    |  | $      | — |    |  | $      | — |    |  | $      | 106,704 |    |
| Reinsuranceassumed                                         |  |                            | 7,053   |                 |  |    | 54,791  |              |  |              | — |                        |  |         | 61,844  |    |  |   | — |    |  |   | — |    |  |   | 61,844  |    |
| Totalgross premiumswritten                                 |  |                            | 89,091  |                 |  |    | 54,791  |              |  |              | 24,666  |                        |  |         | 168,548 |    |  |   | — |    |  |   | — |    |  |   | 168,548 |    |
| Premiumsceded                                              |  |                            | (27,420 | )               |  |    | (10,050 | )            |  |              | (3,714  | )                      |  |         | (41,184 | )  |  |   | — |    |  |   | — |    |  |   | (41,184 | )  |
| Netpremiumswritten                                         |  | $                               | 61,671  |                 |  | $       | 44,741  |              |  | $                 | 20,952  |                        |  | $            | 127,364 |    |  | $      | — |    |  | $      | — |    |  | $      | 127,364 |    |
|                                                       |  |                            |    |                 |  |    |    |              |  |              |    |                        |  |         |    |    |  |   |    |    |  |   |    |    |  |   |    |    |
| Netpremiumsearned                                          |  | $                               | 43,400  |                 |  | $       | 53,761  |              |  | $                 | 7,848   |                        |  | $            | 105,009 |    |  | $      | — |    |  | $      | — |    |  | $      | 105,009 |    |
| Technicalservicesrevenues                                  |  |                            | — |                 |  |    | — |              |  |              | — |                        |  |         | — |    |  |   | 8,085   |    |  |   | (909    | )  |  |   | 7,176   |    |
| Otherincome                                                |  |                            | 575     |                 |  |    | 758     |              |  |              | — |                        |  |         | 1,333   |    |  |   | 1,794   |    |  |   | — |    |  |   | 3,127   |    |
| Netlosses and lossexpenses                                 |  |                            | (23,974 | )               |  |    | (34,452 | )            |  |              | (4,180  | )                      |  |         | (62,606 | )  |  |   | — |    |  |   | 87      |    |  |   | (62,519 | )  |
| Directtechnical servicescosts                              |  |                            | — |                 |  |    | — |              |  |              | — |                        |  |         | — |    |  |   | (5,999  | )  |  |   | — |    |  |   | (5,999  | )  |
| Acquisitionexpenses                                        |  |                            | (6,112  | )               |  |    | (12,189 | )            |  |              | (942    | )                      |  |         | (19,243 | )  |  |   | — |    |  |   | — |    |  |   | (19,243 | )  |
| Generaland administrativeexpenses                          |  |                            | (11,383 | )               |  |    | (6,404  | )            |  |              | (4,312  | )                      |  |         | (22,099 | )  |  |   | (2,699  | )  |  |   | 822     |    |  |   | (23,976 | )  |
| **Segmentincome(loss)**                                    |  | $                               | 2,506   |                 |  | $       | 1,474   |              |  | $                 | (1,586  | )                      |  | $            | 2,394   |    |  | $      | 1,181   |    |  | $      | — |    |  | $      | 3,575   |    |
| Depreciation of fixed assetsand amortization ofintangibles |  |                            |    |                 |  |    |    |              |  |              |    |                        |  |         |    |    |  |   |    |    |  |   |    |    |  | $      | (959    | )  |
| Interestexpense                                            |  |                            |    |                 |  |    |    |              |  |              |    |                        |  |         |    |    |  |   |    |    |  |   |    |    |  |   | (944    | )  |
| Netinvestmentincome                                        |  |                            |    |                 |  |    |    |              |  |              |    |                        |  |         |    |    |  |   |    |    |  |   |    |    |  |   | 6,187   |    |
| Netrealized gains oninvestments                            |  |                            |    |                 |  |    |    |              |  |              |    |                        |  |         |    |    |  |   |    |    |  |   |    |    |  |   | 862     |    |
| Otherloss                                                  |  |                            |    |                 |  |    |    |              |  |              |    |                        |  |         |    |    |  |   |    |    |  |   |    |    |  |   | (59     | )  |
| Netforeign exchangegains                                   |  |                            |    |                 |  |    |    |              |  |              |    |                        |  |         |    |    |  |   |    |    |  |   |    |    |  |   | 88      |    |
| **Netincome before incometaxes**                           |  |                            |    |                 |  |    |    |              |  |              |    |                        |  |         |    |    |  |   |    |    |  |   |    |    |  | $      | 8,750   |    |
|                                                            |

10

----

QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; expressedin thousands of US dollars except for share and per share amounts,or as otherwise stated)

|                                                            |  |                                 |         |                       |  |                   |         |                    |  |                             |         |              |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------------------------|--|---------------------------------|---------|-----------------------|--|-------------------|---------|--------------------|--|-----------------------------|---------|--------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                       |  | Threemonths ended June 30, 2004 |
| Statement ofoperations by segment                          |  | Specialtyinsurance              |         | Specialty reinsurance |  | Underwritingtotal |         | Technical services |  | Adjustments andeliminations |         | Consolidated |
|                                                       |  |                            |    |                  |  |              |    |               |  |                        |    |         |  |   |    |    |  |   |    |    |  |   |    |    |
| Directinsurance                                            |  | $                               | 23,221  |                  |  | $                 | — |               |  | $                           | 23,221  |         |  | $      | — |    |  | $      | — |    |  | $      | 23,221  |    |
| Reinsuranceassumed                                         |  |                            | 44,619  |                  |  |              | 67,131  |               |  |                        | 111,750 |         |  |   | — |    |  |   | — |    |  |   | 111,750 |    |
| Totalgross premiumswritten                                 |  |                            | 67,840  |                  |  |              | 67,131  |               |  |                        | 134,971 |         |  |   | — |    |  |   | — |    |  |   | 134,971 |    |
| Premiumsceded                                              |  |                            | (20,908 | )                |  |              | — |               |  |                        | (20,908 | )       |  |   | — |    |  |   | — |    |  |   | (20,908 | )  |
| Netpremiumswritten                                         |  | $                               | 46,932  |                  |  | $                 | 67,131  |               |  | $                           | 114,063 |         |  | $      | — |    |  | $      | — |    |  | $      | 114,063 |    |
|                                                       |  |                            |    |                  |  |              |    |               |  |                        |    |         |  |   |    |    |  |   |    |    |  |   |    |    |
| Netpremiumsearned                                          |  | $                               | 17,623  |                  |  | $                 | 39,232  |               |  | $                           | 56,855  |         |  | $      | — |    |  | $      | — |    |  | $      | 56,855  |    |
| Technicalservicesrevenues                                  |  |                            | — |                  |  |              | — |               |  |                        | — |         |  |   | 8,841   |    |  |   | (495    | )  |  |   | 8,346   |    |
| Otherincome                                                |  |                            | — |                  |  |              | — |               |  |                        | — |         |  |   | 118     |    |  |   | — |    |  |   | 118     |    |
| Netlosses and lossexpenses                                 |  |                            | (8,839  | )                |  |              | (23,486 | )             |  |                        | (32,325 | )       |  |   | — |    |  |   | — |    |  |   | (32,325 | )  |
| Directtechnical servicescosts                              |  |                            | — |                  |  |              | — |               |  |                        | — |         |  |   | (5,827  | )  |  |   | — |    |  |   | (5,827  | )  |
| Acquisitionexpenses                                        |  |                            | (4,337  | )                |  |              | (8,500  | )             |  |                        | (12,837 | )       |  |   | — |    |  |   | — |    |  |   | (12,837 | )  |
| Generaland administrativeexpenses                          |  |                            | (7,396  | )                |  |              | (5,381  | )             |  |                        | (12,777 | )       |  |   | (2,295  | )  |  |   | 495     |    |  |   | (14,577 | )  |
| **Segment(loss)income**                                    |  | $                               | (2,949  | )                |  | $                 | 1,865   |               |  | $                           | (1,084  | )       |  | $      | 837     |    |  | $      | — |    |  | $      | (247    | )  |
| Depreciation of fixed assetsand amortization ofintangibles |  |                            |    |                  |  |              |    |               |  |                        |    |         |  |   |    |    |  |   |    |    |  |   | (450    | )  |
| Netinvestmentincome                                        |  |                            |    |                  |  |              |    |               |  |                        |    |         |  |   |    |    |  |   |    |    |  |   | 3,318   |    |
| Netrealized gains oninvestments                            |  |                            |    |                  |  |              |    |               |  |                        |    |         |  |   |    |    |  |   |    |    |  |   | (827    | )  |
| Otherincome                                                |  |                            |    |                  |  |              |    |               |  |                        |    |         |  |   |    |    |  |   |    |    |  |   | 117     |    |
| Netforeign exchangelosses                                  |  |                            |    |                  |  |              |    |               |  |                        |    |         |  |   |    |    |  |   |    |    |  |   | (96     | )  |
| **Netincome before incometaxes**                           |  |                            |    |                  |  |              |    |               |  |                        |    |         |  |   |    |    |  |   |    |    |  | $      | 1,815   |    |
|                                                            |

11

----

QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; expressedin thousands of US dollars except for share and per share amounts,or as otherwise stated)

|                                                            |  |                               |         |                      |  |         |         |                   |  |                    |         |                             |  |              |          |         |  |        |         |         |  |        |         |         |  |        |          |         |  |  |
|------------------------------------------------------------|--|-------------------------------|---------|----------------------|--|---------|---------|-------------------|--|--------------------|---------|-----------------------------|--|--------------|----------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--------|----------|---------|--|--|
|                                                       |  | Sixmonths ended June 30, 2005 |
| Statement ofoperations by segment                          |  | Specialtyinsurance            |         | Specialtyreinsurance |  | Lloyd's |         | Underwritingtotal |  | Technical services |         | Adjustments andeliminations |  | Consolidated |
|                                                       |  |                          |    |                 |  |    |    |              |  |               |    |                        |  |         |     |    |  |   |    |    |  |   |    |    |  |   |     |    |
| Directinsurance                                            |  | $                             | 148,216 |                 |  | $       | — |              |  | $                  | 40,959  |                        |  | $            | 189,175  |    |  | $      | — |    |  | $      | — |    |  | $      | 189,175  |    |
| Reinsuranceassumed                                         |  |                          | 12,536  |                 |  |    | 139,563 |              |  |               | — |                        |  |         | 152,099  |    |  |   | — |    |  |   | — |    |  |   | 152,099  |    |
| Totalgross premiumswritten                                 |  |                          | 160,752 |                 |  |    | 139,563 |              |  |               | 40,959  |                        |  |         | 341,274  |    |  |   | — |    |  |   | — |    |  |   | 341,274  |    |
| Premiumsceded                                              |  |                          | (52,350 | )               |  |    | (11,347 | )            |  |               | (7,336  | )                      |  |         | (71,033  | )  |  |   | — |    |  |   | — |    |  |   | (71,033  | )  |
| Netpremiumswritten                                         |  | $                             | 108,402 |                 |  | $       | 128,216 |              |  | $                  | 33,623  |                        |  | $            | 270,241  |    |  | $      | — |    |  | $      | — |    |  | $      | 270,241  |    |
|                                                       |  |                          |    |                 |  |    |    |              |  |               |    |                        |  |         |     |    |  |   |    |    |  |   |    |    |  |   |     |    |
| Netpremiumsearned                                          |  | $                             | 78,835  |                 |  | $       | 106,502 |              |  | $                  | 11,157  |                        |  | $            | 196,494  |    |  | $      | — |    |  | $      | — |    |  | $      | 196,494  |    |
| Technicalservicesrevenues                                  |  |                          | — |                 |  |    | — |              |  |               | — |                        |  |         | —  |    |  |   | 16,085  |    |  |   | (1,758  | )  |  |   | 14,327   |    |
| Otherincome                                                |  |                          | 829     |                 |  |    | 1,548   |              |  |               | — |                        |  |         | 2,377    |    |  |   | 1,917   |    |  |   | — |    |  |   | 4,294    |    |
| Netlosses and lossexpenses                                 |  |                          | (50,631 | )               |  |    | (63,452 | )            |  |               | (6,019  | )                      |  |         | (120,102 | )  |  |   | — |    |  |   | 87      |    |  |   | (120,015 | )  |
| Directtechnical servicescosts                              |  |                          | — |                 |  |    | — |              |  |               | — |                        |  |         | —  |    |  |   | (10,860 | )  |  |   | — |    |  |   | (10,860  | )  |
| Acquisitionexpenses                                        |  |                          | (12,659 | )               |  |    | (25,787 | )            |  |               | (1,274  | )                      |  |         | (39,720  | )  |  |   | — |    |  |   | — |    |  |   | (39,720  | )  |
| Generaland administrativeexpenses                          |  |                          | (21,111 | )               |  |    | (11,297 | )            |  |               | (8,873  | )                      |  |         | (41,281  | )  |  |   | (5,237  | )  |  |   | 1,671   |    |  |   | (44,847  | )  |
| **Segment(loss) income**                                   |  | $                             | (4,737  | )               |  | $       | 7,514   |              |  | $                  | (5,009  | )                      |  | $            | (2,232   | )  |  | $      | 1,905   |    |  | $      | — |    |  | $      | (327     | )  |
| Depreciation of fixed assetsand amortization ofintangibles |  |                          |    |                 |  |    |    |              |  |               |    |                        |  |         |     |    |  |   |    |    |  |   |    |    |  | $      | (1,801   | )  |
| Interestexpense                                            |  |                          |    |                 |  |    |    |              |  |               |    |                        |  |         |     |    |  |   |    |    |  |   |    |    |  |   | (1,771   | )  |
| Netinvestmentincome                                        |  |                          |    |                 |  |    |    |              |  |               |    |                        |  |         |     |    |  |   |    |    |  |   |    |    |  |   | 11,412   |    |
| Netrealized gains oninvestments                            |  |                          |    |                 |  |    |    |              |  |               |    |                        |  |         |     |    |  |   |    |    |  |   |    |    |  |   | 379      |    |
| Otherincome                                                |  |                          |    |                 |  |    |    |              |  |               |    |                        |  |         |     |    |  |   |    |    |  |   |    |    |  |   | 461      |    |
| Netforeign exchangelosses                                  |  |                          |    |                 |  |    |    |              |  |               |    |                        |  |         |     |    |  |   |    |    |  |   |    |    |  |   | (24      | )  |
| **Netincome before incometaxes**                           |  |                          |    |                 |  |    |    |              |  |               |    |                        |  |         |     |    |  |   |    |    |  |   |    |    |  | $      | 8,329    |    |
|                                                            |

12

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QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS     (Unaudited; expressedin thousands of US dollars except for share and per share amounts,or as otherwisestated)

|                                                            |  |                              |         |                       |  |                   |         |                    |  |                             |         |              |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------------------------|--|------------------------------|---------|-----------------------|--|-------------------|---------|--------------------|--|-----------------------------|---------|--------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                       |  | Sixmonths ended June 30,2004 |
| Statement of operations bySegment                          |  | Specialtyinsurance           |         | Specialty reinsurance |  | Underwritingtotal |         | Technical services |  | Adjustments andeliminations |         | Consolidated |
| ** **                                            |  |
| Directinsurance                                            |  | $                            | 39,261  |                  |  | $                 | — |               |  | $                           | 39,261  |         |  | $      | — |    |  | $      | — |    |  | $      | 39,261  |    |
| Reinsuranceassumed                                         |  |                         | 66,611  |                  |  |              | 147,828 |               |  |                        | 214,439 |         |  |   | — |    |  |   | — |    |  |   | 214,439 |    |
| Totalgross premiumswritten                                 |  |                         | 105,872 |                  |  |              | 147,828 |               |  |                        | 253,700 |         |  |   | — |    |  |   | — |    |  |   | 253,700 |    |
| Premiumsceded                                              |  |                         | (27,182 | )                |  |              | — |               |  |                        | (27,182 | )       |  |   | — |    |  |   | — |    |  |   | (27,182 | )  |
| Netpremiumswritten                                         |  | $                            | 78,690  |                  |  | $                 | 147,828 |               |  | $                           | 226,518 |         |  | $      | — |    |  | $      | — |    |  | $      | 226,518 |    |
| Netpremiumsearned                                          |  | $                            | 21,632  |                  |  | $                 | 62,458  |               |  | $                           | 84,090  |         |  | $      | — |    |  | $      | — |    |  | $      | 84,090  |    |
| Technicalservicesrevenues                                  |  |                         | — |                  |  |              | — |               |  |                        | — |         |  |   | 15,877  |    |  |   | (1,024  | )  |  |   | 14,853  |    |
| Otherincome                                                |  |                         | — |                  |  |              | — |               |  |                        | — |         |  |   | 277     |    |  |   | — |    |  |   | 277     |    |
| Netlosses and lossexpenses                                 |  |                         | (11,014 | )                |  |              | (37,206 | )             |  |                        | (48,220 | )       |  |   | — |    |  |   | — |    |  |   | (48,220 | )  |
| Directtechnical servicescosts                              |  |                         | — |                  |  |              | — |               |  |                        | — |         |  |   | (10,211 | )  |  |   | — |    |  |   | (10,211 | )  |
| Acquisitionexpenses                                        |  |                         | (5,159  | )                |  |              | (14,295 | )             |  |                        | (19,454 | )       |  |   | — |    |  |   | — |    |  |   | (19,454 | )  |
| Generaland administrativeexpenses                          |  |                         | (16,045 | )                |  |              | (10,573 | )             |  |                        | (26,618 | )       |  |   | (4,812  | )  |  |   | 1,024   |    |  |   | (30,406 | )  |
| **Segment(loss)income**                                    |  | $                            | (10,586 | )                |  | $                 | 384     |               |  | $                           | (10,202 | )       |  | $      | 1,131   |    |  | $      | — |    |  | $      | (9,071  | )  |
| Depreciation of fixedassets and amortization ofintangibles |  |                         |    |                  |  |              |    |               |  |                        |    |         |  |   |    |    |  |   |    |    |  |   | (837    | )  |
| Netinvestmentincome                                        |  |                         |    |                  |  |              |    |               |  |                        |    |         |  |   |    |    |  |   |    |    |  |   | 6,553   |    |
| Netrealized gains oninvestments                            |  |                         |    |                  |  |              |    |               |  |                        |    |         |  |   |    |    |  |   |    |    |  |   | 368     |    |
| Otherincome                                                |  |                         |    |                  |  |              |    |               |  |                        |    |         |  |   |    |    |  |   |    |    |  |   | 149     |    |
| Netforeign exchangegains                                   |  |                         |    |                  |  |              |    |               |  |                        |    |         |  |   |    |    |  |   |    |    |  |   | 128     |    |
| **Netloss before incometaxes**                             |  |                         |    |                  |  |              |    |               |  |                        |    |         |  |   |    |    |  |   |    |    |  | $      | (2,710  | )  |
|                                                            |

Itemsof revenue and expense resulting from charges between segments areeliminated on consolidation of the segments. During the three and sixmonths ended June 30, 2005, the technical services segment charged theunderwriting segment $0.9 million and $1.8 million of revenues fortechnical services rendered which included $0.1 million and zerocharged by the technical services segment related to loss adjustmentexpenses incurred. During the three and six months ended June 30, 2004,the technical services segment charged the underwriting segment $0.5million and $1.0 million of revenues for technical servicesrendered.

The Company's specialty insurance segment writesbusiness both on a direct basis with insured clients or by assumingreinsurance of underlying policies that are issued on its behalf bythird party insurers and reinsurers. Our Lloyd's segment was notestablished until the fourth quarter of 2004.

5.    Stock-based compensation

Employee stock awardsunder the Company's long term incentive compensation plan areaccounted for in accordance with APB 25. Compensation expense for stockoptions and stock-based awards granted to employees is recognized usingthe intrinsic value method to the extent that the fair value of thestock exceeds the exercise price of the option at the measurement date.Any resulting compensation expense is recorded over the shorter of thevesting or service period.

13

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QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS     (Unaudited; expressedin thousands of US dollars except for share and per share amounts,or as otherwisestated)

The Company provides the disclosure as setforth in 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.

PerformanceShare Units

During the six months ended June 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 sixmonths ended June 30, 2005, awards for 105,185 performance share unitswere granted at a weighted average grant date fair value of $8.87.During the three months ended June 30, 2005 and the three and sixmonths ended June 30, 2004, zero awards for performance share unitswere granted.

The following table summarizes the Company'sstock-based compensation, net income (loss) and earnings (loss) pershare for the three and six months ended June 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 CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS     (Unaudited; expressedin thousands of US dollars except for share and per share amounts,or as otherwisestated)

|                                                                                             |  |                   |         |                 |  |               |         |              |  |        |         |         |  |        |         |         |  |  |
|---------------------------------------------------------------------------------------------|--|-------------------|---------|-----------------|--|---------------|---------|--------------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                        |  | Threemonths ended |         | Six monthsended |
|                                                                                        |  | June 30,2005      |         | June 30, 2004   |  | June 30, 2005 |         | June 30,2004 |
| **Stock compensationexpense**                                                               |  |              |    |            |  |          |    |         |  |   |    |    |  |   |    |    |
| Asreported                                                                                  |  | $                 | — |            |  | $             | — |         |  | $      | — |    |  | $      | — |    |
| Additionalstock-based employee compensation expense determined under fair valuebased method |  |              | (924    | )          |  |          | (621    | )       |  |   | (1,641  | )  |  |   | (1,234  | )  |
| Proforma                                                                                    |  | $                 | (924    | )          |  | $             | (621    | )       |  | $      | (1,641  | )  |  | $      | (1,234  | )  |
| Netincome (loss)                                                                            |  |              |    |            |  |          |    |         |  |   |    |    |  |   |    |    |
| Asreported                                                                                  |  | $                 | 8,530   |            |  | $             | 1,815   |         |  | $      | 7,887   |    |  | $      | (2,710  | )  |
| Additionalstock-based employee compensation expense determined under fair valuebased method |  |              | (924    | )          |  |          | (621    | )       |  |   | (1,641  | )  |  |   | (1,234  | )  |
| Proforma                                                                                    |  | $                 | (7,606  | )          |  | $             | 1,194   |         |  | $      | 6,246   |    |  | $      | (3,944  | )  |
| Basicearnings (loss) pershare                                                               |  |              |    |            |  |          |    |         |  |   |    |    |  |   |    |    |
| Asreported.                                                                                 |  | $                 | 0.15    |            |  | $             | 0.03    |         |  | $      | 0.14    |    |  | $      | (0.05   | )  |
| Pro forma                                                                                   |  | $                 | 0.13    |            |  | $             | 0.02    |         |  | $      | 0.11    |    |  | $      | (0.07   | )  |
| Dilutedearnings (loss) pershare                                                             |  |              |    |            |  |          |    |         |  |   |    |    |  |   |    |    |
| Asreported                                                                                  |  | $                 | 0.15    |            |  | $             | 0.03    |         |  | $      | 0.14    |    |  | $      | (0.05   | )  |
| Pro forma                                                                                   |  | $                 | 0.13    |            |  | $             | 0.02    |         |  | $      | 0.11    |    |  | $      | (0.07   | )  |
|                                                                                             |

6.    ReinsuranceCeded

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

|                                |  |                 |         |                 |  |                         |         |         |  |        |         |         |  |  |
|--------------------------------|--|-----------------|---------|-----------------|--|-------------------------|---------|---------|--|--------|---------|---------|--|--|
| Threemonths ended June 30,2005 |  | PremiumsWritten |         | Premiums Earned |  | Losses and LossExpenses |
| Directinsurance                |  | $               | 106,704 |            |  | $                       | 56,115  |    |  | $      | 36,241  |    |
| Reinsuranceassumed             |  |            | 61,844  |            |  |                    | 72,435  |    |  |   | 41,267  |    |
| Totalgross premiumswritten     |  |            | 168,548 |            |  |                    | 128,550 |    |  |   | 77,508  |    |
| Cededreinsurance               |  |            | (41,184 | )          |  |                    | (23,541 | )  |  |   | (14,989 | )  |
| Net                            |  | $               | 127,364 |            |  | $                       | 105,009 |    |  | $      | 62,519  |    |
|                                |

|                                 |  |                 |         |                 |  |                         |        |         |  |        |        |         |  |  |
|---------------------------------|--|-----------------|---------|-----------------|--|-------------------------|--------|---------|--|--------|--------|---------|--|--|
| Threemonths ended June 30, 2004 |  | PremiumsWritten |         | Premiums Earned |  | Losses and LossExpenses |
| Directinsurance                 |  | $               | 23,221  |            |  | $                       | 5,117  |    |  | $      | 2,797  |    |
| Reinsuranceassumed              |  |            | 111,750 |            |  |                    | 55,512 |    |  |   | 31,622 |    |
| Totalgross premiumswritten      |  |            | 134,971 |            |  |                    | 60,629 |    |  |   | 34,419 |    |
| Cededreinsurance                |  |            | (20,908 | )          |  |                    | (3,774 | )  |  |   | (2,094 | )  |
| Net                             |  | $               | 114,063 |            |  | $                       | 56,855 |    |  | $      | 32,325 |    |
|                                 |

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QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS     (Unaudited; expressedin thousands of US dollars except for share and per share amounts,or as otherwisestated)

|                              |  |                 |         |                 |  |                         |         |         |  |        |         |         |  |  |
|------------------------------|--|-----------------|---------|-----------------|--|-------------------------|---------|---------|--|--------|---------|---------|--|--|
| Sixmonths ended June 30,2005 |  | PremiumsWritten |         | Premiums Earned |  | Losses and LossExpenses |
| Directinsurance              |  | $               | 189,175 |            |  | $                       | 91,747  |    |  | $      | 62,654  |    |
| Reinsuranceassumed           |  |            | 152,099 |            |  |                    | 147,787 |    |  |   | 83,748  |    |
| Totalgross premiumswritten   |  |            | 341,274 |            |  |                    | 239,534 |    |  |   | 146,402 |    |
| Cededreinsurance             |  |            | (71,033 | )          |  |                    | (43,040 | )  |  |   | (26,387 | )  |
| Net                          |  | $               | 270,241 |            |  | $                       | 196,494 |    |  | $      | 120,015 |    |
|                              |

|                              |  |                 |         |                 |  |                         |        |         |  |        |        |         |  |  |
|------------------------------|--|-----------------|---------|-----------------|--|-------------------------|--------|---------|--|--------|--------|---------|--|--|
| Sixmonths ended June 30,2004 |  | PremiumsWritten |         | Premiums Earned |  | Losses and LossExpenses |
| Directinsurance              |  | $               | 39,261  |            |  | $                       | 7,240  |    |  | $      | 3,934  |    |
| Reinsuranceassumed           |  |            | 214,439 |            |  |                    | 81,122 |    |  |   | 46,535 |    |
| Totalgross premiumswritten   |  |            | 253,700 |            |  |                    | 88,362 |    |  |   | 50,469 |    |
| Cededreinsurance             |  |            | (27,182 | )          |  |                    | (4,272 | )  |  |   | (2,249 | )  |
| Net                          |  | $               | 226,518 |            |  | $                       | 84,090 |    |  | $      | 48,220 |    |
|                              |

7.    Earnings(loss) per share

The following table sets forth the computationof basic and diluted earnings (loss) pershare.

|                                                          |  |                   |            |                 |  |               |            |              |  |        |            |        |  |        |            |         |  |  |  |  |  |  |  |  |  |  |
|----------------------------------------------------------|--|-------------------|------------|-----------------|--|---------------|------------|--------------|--|--------|------------|--------|--|--------|------------|---------|--|--|--|--|--|--|--|--|--|--|
|                                                     |  | Threemonths ended |            | Six monthsended |  |
|                                                     |  | June 30,2005      |            | June 30, 2004   |  | June 30, 2005 |            | June 30,2004 |  |
| **Basic earnings (loss) pershare**                       |  |              |       |            |  |          |       |         |  |   |       |   |  |   |       |    |  |
| Netincome(loss)                                          |  | $                 | 8,530      |            |  | $             | 1,815      |         |  | $      | 7,887      |   |  | $      | (2,710     | )  |  |
| Weightedaverage common shares outstanding –basic   |  |              | 56,801,890 |            |  |          | 56,798,218 |         |  |   | 56,800,054 |   |  |   | 56,798,218 |    |  |
| Basicearnings (loss) pershare                            |  | $                 | 0.15       |            |  | $             | 0.03       |         |  | $      | 0.14       |   |  | $      | (0.05      | )  |  |
| **Dilutedearnings (loss) pershare**                      |  |              |       |            |  |          |       |         |  |   |       |   |  |   |       |    |  |
| Netincome(loss)                                          |  | $                 | 8,530      |            |  | $             | 1,815      |         |  | $      | 7,887      |   |  | $      | (2,710     | )  |  |
| Weightedaverage common sharesoutstanding                 |  |              | 56,801,890 |            |  |          | 56,798,218 |         |  |   | 56,800,054 |   |  |   | 56,798,218 |    |  |
| Weightedaverage common shareequivalents                  |  |              |       |            |  |          |       |         |  |   |       |   |  |   |       |    |  |
| Options                                                  |  |              | —    |            |  |          | 387,326    |         |  |   | —    |   |  |   | —    |    |  |
| Warrants                                                 |  |              | —    |            |  |          | 343,148    |         |  |   | —    |   |  |   | —    |    |  |
| Weightedaverage common shares outstanding –diluted |  |              | 56,801,890 |            |  |          | 56,528,692 |         |  |   | 56,800,054 |   |  |   | 56,798,218 |    |  |
| Dilutedearnings (loss) pershare                          |  | $                 | 0.15       |            |  | $             | 0.03       |         |  | $      | 0.14       |   |  | $      | (0.05      | )  |  |
|                                                          |

Dueto the exercise price of all of the Company's outstanding optionsexceeding the average market price of the Company's shares forthe three and six months ended June 30, 2005, the calculation ofweighted average common shares outstanding on a diluted basis excludes4,142,879 options and 2,542,813 warrants, as the effect would have beenanti-dilutive.

Due to a net loss for the six months ended June30, 2004, the assumed net exercise of options and warrants under thetreasury stock method has been excluded, as the effect would have been

16

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QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS     (Unaudited; expressedin thousands of US dollars except for share and per share amounts,or as otherwisestated)

anti-dilutive. Accordingly, for the sixmonths ended June 30, 2004, the calculation of weighted average commonshares outstanding on a diluted basis excludes 2,887,900 options and2,542,813 warrants.

8.    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 threemonths ended June 30, 2005 the Company recorded $0.1 million inunrealized gains associated with the change in fair value of thesederivatives.

9.    Commitments and contingencies

a)    Concentrations of credit risk

As of June 30,2005, substantially all of the Company's cash and cashequivalents, and investments were held by two custodians. Managementbelieves these custodians to be of high credit quality. TheCompany's investment portfolio is managed by external investmentadvisors in accordance with the Company's investment guidelines.The Company's investment guidelines require that the averagecredit quality of the investment portfolio is typically Aa3/AA−and that no more than 5% of the investment portfolio'smarket value shall be invested in securities rated belowBaa3/BBB−. The Company also limits its exposure to any singleissuer to 5% or less of the total portfolio's market valueat the time of purchase, with the exception of U.S. government andagency securities. As of June 30, 2005, the largest single non-U.S.government and government agencies issuer accounted for less than1.5% of the aggregate market value of the externally managedportfolios.

The premiums receivable balance of $202.6 million asof June 30, 2005 includes approximately $24.9 million, or 12.3%,from one third party agent that sources a residential builders'and contractors' program that provides warranty, generalliability, builders' risk and excess liability coverages for newhome contractors throughout the U.S. (known as the "HBWprogram"). The Company has not experienced any lossesrelated to premiums receivable from this third party agent to date andmonitors the aged premiums receivable balances on a monthly basis.

b)    Concentrations of premium production

TheCompany generates its business primarily through brokers and to a muchlesser extent direct relationships with insurance companies. During thesix months ended June 30, 2005, three brokers accounted forapproximately 46.8%, 18.8% and 12.7% of thespecialty reinsurance segment's gross premiums written and twobrokers accounted for approximately 26.8% and 17.1% ofthe Lloyd's segment's gross premiums written. No otherbrokers accounted for more than 10% of the specialtyreinsurance, specialty insurance or Lloyd's segments' grosswritten premium for the six months ended June 30, 2005.

Duringthe six months ended June 30, 2004, one broker accounted forapproximately 10.9% of the specialty insurance segment'sgross premiums written and three brokers accounted for approximately

17

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QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS     (Unaudited; expressedin thousands of US dollars except for share and per share amounts,or as otherwisestated)

40.1%, 16.6% and 16.4%of the specialty reinsurance segment's gross premiums written. Noother brokers accounted for more than 10% of the underwritingsegments' gross written premium for the six months ended June 30,2004. The Company believes that all of its brokers are significant andestablished companies.

During the six months ended June 30, 2005and 2004, the Company continued writing the HBW program. This programaccounted for approximately $47.7 million, or 53.5% and $93.4million, or 58.1%, of the specialty insurance segment grosswritten premiums for the three and six months ended June 30, 2005.Policies underwritten in this program are sourced by one third partyagent that the Company believes is a large and established specialistin this class of business. This program accounted for approximately$67.1 million, or 63.0%, of the specialty insurance segmentgross written premiums for the six months ended June 30, 2004.

c)    Restricted assets

The Company is required tomaintain assets on deposit with various regulatory authorities tosupport its insurance and reinsurance operations. These requirementsare generally promulgated by the regulations of the individuallocations within which the Company operates. These funds on deposit areavailable to settle insurance and reinsurance liabilities.

TheCompany participates in the Lloyd's of London market throughSyndicate 4000 at Lloyd's and has dedicated a significant amountof its capital to the Lloyd's business. The regulations of theCouncil of Lloyd's determine the amount of premium that may bewritten, also known as stamp capacity, based on the Company'sfunds at Lloyd's. The Company has 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 typically closesan underwriting year by reinsuring outstanding claims on thatunderwriting year with the participants of the next underwriting year.As of June 30, 2005, cash and investments with a market value of $108.2million are held by Lloyd's as trustee.

The Company hasalso issued letters of credit ("LOC") underits Credit Agreement for which cash and cash equivalents andinvestments are pledged as security in favor of certain cedingcompanies to collateralize its obligations under contracts of insuranceand reinsurance and in favor of a landlord relating to a leaseagreement for office space.

The Company also utilizes trustfunds in certain large transactions where the trust funds are set upfor the benefit of the ceding companies, and generally take the placeof letter of credit requirements. In addition, the Company holds cashand cash equivalents and investments in trust to fund theCompany's obligations associated with the assumption ofenvironmental remediation liabilities.

18

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QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS     (Unaudited; expressedin thousands of US dollars except for share and per share amounts,or as otherwisestated)

The fair values of these restricted assetsby category at June 30, 2005 are asfollows:

|                                                          |  |                          |        |             |  |        |         |        |  |  |
|----------------------------------------------------------|--|--------------------------|--------|-------------|--|--------|---------|--------|--|--|
|                                                     |  | June30, 2005             |
|                                                     |  | Cash andcash equivalents |        | Investments |
| Depositswith U.S. regulatory authorities                 |  | $                        | 101    |        |  | $      | 29,486  |   |
| Funds deposited withLloyd's                              |  |                     | 1,362  |        |  |   | 106,819 |   |
| LOCpledged assets                                        |  |                     | 6,013  |        |  |   | 140,932 |   |
| Trustfunds                                               |  |                     | 24,917 |        |  |   | 108,312 |   |
| Amounts held intrust funds related to depositliabilities |  |                     | 3,048  |        |  |   | 39,898  |   |
| Total                                                    |  | $                        | 35,441 |        |  | $      | 425,447 |   |
|                                                          |

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QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS     (Unaudited; expressedin thousands of US dollars except for share and per share amounts,or as otherwisestated)

d)    Lease commitments

The Company leases office space and furniture and equipment underoperating lease agreements. Certain office space leases include anescalation clause that calls for annual increases to the base rentalpayments. Rent expenses are being recognized on a straight-line basisover the respective lease terms. Future annual minimum payments undernon-cancelable operating leases as of June 30, 2005, are asfollows:

|                    |  |        |        |        |  |  |  |  |  |  |
|--------------------|--|--------|--------|--------|--|--|--|--|--|--|
| Yearending June30, |  |   |        |
| 2006               |  | $      | 4,677  |   |  |
| 2007               |  |   | 4,654  |   |  |
| 2008               |  |   | 3,839  |   |  |
| 2009               |  |   | 3,211  |   |  |
| 2010               |  |   | 3,131  |   |  |
| 2011andthereafter  |  |   | 23,538 |   |  |
| Total              |  | $      | 43,050 |   |  |
|                    |

Totalrent expense under operating leases for the three and six months endedJune 30, 2005 was approximately $1.1 million and $2.2 million.

10.    Junior subordinated debentures

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

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

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

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

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QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS     (Unaudited; expressedin thousands of US dollars except for share and per share amounts,or as otherwisestated)

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

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

Quanta Trust IIis determined to be a Variable Interest Entity("VIE") under FASB Interpretation No. 46(revised December 2003) ("FIN46R"),"Consolidation of Variable 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 comprehensive loss.

11.    Subsequent event

Credit agreement

On July 11, 2005, Quanta Holdings and certain designated insurancesubsidiaries entered into an amended and restated credit agreementdated July 11, 2005, providing for a secured bank letter of creditfacility and a revolving credit facility with a syndicate of lenders inthe amount of $250 million. Up to $25 million may be borrowed under thefacility on a revolving basis for general corporate purposes andworking capital requirements. The facility is secured by specifiedinvestments of the borrowers. The availability for issuances of lettersof credit and borrowings to a borrower is based on the amount ofeligible investments pledged by that borrower and the absence ofmaterial adverse change provisions. Regulatory restrictions will alsolimit the amount of investments that may be pledged by our U.S.insurance borrowers and, consequently, the amount available for lettersof credit and borrowings under the facility to those borrowers. Thefacility terminates on July 11, 2008. The credit agreement has certainfinancial covenants, including maximum leverage ratio, minimumconsolidated net worth provisions 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. Quanta Holdings has also unconditionally and irrevocablyguaranteed all of the obligations of its subsidiaries to the lenders.The Company uses the letter of credit facility primarily to providesecurity to its insured or reinsured clients under the terms of itsinsurance and reinsurance contracts.

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

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

Safe Harbor Disclosure

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

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

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

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

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

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

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

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

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

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

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

|              |                                                                                                       |
|--------------|-------------------------------------------------------------------------------------------------------|
| •  | risks relating toour reliance on program managers, third party administrators, andsupporting vendors; |

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

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

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

This list of factors is notexhaustive and should be read with the other cautionary statements thatare included in this report and under "Item 7A.Quantitative and Qualitive Disclosures About Market Risk"in the Form 10-K filed by the Company with the SEC on March 30,2005.

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

Overview

General

Quanta Holdings was incorporated on May 23,2003 as a Bermuda holding company formed to provide specialty linesinsurance, reinsurance, risk assessment and technical services on aglobal basis through its affiliated companies. We commenced substantiveoperations on September 3, 2003 when we obtained our initial capitaland purchased ESC, our predecessor for accounting purposes. During theremainder of 2003, we wrote a small number of insurance and reinsurancecontracts. During the year ended December 31, 2004 and the six monthsended June 30, 2005 we continued to grow and diversify our specialtylines of business, and we had a significant increase in the number ofinsurance and reinsurance contracts underwritten.

Through ouroperating subsidiaries in Bermuda, the U.S. and Europe, we focus onwriting coverage for specialized classes of property and casualtyinsurance and reinsurance risks through teams of experienced andtechnically qualified underwriters. We define specialty insurance andreinsurance as those lines of business that are often unusual ordifficult to place and do not fit the underwriting criteria of standardcommercial product providers. We are using our Bermuda operationsprimarily to insure U.S. risks from Bermuda on a non-admitted basis andalso to underwrite some European risks. We are also writing specialtyinsurance and reinsurance in the United States on an admitted basisthrough our subsidiary, Quanta Indemnity Company, which is a U.S.licensed insurer with licenses in 45 states and is an accreditedreinsurer in Washington, D.C. Further, we write specialty insurancefrom the United States on an excess and surplus lines basis and U.S.reinsurance on a non-admitted basis through our subsidiary, QuantaSpecialty Lines Insurance Company. 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 Syndicate 4000 atLloyd's in London. Since February 2005 we are serving ourLondon-based clients for European insurance and reinsurance businessthrough our Quanta Europe branch in London.

We acquiredEnvironmental Strategies Corporation, known as ESC, on September 3,2003. ESC is our predecessor company for accounting and financialreporting purposes. ESC provides diversified environmental riskmanagement services to assist customers in environmental remediation,regulatory analyses, technical support for environmental claims, mergerand acquisition due diligence, environmental audits and riskassessments, and engineering and information management services. ESCalso provides risk assessment and technical services support to ourenvironmental underwriters. We have also established Quanta TechnicalServices, which we use to provide risk assessment and evaluationtechnical services in our other specialty lines of insurance and tothird parties on a fee basis. Through Quanta Technical Services and itssubsidiaries, we also provide liability assumption programs under whichthese subsidiaries assume specified liabilities (which may, at times,include taking title to property) associated with environmentalconditions in properties and agree to provide technical services and toperform the required remediation services. During the second quarter of2005, we assumed a liability assumption program in Buffalo for whichestimated liabilities of approximately $14 million have been recorded,as of June 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 

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the actual results that we expect to achievein future periods.  This report does contain our second quarterto quarter comparison of our business in 2004 and 2005 and, in general,reveals that our insurance business has grown and the insurance segmenthas become a bigger proportion of our business in the second quarter of2005 as compared to the second quarter of 2004.  We expect thatthis trend will continue throughout 2005.  This trend is notexpected to occur evenly during the quarters as the reinsurancebusiness has traditionally been more concentrated in the first andthird quarter.

We generated approximately $127.4 million and$270.2 million of net premiums written after premiums ceded onpurchased reinsurance protection and $105.0 million and $196.5 millionof net premiums earned during the three months and six months endedJune 30, 2005. This compares to approximately $114.1 million and $226.5million of net premiums written and $56.9 million and $84.1 million ofnet premiums earned during the three months and six months ended June30, 2004. During the three months ended June 30, 2005, we restructuredour reinsurance protection programs related to our specialty insurancebusiness. The restructure involved the commutation of our 2004reinsurance treaty protection, which was ceded on an excess of lossbasis, in two of our product lines, Professional Liability andFidelity. The unexpired portions of this business were thentransferred, effective April 1, 2005, into our 2005 reinsurance treaty,which is ceded on a proportional quota share basis. The combination ofthe commutation and portfolio transfer generated net ceded earnedpremiums of $0.3 million in the second quarter of 2005. We believe thisnew reinsurance structure for the 2004 treaty year in our Professionaland Fidelity lines will provide economic benefits through lossrecoveries and ceding commission income. During the three months endedJune 30, 2005, we also purchased retrocessional protection in ourspecialty reinsurance property product line segment which is intendedto limit our net loss exposures to catastrophe windstorm events. Thispurchase resulted in approximately $7.0 million of premium ceded.

The primary drivers of growth in our lines of business and netwritten premiums are the continued development of our relationshipswith important insurance and reinsurance brokers, the development ofspecialty insurance lines of business, including Syndicate 4000, andour success during the January 2005 renewal season in the reinsuranceindustry. Our specialty insurance segment demonstrated continuedpremium growth during the six months ended June 30, 2005 and ourLloyd's segment increased its underwriting specialty insurancebusiness following receipt of regulatory approvals during the fourthquarter of 2004. Our specialty insurance and Lloyd's segment,taken together, continue to become increasingly significantcontributors to our overall business and represented approximately59.1% of our total gross premiums written in the six monthsended June 30, 2005 compared to 41.7% in the six months endedJune 30, 2004. We believe that our net premiums written and netpremiums earned will increase as we further develop our currentbusinesses.

In addition, we believe that our portfolio is notyet fully diversified either among classes of risks or source oforigination. For example, during the six months ended June 30, 2005, wegrew our residential builders' and contractors' program,which we refer to as the HBW program, that accounted for approximately58.1% of our specialty insurance segment gross written premium.We expect that this concentration will remain significant through theremainder of 2005. In addition, the HBW program and the other insuranceprograms we write, accounted for 58.9 % of our specialtyinsurance segment gross written premium in the six months ended June30, 2005. We expect that the other insurance programs we write willhave increasing gross written premium through the remainder of 2005 andthat the concentration of our programs business in our specialtyinsurance segment will continue to be significant. As described below,our specialty reinsurance segment showed significant concentrationsacross certain risk classes. In addition, our specialty reinsurancesegment generated approximately 46.8%, 18.8% and12.7% of its gross written premiums through three brokers. Weexpect, but cannot assure you, that our portfolio will continue todiversify through 2005.

A number of insurance companies havebeen subpoenaed by regulators in connection with investigationsrelating to business and accounting practices in the insuranceindustry. To date, we have not been served any subpoenas. We havereceived, and have responded to, inquiries from the North CarolinaDepartment of Insurance, the Colorado Department of Insurance andLloyd's. From January 1, 2004 to September 30, 2004 we were partyto placement service agreements, known as PSAs and market serviceagreements, known as MSAs, with Aon Corporation and Marsh Inc. and havepaid a 

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total of $31,000 under these agreements as ofJune 30, 2005. We have accrued approximately $1.1 million in additionto the amount we have already paid under these agreements. At thistime, it is not possible for us to determine the impact of any outcomeof these investigations on our future results of operations. Inaddition, we do not know what the ramifications of the brokers'stated intent to formulate a different commission structure will be onour future results of operations, financial condition or liquidity asbrokers seek our participation in this commission structure.

With respect to market conditions, we believe that premium rateshave remained largely unchanged in our specialty insurance andreinsurance segments other than in certain market niches includingprimary commercial property and professional liability. In theprofessional liability insurance market, we believe that the rate forcommercial directors and officers liability insurance remainscompetitive and that rates continue to drift downward. In addition, wehave seen rate reductions in Europe in professional liability. In thereinsurance market place, we are generally seeing disciplinedunderwriting by our major competitors. We have seen some ratedeterioration in property and casualty reinsurance as a result of thepricing declines in some sectors of the direct insurance marketplace.However, given the substantial price increases seen in the commercialproperty and casualty markets over the last few years, we continue tobelieve that current price levels will continue an acceptableunderwriting profit. We will continue to seek opportunities to provideinsurance and reinsurance in areas that require both capacity andhighly technical underwriting expertise.

SegmentInformation

We organize our business along five product linesand three geographies. Our two traditional product lines are specialtyinsurance and specialty reinsurance. We also have programs andstructured products product lines. The products we offer our clientsare written either as traditional insurance or reinsurance policies orare provided as a program, a structured product or a combination of atraditional policy with a program or a structured product. Our fifthproduct line is our technical services line. However, for financialreporting purposes, some of our product lines are aggregated forpurposes of the reportable segment disclosure included below:

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

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

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

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

The determination of these reportable segments reflects how wemanage and monitor the performance of our insurance and reinsuranceoperations and may change from time to time. We refer 

24

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to the specialty insurance, specialtyreinsurance and Lloyd's segments as our underwriting segments. Werefer to our risk consulting and management operations as our technicalservices segment. We evaluate each segment based on its underwriting ortechnical services results, as applicable, including items of revenueand expense that are associated with, and directly related to, eachsegment.

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

Main Drivers of our Results

Revenues

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

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

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

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

Expenses

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

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

Acquisition expenses,which are net of expenses recovered under our ceded reinsurancecontracts, consist principally of commissions, fees, brokerage and taxexpenses that are directly related to obtaining and writing insuranceand reinsurance contracts. Typically, acquisition expenses are based ona certain percentage of the premiums written on contracts of insuranceand reinsurance. These expenses are a function of the number and typeof insurance and reinsurance contracts written.

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

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

Results of Operations

The following is a discussion of ourconsolidated results of operations for the three months ended June 30,2005 and 2004.

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Three months ended June 30, 2005 and2004

Results of operations for the three months ended June 30,2005 and 2004 were asfollows:

|                                                  |  |                                |          |                                |  |        |         |         |  |  |
|--------------------------------------------------|--|--------------------------------|----------|--------------------------------|--|--------|---------|---------|--|--|
|                                             |  | Threemonthsended June 30, 2005 |          | Three monthsendedJune 30, 2004 |
|                                             |  | ($ inthousands)                |
| **Revenues**                                     |  |                           |     |                           |  |   |    |    |
| Grosspremiumswritten                             |  | $                              | 168,548  |                           |  | $      | 134,971 |    |
| Netpremiumswritten                               |  | $                              | 127,364  |                           |  | $      | 114,063 |    |
| Netpremiumsearned                                |  | $                              | 105,009  |                           |  | $      | 56,855  |    |
| Technicalservices revenues                       |  |                           | 7,176    |                           |  |   | 8,346   |    |
| Netinvestment income                             |  |                           | 6,187    |                           |  |   | 3,318   |    |
| Netrealized gains (losses) oninvestments         |  |                           | 862      |                           |  |   | (827    | )  |
| Net foreignexchange gains(losses)                |  |                           | 88       |                           |  |   | (96     | )  |
| Otherincome                                      |  |                           | 3,068    |                           |  |   | 235     |    |
| Totalrevenues                                    |  |                           | 122,390  |                           |  |   | 67,831  |    |
| **Expenses**                                     |  |                           |     |                           |  |   |    |    |
| Netlosses and lossexpenses                       |  |                           | (62,519  | )                         |  |   | (32,325 | )  |
| Acquisitionexpenses                              |  |                           | (19,243  | )                         |  |   | (12,837 | )  |
| Directtechnical servicescosts                    |  |                           | (5,999   | )                         |  |   | (5,827  | )  |
| General andadministrativeexpenses                |  |                           | (23,976  | )                         |  |   | (14,577 | )  |
| Interestexpense                                  |  |                           | (944     | )                         |  |   | — |    |
| Depreciationand amortization of intangibleassets |  |                           | (959     | )                         |  |   | (450    | )  |
| Totalexpenses                                    |  |                           | (113,640 | )                         |  |   | (66,016 | )  |
|                                             |  |                           |     |                           |  |   |    |    |
| Incomebefore incometaxes                         |  |                           | 8,750    |                           |  |   | 1,815   |    |
|                                             |  |                           |     |                           |  |   |    |    |
| Incometaxes                                      |  |                           | 220      |                           |  |   | — |    |
| Netincome                                        |  | $                              | 8,530    |                           |  | $      | 1,815   |    |
|                                                  |

Revenues.

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

Premiums.    Gross premiums written were $168.5 million forthe three months ended June 30, 2005, an increase of $33.5 million, or24.9%, compared to $135.0 million for the three months endedJune 30, 2004. The increase of $33.5 million in gross premiums writtenreflects the continued growth of our specialty lines of business andthe contribution of our Lloyd's segment.

We expect during2005 that our insurance gross and net premiums written will continue togrow and that our Lloyd's segment will become a more significantcontributor as we focus on continuing to execute our businessstrategy.

Gross premiums ceded were $41.2 million for the threemonths ended June 30, 2005 an increase of $20.3 million compared to$20.9 million for the three months ended June 30, 2004. The increase ingross premiums ceded primarily reflects the growth in gross writtenpremiums and the $7.0 million in retrocessional protection purchased inour specialty reinsurance property product line segment which isintended to limit our net loss exposures to catastrophe windstormevents. The increase of gross premiums ceded is attributable to alesser extent to the development of our restructured reinsuranceprogram for our specialty lines.

Net premiums earned were $105.0million for the three months ended June 30, 2005 an increase of $48.1million, or 84.7%, compared to $56.9 million for the threemonths ended June 30, 2004 

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reflecting the growth in premiums written incurrent and prior periods. We expect that our net premiums earned willincrease in future periods as we enter into more insurance andreinsurance contracts and as our existing portfolios mature. Our netpremiums written are typically earned over the risk periods of theunderlying insurance policies which are generally twelve months. Netwritten premiums that are not yet earned and are deferred as unearnedpremium reserves, net of deferred reinsurance premiums, totaled $273.7million at June 30, 2005 and will be earned and recognized in ourresults of operations in future periods. Because we only began to writeinsurance and reinsurance business during the fourth quarter of 2003and because our Lloyd's segment commenced operations in December2004, we believe that our net premiums earned are not yetrepresentative of a fully developed and diversified portfolio ofinsurance and reinsurance contracts.

Technical servicesrevenues.    Technical services revenues were $7.2 million forthe three months ended June 30, 2005 a decrease of $1.1 million, or14.0%, compared to $8.3 million for the three months ended June30, 2004. This decrease reflects the impact several non-recurringenvironmental remediation projects that occurred in 2004. Technicalservices revenues of $7.2 million for the three months ended June 30,2005 consisted of $3.6 million from direct labor and $3.6 million fromsubcontractor related activities.

Net investment income andnet realized gains (losses).    Net investment income and netrealized gains (losses) totaled $7.0 million for the three months endedJune 30, 2005 an increase of $4.5 million compared to $2.5 million forthe three months ended June 30, 2004. The increase is primarily due toan increase in net investment income of $2.8 million because of ourlarger amount of invested assets and rises in market interest rates.The increase is also due to higher net realized gains of $1.7million.

Net investment income was $6.2 million for the threemonths ended June 30, 2005 and was derived primarily from interestearned on fixed maturity and short term investments, partially offsetby investment management fees and amortization of discounts on fixedmaturity investments. Our average annualized effective yield(calculated by dividing net investment income by the average amortizedcost of invested assets, net of amounts payable or receivable forinvestments purchased or sold) was approximately 3.4% for thethree months ended June 30, 2005 compared to 2.7% for the threemonths ended June 30, 2004. Net realized gains of $0.9 million weregenerated primarily from the sale of foreign currency forward contractsand fixed maturity securities as we sought to manage our foreigncurrency exposures, total investment returns and the duration of ourinvestment portfolios.

As of June 30, 2005, the average durationof our investment portfolio was approximately 2.3 years with an averagecredit rating of approximately "AA+".

Other income.    Other income was $3.1 million for thethree months ended June 30, 2005 as compared to $0.2 million for thethree months ended June 30, 2004. Other income includes remediationfees and other amounts relating to assumed environmental liabilityprograms of $1.8 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 $62.5 million forthe three months ended June 30, 2005 an increase of $30.2 millioncompared to $32.3 million for the three months ended June 30, 2004. Theincrease in net losses and loss expenses is due to the increase in thenumber of insurance and reinsurance contracts we entered into and theassociated net premiums earned as our insurance and reinsuranceportfolios continue to mature. Net losses and loss expenses are afunction of our net premiums earned and our expected ultimate lossesand loss expenses for reported and unreported claims on contracts ofinsurance and reinsurance underwritten. Included in our expectedultimate losses during the three months ended June 30, 2005 arereported loss estimates, including adverse development of $2.6 millionrelated to contracts of reinsurance insuring claims arising from the2004 hurricanes Charley, Frances, Ivan and Jeanne and adversedevelopment of $2.5 million related to damage caused by an oil pipelinein California which ruptured during a mudslide in the first quarter of2005, which is covered by an insurance contract issued by ourenvironmental 

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liability product line. Our estimate of ourexposure to ultimate claim costs from these reported losses is based oncurrently available information, claims notifications received to date,industry loss estimates, output from industry models, a detailed reviewof affected contracts and discussion with cedants and brokers. Theactual amount of losses from reported events may vary significantlyfrom our estimates. As of June 30, 2005, we have received a limitedamount of significant reported losses. However, we participate in linesof business where claims may not be reported for some period of timeafter those claims are incurred.

Our total net loss ratio(calculated by dividing net losses and loss expenses by net premiumsearned) was 59.5% for the three months ended June 30, 2005 anincrease of 2.6% compared to a total net loss ratio of56.9% for the three months ended June 30, 2004. The increase inthe total net loss ratio is partially due to the adverse developmentrelated to the ruptured oil pipeline in California and to thehurricanes. This increase is offset by an increase in ceded losses thatwe are recovering on our specialty insurance segment'sreinsurance treaties. Changes in our net loss ratios are not unexpectedbecause we are still in the early development stages of ourunderwriting portfolios and as such we expect that our net loss ratiosmay continue to be volatile.

Acquisitionexpenses.    Acquisition expenses were $19.2 million for thethree months ended June 30, 2005 an increase of $6.4 million, or49.9%, compared to $12.8 million for the three months ended June30, 2004. The increase in acquisition expenses is due to the increasein the number of insurance and reinsurance contracts we entered intoand the associated net premiums earned.

Our acquisition costratio (calculated by dividing acquisition expenses by net premiumsearned) for the three months ended June 30, 2005 was 18.3% adecrease of 4.3% compared to our acquisition cost ratio of22.6% for the three months ended June 30, 2004. The decrease isdue to the fact that we are paying less fronting costs on our specialtyinsurance lines because we are licensed in more states and no longerneed to utilize fronting companies to the same extent in order to writeour business, ceding commission income that we are recovering on ourspecialty insurance segment's reinsurance treaties and lowercommissions payable on our HBW program because the contracts containsliding scale commission provisions that vary with changes in theselected loss ratio. Deferred acquisition costs include, as of June 30,2005, $45.5 million of acquisition expenses on written contracts ofinsurance and reinsurance that will by amortized in future periods asthe premiums written to which they relate are earned.

Directtechnical services costs.    Direct technical services costs were$6.0 million for the three months ended June 30, 2005 an increase of$0.2 million, or 3.0%, compared to $5.8 million for the threemonths ended June 30, 2004 and were comprised of subcontractor anddirect labor expenses. Direct technical services costs, as a percentageof technical services revenues, was approximately 83.6% for thethree months ended June 30, 2005, an increase of 13.8% comparedto 69.8% for the three months ended June 30, 2004. The increasein direct technical services costs as a percentage of revenues wasattributable to increased direct labor expenses during the period.

General and administrative expenses.    General andadministrative expenses were $24.0 million for the three months endedJune 30, 2005 an increase of $9.4 million, or 64.5%, compared to$14.6 million for the three months ended June 30, 2004 and werecomprised of $14.5 million of personnel related expenses and $9.5million of other general and administrative expenses. The increase ingeneral and administrative expenses is due primarily to an increase inthe number of employees as we grew our lines of business, especially inEurope, and to a lesser extent by increases in auditing, Sarbanes-OxleySection 404 compliance and information technology development. Generaland administrative expenses include $22.1 million related to ourunderwriting segment, including $0.8 million of expenses charged by ourtechnical services segment for information management servicesprovided, and $2.7 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 17.4% for the three monthsended June 30, 2005 an increase of 6.2% compared to 11.2%for the three months ended June 30, 2004 due to the additional numberof employees hired and development of our infrastructure as we grew ourlines of business in the first quarter of 2005.

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Depreciation and amortization ofintangible assets.    Depreciation and amortization of intangibleassets was $1.0 million for the three months ended June 30, 2005 anincrease of $0.5 million compared to $0.5 million for the three monthsended June 30, 2004 and consisted of amortization of intangible assetsrelated to the acquisition of ESC and depreciation of fixed assets. Theincrease in depreciation and amortization is due to the purchase ofadditional fixed assets throughout 2004 as we grew our lines ofbusiness.

We have not recorded any net deferred income taxbenefits or assets relating to tax operating losses generated by oursubsidiaries since our results of operations include a 100%valuation allowance against net deferred tax assets. For the threemonths ended June 30, 2005, the net valuation allowance reduced byapproximately $0.6 million, to $14.4 million.

Six months endedJune 30, 2005 and 2004

Results of operations for the six monthsended June 30, 2005 and 2004 were asfollows:

|                                                  |  |                              |          |                               |  |        |          |         |  |  |
|--------------------------------------------------|--|------------------------------|----------|-------------------------------|--|--------|----------|---------|--|--|
|                                             |  | Sixmonthsended June 30, 2005 |          | Six months endedJune 30, 2004 |
|                                             |  | ($ inthousands)              |
| **Revenues**                                     |  |                         |     |                          |  |   |     |    |
| Grosspremiumswritten                             |  | $                            | 341,274  |                          |  | $      | 253,700  |    |
| Netpremiumswritten                               |  | $                            | 270,241  |                          |  | $      | 226,518  |    |
| Netpremiumsearned                                |  | $                            | 196,494  |                          |  | $      | 84,090   |    |
| Technicalservices revenues                       |  |                         | 14,327   |                          |  |   | 14,853   |    |
| Netinvestment income                             |  |                         | 11,412   |                          |  |   | 6,553    |    |
| Netrealized gains oninvestments                  |  |                         | 379      |                          |  |   | 368      |    |
| Net foreignexchange (losses)gains                |  |                         | (24      | )                        |  |   | 128      |    |
| Otherincome                                      |  |                         | 4,755    |                          |  |   | 426      |    |
| Totalrevenues                                    |  |                         | 227,343  |                          |  |   | 106,418  |    |
| **Expenses**                                     |  |                         |     |                          |  |   |     |    |
| Netlosses and lossexpenses                       |  |                         | (120,015 | )                        |  |   | (48,220  | )  |
| Acquisitionexpenses                              |  |                         | (39,720  | )                        |  |   | (19,454  | )  |
| Directtechnical servicescosts                    |  |                         | (10,860  | )                        |  |   | (10,211  | )  |
| General andadministrativeexpenses                |  |                         | (44,847  | )                        |  |   | (30,406  | )  |
| Interestexpense                                  |  |                         | (1,771   | )                        |  |   | —  |    |
| Depreciationand amortization of intangibleassets |  |                         | (1,801   | )                        |  |   | (837     | )  |
| Totalexpenses                                    |  |                         | (219,014 | )                        |  |   | (109,128 | )  |
|                                             |  |                         |     |                          |  |   |     |    |
| Income(loss) before incometaxes                  |  |                         | 8,329    |                          |  |   | (2,710   | )  |
|                                             |  |                         |     |                          |  |   |     |    |
| Incometaxes                                      |  |                         | 442      |                          |  |   | —  |    |
| Netincome(loss)                                  |  | $                            | 7,887    |                          |  | $      | (2,710   | )  |
|                                                  |

Revenues.

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

Premiums.    Gross premiums written were $341.3 million forthe six months ended June 30, 2005, an increase of $87.6 million, or34.5%, compared to $253.7 million for the six months ended June30, 2004. The increase of $87.6 million in gross premiums writtenreflects the continued growth of our specialty lines of business, thecontribution of our Lloyd's segment and a solid January 2005renewal season for our specialty reinsurance segment.

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We expect during 2005 that our insuranceand reinsurance gross and net premiums written will continue to growand that our Lloyd's segment will become a more significantcontributor as we focus on continuing to execute our businessstrategy.

Gross premiums ceded were $71.0 million for the sixmonths ended June 30, 2005 an increase of $43.8 million compared to$27.2 million for the six months ended June 30, 2004. The increase ingross premiums ceded 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.

Net premiums earned were $196.5 million for the sixmonths ended June 30, 2005 an increase of $112.4 million, or133.7%, compared to $84.1 million for the six months ended June30, 2004 reflecting the earning of premiums on contracts written duringthe six months ended June 30, 2005 and during the year ended December31, 2004. We expect that our net premiums earned will increase infuture periods as we enter into more insurance and reinsurancecontracts and as our existing portfolios mature. Our net premiumswritten are typically earned over the risk periods of the underlyinginsurance policies which are generally twelve months.

Technical services revenues.    Technical services revenueswere $14.3 million for the six months ended June 30, 2005 a decrease of$0.6 million, or 3.5%, compared to $14.9 million for the sixmonths ended June 30, 2004. This decrease was due to fewernon-recurring projects during 2005. Technical services revenues of$14.3 million for the six months ended June 30, 2005 consisted of $7.6million from direct labor and $6.7 million from subcontractor relatedactivities.

Net investment income and net realizedgains.    Net investment income and net realized gains totaled$11.8 million for the six months ended June 30, 2005 an increase of$4.9 million, or 70.4%, compared to $6.9 million for the sixmonths ended June 30, 2004. The increase of $4.9 million isattributable to the larger amount of invested assets and to a lesserextent by increases in interest rates.

Net investment income was$11.4 million for the six months ended June 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 six months ended June 30, 2005. Netrealized gains of $0.4 million were generated primarily from the saleof foreign currency forward contracts and fixed maturity securities aswe sought to manage our foreign currency exposure, total investmentreturns and the duration of our investment portfolios.

Otherincome.    Other income was $4.8 million for the six months endedJune 30, 2005 and includes remediation fees and other amounts relatingto assumed environmental liabilities programs of $1.9 million andamounts recognized on non-traditional insurance and reinsurancecontracts of $1.8 million. A more detailed description of thesenon-traditional contracts is provided under "-Non-Traditional Contracts" below.

Expenses.

Net losses and lossexpenses.    Net losses and loss expenses were $120.0 million forthe six months ended June 30, 2005 an increase of $71.8 millioncompared to $48.2 million for the six months ended June 30, 2004. Theincrease in net losses and loss expenses is due to the increase in thenumber of insurance and reinsurance contracts we entered into and theassociated net premiums earned as our insurance and reinsuranceportfolios continue to mature. Net losses and loss expenses are afunction of our net premiums earned and our expected ultimate lossesand loss expenses for reported and unreported claims on contracts ofinsurance and reinsurance underwritten. Included in our expectedultimate losses during the six months ended June 30, 2005 are reportedloss estimates, including $7.4 million related to damage caused by anoil pipeline in California which ruptured during a mudslide in thefirst quarter of 2005, for which the damage is covered by an insurancecontract issued by our 

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environmental liability product line, andadverse development of $3.6 million related to contracts of reinsuranceinsuring claims arising from the 2004 hurricanes Charley, Frances, Ivanand Jeanne.

Our total net loss ratio (calculated by dividing netlosses and loss expenses by net premiums earned) was 61.1% forthe six months ended June 30, 2005 an increase of 3.8% comparedto a total net loss ratio of 57.3% for the six months ended June30, 2004. The increase in the total net loss ratio is due primarily tothe ruptured oil pipeline in California and the adverse developmentrelated to the hurricanes, which are in part offset by an increase inceded losses that we are recovering on our specialty insurancesegment's reinsurance treaties. Changes in our net loss ratiosare not unexpected because we are still in the early development stagesof our underwriting portfolios and as such we expect that our net lossratios may continue to be volatile.

Acquisitionexpenses.    Acquisition expenses were $39.7 million for the sixmonths ended June 30, 2005 an increase of $20.3 million, or104.2%, compared to $19.5 million for the six months ended June30, 2004. The increase in acquisition expenses is due to the increasein the number of insurance and reinsurance contracts we entered intoand the associated net premiums earned.

Our acquisition costratio (calculated by dividing acquisition expenses by net premiumsearned) for the six months ended June 30, 2005 was 20.2% adecrease of 2.9% compared to our acquisition cost ratio of23.1% for the six months ended June 30, 2004. The decrease isdue to the fact that we are paying less fronting costs on our specialtyinsurance lines because we are licensed in more states and no longerneed to utilize fronting companies to the same extent in order to writeour business, to ceding commission income that we are recovering on ourspecialty insurance segment's reinsurance treaties and lowercommissions payable on our HBW program as a result of the contractscontaining sliding scale commission provisions that vary with changesin the selected loss ratio.

Direct technical servicescosts.    Direct technical services costs were $10.9 million forthe six months ended June 30, 2005 an increase of $0.7 million, or6.4%, compared to $10.2 million for the six months ended June30, 2004 and were comprised of subcontractor and direct labor expenses.Direct technical services costs, as a percentage of technical servicesrevenues, was approximately 75.8% for the three months endedJune 30, 2005, an increase of 7.1% compared to 68.7% forthe six months ended June 30, 2004. The increase in direct technicalservices costs as a percentage of revenues was primarily due to theincreased direct labor costs during the period.

General andadministrative expenses.    General and administrative expenseswere $44.8 million for the six months ended June 30, 2005 an increaseof $14.4 million, or 47.5%, compared to $30.4 million for thesix months ended June 30, 2004 and were comprised of $27.9 million ofpersonnel related expenses and $16.9 million of other general andadministrative expenses. The increase in general and administrativeexpenses is due primarily to an increase in the number of employees,especially in Europe, as we grew our lines of business and to a lesserextent the build out of our infrastructure and Sarbanes-Oxley Section404 compliance costs. General and administrative expenses include $41.3million related to our underwriting segment, including $1.7 million ofexpenses charged by our technical services segment for informationmanagement services provided, and $5.2 million of expenses related toour technical services segment.

Our general and administrativeexpense ratio (calculated by dividing underwriting related general andadministrative expenses by net premiums written) was 15.3% forthe six months ended June 30, 2005 an increase of 3.5% comparedto 11.8% for the six months ended June 30, 2004 due to theadditional number of employees hired and development of ourinfrastructure as we grew our lines of business.

Depreciationand amortization of intangible assets.    Depreciation andamortization of intangible assets was $1.8 million for the six monthsended June 30, 2005 an increase of $1.0 million compared to $0.8million for the six months ended June 30, 2004 and consisted ofamortization of intangible assets related to the acquisition of ESC anddepreciation of fixed assets. The increase in depreciation andamortization is due to the purchase of additional fixed assetsthroughout 2004 as we grew our lines of business.

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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 six months ended June 30, 2005, the net valuation allowance wasapproximately $1.1 million.

Results by Operating Segments

Underwriting

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

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

Threemonths ended June 30, 2005 and 2004

The following tablesummarizes our net underwriting results and profitability measures forour segments for the three months ended June 30, 2005 and 2004:

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Specialtyinsurance

|                                        |  |                                 |         |                                |  |        |         |         |  |        |         |          |  |  |
|----------------------------------------|--|---------------------------------|---------|--------------------------------|--|--------|---------|---------|--|--------|---------|----------|--|--|
|                                   |  | Threemonths ended June 30, 2005 |         | Three monthsended June 30,2004 |  | Change |
|                                   |  | ($ inthousands)                 |
| Gross premiumswritten                  |  | $                               | 89,091  |                           |  | $      | 67,840  |    |  | $      | 21,251  |     |
| Premiumsceded                          |  |                            | (27,420 | )                         |  |   | (20,908 | )  |  |   | (6,512  | )   |
| Netpremiumswritten                     |  | $                               | 61,671  |                           |  | $      | 46,932  |    |  | $      | 14,739  |     |
| Netpremiumsearned                      |  | $                               | 43,400  |                           |  | $      | 17,623  |    |  | $      | 25,777  |     |
| Otherincome                            |  |                            | 575     |                           |  |   | — |    |  |   | 575     |     |
| Netlosses and lossexpenses             |  |                            | (23,974 | )                         |  |   | (8,839  | )  |  |   | (15,135 | )   |
| Acquisitionexpenses                    |  |                            | (6,112  | )                         |  |   | (4,337  | )  |  |   | (1,775  | )   |
| Generaland administrativeexpenses      |  |                            | (11,383 | )                         |  |   | (7,396  | )  |  |   | (3,987  | )   |
| Netunderwriting income(loss)           |  | $                               | 2,506   |                           |  | $      | (2,949  | )  |  | $      | 5,455   |     |
| Ratios:                                |  |                            |    |                           |  |   |    |    |  |   |    |     |
| Lossand loss expenseratio              |  |                            | 55.2    | %                         |  |   | 50.2    | %  |  |   | 5.0     | %   |
| Acquisitionexpenseratio                |  |                            | 14.1    | %                         |  |   | 24.6    | %  |  |   | (10.5   | )%  |
| Generaland administrative expenseratio |  |                            | 18.5    | %                         |  |   | 15.8    | %  |  |   | 2.7     | %   |
| Combinedratio                          |  |                            | 87.8    | %                         |  |   | 90.6    | %  |  |   | (2.8    | )%  |
|                                        |

Premiums.    Grossand net written premiums were $89.1 million and $61.7 million for thethree months ended June 30, 2005 compared to $67.8 million and $46.9million for the three months ended June 30, 2004. The increase in ourspecialty insurance segment's gross and net premiums written wasdue primarily to growth in U.S. insurance business as we grew from ourstart-up phase into a more recognized insurer. The increase reflectsour increasing participation in the insurance marketplace anddevelopment of our insurance portfolios.

The table below showsgross written premiums by product line for the three months ended June30, 2005 and 2004 whether written on a traditional insurance, programsor structuredbasis:

|                               |  |                                |        |                                |  |        |         |        |  |  |
|-------------------------------|--|--------------------------------|--------|--------------------------------|--|--------|---------|--------|--|--|
|                          |  | Threemonthsended June 30, 2005 |        | Three monthsendedJune 30, 2004 |
|                          |  | ($ inthousands)                |
| Technical risk property       |  | $                              | 53,081 |                           |  | $      | 45,497  |   |
| Professionalliability         |  |                           | 18,186 |                           |  |   | 10,872  |   |
| Environmentalliability        |  |                           | 9,737  |                           |  |   | 7,995   |   |
| Fidelity andcrime             |  |                           | 3,657  |                           |  |   | 2,920   |   |
| Surety                        |  |                           | 2,763  |                           |  |   | 556     |   |
| Tradecredit and politicalrisk |  |                           | 1,564  |                           |  |   | — |   |
| Other                         |  |                           | 103    |                           |  |   | — |   |
| Total                         |  | $                              | 89,091 |                           |  | $      | 67,840  |   |
|                               |

Duringthe three months ended June 30, 2005 we continued to write, in ourtechnical risk property product line, the HBW program, which accountedfor approximately $47.7 million, or 89.9%, of the technical riskproperty line of business and 53.3% of total specialty insurancesegment gross written premiums in the three months ended June 30, 2005.The policies in the program are underwritten through a third partyagent that we believe is an established specialist in this technicalfield. We expect that this program will continue to contributesubstantial net written premiums during the remainder of 2005 and thatwe will experience further growth and diversification in our otherspecialty insurance lines of business.

Approximately53.3% of our specialty insurance segment gross written premiumsof $89.1 million were generated through our HBW program. The remaining46.7% of our specialty insurance segment 

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gross written premiums were generatedthrough a significant number of brokers, none of which accounted formore than 10% of our total specialty insurance segment grosswritten premiums.

Ceded premiums were $27.4 million during thethree months ended June 30, 2005 an increase of $6.5 million comparedto $20.9 million for the three months ended June 30, 2004. The increasein ceded premiums reflects the increase in our gross written premiumsand the reinsurance treaties that we have entered into for ourspecialty insurance product lines in order to limit our net lossexposures to our planned net limits and to control our aggregateexposures to particular classes of risk. Gross premiums written andceded premiums are earned over the period of each insured risk. Theterms of our insurance contracts range from between one and ten years.Net premiums earned during the three months ended June 30, 2005 were$61.7 million representing the earning and amortization of premiumswritten and ceded during the year ended December 31, 2004 and the sixmonths ended June 30, 2005.

Other income.    Otherincome was $0.6 million for the three months ended June 30, 2005 andrelated 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 andloss expenses.    Net losses and loss expenses were $24.0 millionfor the three months ended June 30, 2005 an increase of $15.2 millioncompared to $8.8 million for the three months ended June 30, 2004. Theincrease of $15.2 million in net losses and loss expenses incurred wasdue to the growth in the number of insurance contracts we entered intoand the associated net premiums earned. Net losses and loss expenseswere a function of our net premiums earned and our expected ultimatelosses and loss expenses for reported and unreported claims oncontracts of insurance underwritten. Included in our expected ultimatelosses during the three months ended June 30, 2005 is $2.5 million ofadverse development for damages from a ruptured oil pipeline inCalifornia that occurred during the first quarter of 2005, which wascovered by an insurance contract issued by our environmental liabilityproduct line, and two claims resulting from fires under contracts ofinsurance issued by our technical risk property line.

Our lossratio was 55.2% for the three months ended June 30, 2005compared to 50.2% for the three months ended June 30, 2004. Theincrease in our specialty insurance loss ratio is due, in part, to theenvironmental adverse development and the two claims related to firesdescribed above, which are in part offset by an increase in cededlosses that we are recovering on our specialty insurancesegment's reinsurance treaties. We have received a limited numberof other less significant loss notifications in our specialty insurancesegment. However, we participate in lines of business where claims maynot be reported for some period of time after those claims areincurred.

Acquisition expenses.    Acquisition expenseswere $6.1 million for the three months ended June 30, 2005 an increaseof $1.8 million compared to $4.3 million for the three months endedJune 30, 2004. The increase of $1.8 million in acquisition expenses wasdue to the increase in the number of insurance contracts we enteredinto and the associated net premiums earned. These acquisition expensesprimarily represented brokerage fees, commission fees and premium taxexpenses and were net of ceding commissions earned on purchasedreinsurance treaties.

Our acquisition expense ratio was14.1% for the three months ended June 30, 2005 a decrease of10.5% compared to 24.6% for the three months ended June30, 2004. The reduction in our acquisition expense ratio in thespecialty insurance segment is due to the fact that we are paying lessfronting costs because we are licensed in more states and no longerneed to utilize fronting companies to the same extent in order to writeour insurance business, acquisition costs on our technical riskproperty contracts, including the HBW program described above, beinglower during the three months ended June 30, 2005 as a result of thecontracts containing sliding scale commission provisions that vary withchanges in the selected loss ratio. The reduction in our acquisitionexpense ratio is also due to ceding commission income that we areearning on the reinsurance treaties that we have entered into for eachof our specialty insurance product lines.

General andadministrative expenses.    Direct and allocated indirect generaland administrative expenses totaled $11.4 million for the three monthsended June 30, 2005 an increase of $4.0 million 

35

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compared to $7.4 million for the threemonths ended June 30, 2004. The increase in our general andadministrative expense ratio was due to the additional number ofemployees hired throughout 2004 and 2005 and the continued build out ofour infrastructure as we grew our specialty insurance lines ofbusiness.

As a result, our general and administrative expenseratio increased to 18.5% of net premiums written for the threemonths ended June 30, 2005 compared to 15.8% for the threemonths ended June 30, 2004.

Specialtyreinsurance

|                                        |  |                                |         |                                |  |        |         |         |  |        |         |         |  |  |
|----------------------------------------|--|--------------------------------|---------|--------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                   |  | Threemonthsended June 30, 2005 |         | Three monthsended June 30,2004 |  | Change |
|                                   |  | ($ inthousands)                |
| Gross premiumswritten                  |  | $                              | 54,791  |                           |  | $      | 67,131  |    |  | $      | (12,340 | )  |
| Premiumsceded                          |  |                           | (10,050 | )                         |  |   | — |    |  |   | (10,050 | )  |
| Netpremiumswritten                     |  | $                              | 44,741  |                           |  | $      | 67,131  |    |  | $      | (22,390 | )  |
| Netpremiumsearned                      |  | $                              | 53,761  |                           |  | $      | 39,232  |    |  | $      | 14,529  |    |
| Otherincome                            |  |                           | 758     |                           |  |   | — |    |  |   | 758     |    |
| Netlosses and lossexpenses             |  |                           | (34,452 | )                         |  |   | (23,486 | )  |  |   | (10,966 | )  |
| Acquisitionexpenses                    |  |                           | (12,189 | )                         |  |   | (8,500  | )  |  |   | (3,689  | )  |
| Generaland administrativeexpenses      |  |                           | (6,404  | )                         |  |   | (5,381  | )  |  |   | (1,023  | )  |
| Netunderwriting income(loss)           |  | $                              | 1,474   |                           |  | $      | 1,865   |    |  | $      | (391    | )  |
| Ratios:                                |  |                           |    |                           |  |   |    |    |  |   |    |    |
| Lossand loss expenseratio              |  |                           | 64.1    | %                         |  |   | 59.9    | %  |  |   | 4.2     | %  |
| Acquisitionexpenseratio                |  |                           | 22.7    | %                         |  |   | 21.7    | %  |  |   | 1.0     | %  |
| Generaland administrative expenseratio |  |                           | 14.3    | %                         |  |   | 8.0     | %  |  |   | 6.3     | %  |
| Combinedratio                          |  |                           | 101.1   | %                         |  |   | 89.6    | %  |  |   | 11.5    | %  |
|                                        |

Premiums.    Grossand net premiums written were $54.8 million and $44.7 million for thethree months ended June 30, 2005 compared to $67.1 million of gross andnet premiums for the three months ended June 30, 2004. The decrease inour specialty reinsurance segment's gross and net writtenpremiums is consistent with our strategy to grow our specialtyinsurance lines of business. In addition, during the three months endedJune 30, 2005 our net premiums written have decreased following thepurchase of $7.0 million of ceded reinsurance protection by ourspecialty reinsurance property product line in order to limit our netloss exposures to our planned net limits and to control our aggregateexposures to catastophe windstorm and earthquake events. Thesereinsurance treaties provide us with reinsurance protection on anexcess of loss, quota share treaty and facultative basis for policieswritten in our reinsurance product lines of business.

The tablebelow shows gross written premiums by product line whether written on atraditional reinsurance, programs or structuredbasis:

|                                   |  |                                |         |                                |  |        |        |        |  |  |
|-----------------------------------|--|--------------------------------|---------|--------------------------------|--|--------|--------|--------|--|--|
|                              |  | Threemonthsended June 30, 2005 |         | Three monthsendedJune 30, 2004 |
|                              |  | ($ inthousands)                |
| Property                          |  | $                              | 20,973  |                           |  | $      | 33,109 |   |
| Casualty                          |  |                           | 21,221  |                           |  |   | 25,083 |   |
| Marine,technical risk andaviation |  |                           | 12,597  |                           |  |   | 8,484  |   |
| Structuredreinsurance             |  |                           | — |                           |  |   | 455    |   |
| Total                             |  | $                              | 54,791  |                           |  | $      | 67,131 |   |
|                                   |

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 

36

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over the period of each insured risk. Weexpect to purchase additional reinsurance treaties during the secondhalf of 2005 in order to further limit our net loss exposures toproperty catastrophe risks.

Net premiums earned of $53.8 millionreflect the earning of premiums on contracts written during the yearended December 31, 2004 and during the six months ended June 30,2005.

Other income.    Other income was $0.8 millionfor the three months ended June 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-Traditional Contracts"below.

Net losses and loss expenses.    Net losses andloss expenses were $34.5 million for the three months ended June 30,2005 an increase of $11.0 million compared to $23.5 million for thethree months ended June 30, 2004. This increase was due to the increasein the number of reinsurance contracts we entered into and theassociated net premiums earned. Net losses and loss expenses were afunction of our net premiums earned and our expected ultimate lossesand loss expenses for reported and unreported claims on contracts ofreinsurance underwritten. Included in our expected ultimate losses forthe three months ended June 30, 2005, is adverse development of $2.6million related to our loss estimates on contracts of reinsurance andinsurance insuring claims arising from hurricanes Charley, Frances,Ivan and Jeanne. The actual amount of losses from the hurricanes mayvary significantly from the estimate.

Our total net loss ratio(calculated by dividing net losses and loss expenses by net premiumsearned) was 64.1% for the three months ended June 30, 2005 anincrease of 4.2% compared to 59.9% for the three monthsended June 30, 2004. The increase in our total net loss ratio primarilyreflects the adverse development on the hurricane claims discussedabove. We expect during the second half of 2005 to enter into furtherreinsurance treaties in our property reinsurance line of business toreduce the potential impact to our total net loss ratio fromcatastrophic events of similar magnitude as we experienced in thesecond half of 2004.

Acquisitionexpenses.    Acquisition expenses were $12.2 million for thethree months ended June 30, 2005 an increase of $3.7 million comparedto $8.5 million for the three months ended June 30, 2004. The increasein acquisition expenses was due to the increase in the number ofreinsurance contracts we entered into and the associated net premiumsearned. These acquisition expenses primarily represented brokerage andceding commissions. Our acquisition expense ratio was 22.7% forthe three months ended June 30, 2005 an increase of 1.0%compared to 21.7% for the three months ended June 30, 2004. Thisincrease is primarily due to changes in our mix of business and thetype and nature of contracts written.

General andadministrative expenses.    Direct and allocated indirect generaland administrative expenses totaled $6.4 million for the three monthsended June 30, 2005, an increase of $1.0 million compared to $5.4million for the three months ended June 30, 2004. Our general andadministrative expense ratio was 14.3% of net premiums writtenfor the three months ended June 30, 2005 an increase of 6.3%compared to 8.0% for the three months ended June 30, 2004 andwas primarily due to the decrease in our net premiums written.

Lloyd's

We did not commence writing businessat our Lloyd's Syndicate 4000 until the fourth quarter of 2004and accordingly there is no comparative review of the three monthsended June 30, 2005 to the three months ended June 30,2004.

37

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|                                        |  |                                |        |         |  |  |
|----------------------------------------|--|--------------------------------|--------|---------|--|--|
|                                   |  | Threemonthsended June 30, 2005 |
|                                   |  | ($ inthousands)                |
| Gross premiumswritten                  |  | $                              | 24,666 |    |
| Premiumsceded                          |  |                           | (3,714 | )  |
| Netpremiums written                    |  | $                              | 20,952 |    |
| Netpremiums earned                     |  | $                              | 7,848  |    |
| Net losses and lossexpenses            |  |                           | (4,180 | )  |
| Acquisitionexpenses                    |  |                           | (942   | )  |
| General and administrativeexpenses     |  |                           | (4,312 | )  |
| Net underwritingloss                   |  | $                              | (1,586 | )  |
| Ratios:                                |  |                           |   |    |
| Lossand loss expenseratio              |  |                           | 53.3   | %  |
| Acquisition expenseratio               |  |                           | 12.0   | %  |
| General andadministrative expenseratio |  |                           | 20.6   | %  |
| Combinedratio                          |  |                           | 85.9   | %  |
|                                        |

Premiums.    Wecommenced underwriting specialty insurance lines at Syndicate 4000 atLloyd's in December 2004. Gross and net written premiums were$24.7 million and $21.0 million for the three months ended June 30,2005 and represented professional liability insurance business. Weexpect that our gross and net premiums written will increase in futureperiods as we continue to grow our Syndicate 4000 at Lloyd's andenter into additional insurance contracts.

Net premiums earnedin the three months ended June 30, 2005 were $7.8 million and reflectthe earning of premiums on contracts written during the six monthsended June 30, 2005 and during the year ended December 31, 2004. Weexpect that our net premiums earned will increase in future periods asSyndicate 4000 at Lloyd's continues to grow and enters intoadditional insurance contracts.

Losses and lossexpenses.    Net losses and loss expenses incurred were $4.2million for the three months ended June 30, 2005 and reflect a loss andloss expense ratio (calculated as losses and loss expenses incurreddivided by net premium earned) of 53.3%. For the three monthsended June 30, 2005, given the segment's limited operatinghistory and historical claims experience, we continued to adopt anexpected loss ratio methodology to estimate our ultimate cost oflosses. As of June 30, 2005, we had not received any notifications ofsignificant reported losses that were covered under Syndicate4000's insurance contracts. However, we participate in lines ofbusiness where claims may not be reported for some period of time afterthose claims are incurred.

Acquisitionexpenses.    Acquisition expenses were $0.9 million for the threemonths ended June 30, 2005 and reflect an acquisition expense ratio of12.0% and were a function of the number and type of insurancecontracts we entered into and the associated net premiums earned. Theseacquisition expenses primarily represented brokerage expenses.

General and administrative expenses.    Direct andallocated indirect general and administrative expenses totaled $4.3million, or 20.6%, of net premiums written for the three monthsended June 30, 2005 and were largely comprised of employee and otherLloyd's and corporate related expenses. We expect our general andadministrative expense ratio to decrease during the remainder of 2005as we continue to expand our Lloyd's business and increase ournet premiums written.

38

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Technical services

Three months ended June 30, 2005 and2004

|                                   |  |                               |        |                              |  |        |        |         |  |        |       |         |  |  |
|-----------------------------------|--|-------------------------------|--------|------------------------------|--|--------|--------|---------|--|--------|-------|---------|--|--|
|                              |  | ThreemonthsendedJune 30, 2005 |        | ThreemonthsendedJune 30,2004 |  | Change |
|                              |  | ($ inthousands)               |
| Technical servicesrevenues        |  | $                             | 8,085  |                         |  | $      | 8,841  |    |  | $      | (756  | )  |
| Otherincome                       |  |                          | 1,794  |                         |  |   | 118    |    |  |   | 1,676 |    |
| Directtechnical servicescosts     |  |                          | (5,999 | )                       |  |   | (5,827 | )  |  |   | (172  | )  |
| Generaland administrativeexpenses |  |                          | (2,699 | )                       |  |   | (2,295 | )  |  |   | (404  | )  |
| Nettechnical servicesincome       |  | $                             | 1,181  |                         |  | $      | 837    |    |  | $      | 344   |    |
|                                   |

Technicalservices revenues.    Technical services revenues were $8.1million for the three months ended June 30, 2005, a decrease of $0.7million, or 8.6%, compared to $8.8 million for the three monthsended June 30, 2004. The decrease of $0.7 million in technical servicesrevenues is attributable to decrease in subcontractor revenue which isa result of fewer non-recurring environmental remediation projects in2005.

Other income.    Other income was $1.8 millionfor the three months ended June 30, 2005 compared to $0.1 million forthe three months ended June 30, 2004. Other income was generated fromour environmental liability assumption programs and primarily from anew project in Buffalo, New York, under which we assume specifiedenvironmental liabilities. This income represents fees, reimbursementsand other remediation amounts relating to the services performed.

Direct technical services costs.    Direct technicalservices costs were $6.0 million for the three months ended June 30,2005, an increase of $0.2 million, or 3.0%, compared to $5.8million for the three months ended June 30, 2004. The increase indirect technical services costs was primarily attributable to increaseddirect labor expenses which resulted from an increase in the number,and change in the scope and nature of, remediation projects undertakenduring the three months ended June 30, 2005 compared to the threemonths ended June 30, 2004. Direct technical services costs, as apercentage of revenue was 74.2% for the three months ended June30, 2005 compared to 65.9% for the three months ended June 30,2004. The increase in direct technical services costs as a percentageof revenues was attributable to higher costs associated withenvironmental projects in 2005 as compared to 2004.

Generaland administrative expenses.    Direct and indirect allocatedgeneral and administrative expenses were $2.7 million for the threemonths ended June 30, 2005 an increase of $0.4 million, or 17.6%compared to $2.3 million for the three months ended June 30, 2004. Theincrease is attributable to increased staffing levels, higher overheadallocation arising from the development of our infrastructure andSarbanes-Oxley Section 404 compliance efforts and professional feesassociated with the new environmental liability assumption program inBuffalo, New York.

39

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Six monthsended June 30, 2005 and 2004

The following tablesummarizes our net underwriting results and profitability measures forour segments for the six months ended June 30, 2005 and 2004:

Specialtyinsurance

|                                        |  |                               |         |                               |  |        |         |         |  |        |         |          |  |  |
|----------------------------------------|--|-------------------------------|---------|-------------------------------|--|--------|---------|---------|--|--------|---------|----------|--|--|
|                                   |  | Sixmonths ended June 30, 2005 |         | Six months endedJune 30, 2004 |  | Change |
|                                   |  | ($ inthousands)               |
| Gross premiumswritten                  |  | $                             | 160,752 |                          |  | $      | 105,872 |    |  | $      | 54,880  |     |
| Premiumsceded                          |  |                          | (52,350 | )                        |  |   | (27,182 | )  |  |   | (25,168 | )   |
| Netpremiumswritten                     |  |                          | 108,402 |                          |  | $      | 78,690  |    |  | $      | 29,712  |     |
|                                   |  |                          |    |                          |  |   |    |    |  |   |    |     |
| Netpremiumsearned                      |  | $                             | 78,835  |                          |  | $      | 21,632  |    |  | $      | 57,203  |     |
| Otherincome                            |  |                          | 829     |                          |  |   | --      |    |  |   | 829     |     |
| Net lossesand lossexpenses             |  |                          | (50,631 | )                        |  |   | (11,014 | )  |  |   | (39,617 | )   |
| Acquisitionexpenses                    |  |                          | (12,659 | )                        |  |   | (5,159  | )  |  |   | (7,500  | )   |
| Generaland administrativeexpenses      |  |                          | (21,111 | )                        |  |   | (16,045 | )  |  |   | (5,066  | )   |
| Netunderwriting (loss)income           |  | $                             | (4,737  | )                        |  | $      | (10,586 | )  |  | $      | 5,849   |     |
| Ratios:                                |  |                          |    |                          |  |   |    |    |  |   |    |     |
| Lossand loss expenseratio              |  |                          | 64.2    | %                        |  |   | 50.9    | %  |  |   | 13.3    | %   |
| Acquisitionexpenseratio                |  |                          | 16.1    | %                        |  |   | 23.8    | %  |  |   | (7.7    | )%  |
| Generaland administrative expenseratio |  |                          | 19.5    | %                        |  |   | 20.4    | %  |  |   | (0.9    | )%  |
| Combinedratio                          |  |                          | 99.8    | %                        |  |   | 95.1    | %  |  |   | 4.7     | %   |
|                                        |

Premiums.     Grossand net written premiums were $160.8 million and $108.4 million for thesix months ended June 30, 2005 compared to $105.9 million and $78.7million for the six months ended June 30, 2004. The increase in ourspecialty insurance segment's gross and net premiums written wasdue primarily to growth in U.S. insurance business as we grew from ourstart-up phase into a more recognized insurer. The increase reflectsour increasing participation in the insurance marketplace anddevelopment of our insurance portfolios.

The table below showsgross written premiums by product line for the six months ended June30, 2005 and 2004 whether written on a traditional insurance, programsor structuredbasis:

|                               |  |                               |         |                            |  |        |         |        |  |  |  |  |  |  |
|-------------------------------|--|-------------------------------|---------|----------------------------|--|--------|---------|--------|--|--|--|--|--|--|
|                          |  | Sixmonths ended June 30, 2005 |         | SixmonthsendedJune 30,2004 |  |
|                          |  | ($ inthousands)               |         |
| Technical risk property       |  | $                             | 101,603 |                       |  | $      | 67,537  |   |  |
| Professionalliability         |  |                          | 27,104  |                       |  |   | 18,191  |   |  |
| Environmentalliability        |  |                          | 15,579  |                       |  |   | 15,077  |   |  |
| Fidelity andcrime             |  |                          | 7,549   |                       |  |   | 4,511   |   |  |
| Surety                        |  |                          | 5,634   |                       |  |   | 556     |   |  |
| Tradecredit and politicalrisk |  |                          | 3,180   |                       |  |   | — |   |  |
| Other                         |  |                          | 103     |                       |  |   | — |   |  |
| Total                         |  | $                             | 160,752 |                       |  | $      | 105,872 |   |  |
|                               |

Duringthe six months ended June 30, 2005 we continued to write, in ourtechnical risk property product line, the HBW program, which accountedfor approximately $93.4 million, or 92.0%, of the technical riskproperty line of business and 58.1% of total specialty insurancesegment gross written premiums in the six months ended June 30, 2005.The policies in the program are underwritten 

40

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through a third party agent that we believeis an established specialist in this technical field. We expect thatthis program will continue to contribute substantial net writtenpremiums during the remainder of 2005 and that we will experiencefurther growth and diversification in our other specialty insurancelines of business. Our HBW gross premiums written during the six monthsended June 30, 2005 are summarized in the table below by specialty riskclass.

|          |  |              |      |        |  |  |
|----------|--|--------------|------|--------|--|--|
|     |  | ($inmillion) |
| Casualty |  | $            | 79.0 |   |
| Warranty |  |         | 8.0  |   |
| Property |  |         | 6.4  |   |
| Total    |  | $            | 93.4 |   |
|          |

Approximately58.1% of our specialty insurance segment gross written premiumsof $160.8 million were generated through our HBW program. The remaining41.9% of our specialty insurance segment gross written premiumswere generated through a significant number of brokers, none of whichaccounted for more than 10% of our total specialty insurancesegment gross written premiums.

Ceded premiums were $52.4million during the six months ended June 30, 2005, an increase of $25.2million compared to $27.2 million for the six months ended June 30,2004. The increase in ceded premiums reflects the increase in our grosswritten premiums and the reinsurance treaties that we have entered intofor our specialty insurance product lines in order to limit our netloss exposures to our planned net limits and to control our aggregateexposures to particular classes of risk. Gross premiums written andceded premiums are earned over the period of each insured risk. Theterms of our insurance contracts range from between one and ten years.Net premiums earned during the six months ended June 30, 2005 were$78.8 million representing the earning and amortization of premiumswritten and ceded during the year ended December 31, 2004 and the sixmonths ended June 30, 2005.

Other income.    Otherincome was $0.8 million for the six months ended June 30, 2005 andrelated 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 andloss expenses.    Net losses and loss expenses were $50.6 millionfor the six months ended June 30, 2005 an increase of $39.6 millioncompared to $11.0 million for the six months ended June 30, 2004. Theincrease of $39.6 million in net losses and loss expenses incurred wasdue to the increase in the number of insurance contracts we enteredinto and the associated net premiums earned. Net losses and lossexpenses were a function of our net premiums earned and our expectedultimate losses and loss expenses for reported and unreported claims oncontracts of insurance underwritten. Included in our expected ultimatelosses during the six months ended June 30, 2005 is $7.4 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 productline.

Our loss ratio was 64.2% for the six months endedJune 30, 2005 compared to 50.9% for the six months ended June30, 2004. The increase in our specialty insurance loss ratio is dueprimarily to the environmental loss described above. We have received alimited number of other less significant loss notifications in ourspecialty insurance segment. However, we participate in lines ofbusiness where claims may not be reported for some period of time afterthose claims are incurred.

Acquisitionexpenses.    Acquisition expenses were $12.7 million for the sixmonths ended June 30, 2005 an increase of $7.5 million compared to $5.2million for the six months ended June 30, 2004. The increase of $7.5million in acquisition expenses was due to the increase in the numberof insurance contracts we entered into and the associated net premiumsearned. These acquisition expenses primarily represented brokeragefees, commission fees and premium tax expenses and were net of cedingcommissions earned on purchased reinsurance treaties.

Ouracquisition expense ratio was 16.1% for the six months endedJune 30, 2005 a decrease of 7.7% compared to 23.8% forthe six months ended June 30, 2004. The reduction in our acquisition

41

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expense ratio in the specialty insurancesegment is primarily due to the fact that we are paying less frontingcosts because we are licensed in more states and no longer need toutilize fronting companies to the same extent in order to write ourinsurance business, to the acquisition costs on our HBW program, beinglower during the six months ended June 30, 2005 as a result of thecontracts containing sliding scale commission provisions that vary withchanges in the selected loss ratio. The reduction in our acquisitionexpense ratio is also due to ceding commission income that we areearning on the reinsurance treaties that we have entered into for ourspecialty insurance product lines.

General and administrativeexpenses.    Direct and allocated indirect general andadministrative expenses totaled $21.1 million for the six months endedJune 30, 2005, an increase of $5.1 million compared to $16.0 millionfor the six months ended June 30, 2004. The increase in our general andadministrative expense ratio was due to the additional number ofemployees hired throughout 2004 as we grew our specialty insurancelines of business and developed our infrastructure.

Our generaland administrative expense ratio was 19.5% of net premiumswritten for the six months ended June 30, 2005 a decrease of0.9% compared to 20.4% for the six months ended June 30,2004 and was due to the increase in our net premiums written.

Specialtyreinsurance

|                                        |  |                               |         |                               |  |        |         |         |  |        |         |         |  |  |
|----------------------------------------|--|-------------------------------|---------|-------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                   |  | Sixmonths ended June 30, 2005 |         | Six months endedJune 30, 2004 |  | Change |
|                                   |  | ($ inthousands)               |
| Gross premiumswritten                  |  | $                             | 139,563 |                          |  | $      | 147,828 |    |  | $      | (8,265  | )  |
| Premiumsceded                          |  |                          | (11,347 | )                        |  |   | — |    |  |   | (11,347 | )  |
| Netpremiumswritten                     |  | $                             | 128,216 |                          |  | $      | 147,828 |    |  | $      | (19,612 | )  |
|                                   |  |                          |    |                          |  |   |    |    |  |   |    |    |
| Netpremiumsearned                      |  | $                             | 106,502 |                          |  | $      | 62,458  |    |  | $      | 44,044  |    |
| Otherincome                            |  |                          | 1,548   |                          |  |   | — |    |  |   | 1,548   |    |
| Netlosses and lossexpenses             |  |                          | (63,452 | )                        |  |   | (37,206 | )  |  |   | (26,246 | )  |
| Acquisitionexpenses                    |  |                          | (25,787 | )                        |  |   | (14,295 | )  |  |   | (11,492 | )  |
| Generaland administrativeexpenses      |  |                          | (11,297 | )                        |  |   | (10,573 | )  |  |   | (724    | )  |
| Netunderwritingincome                  |  | $                             | 7,514   |                          |  | $      | 384     |    |  | $      | 7,130   |    |
| Ratios:                                |  |                          |    |                          |  |   |    |    |  |   |    |    |
| Lossand loss expenseratio              |  |                          | 59.6    | %                        |  |   | 59.6    | %  |  |   | 0.0     | %  |
| Acquisitionexpenseratio                |  |                          | 24.2    | %                        |  |   | 22.9    | %  |  |   | 1.3     | %  |
| Generaland administrative expenseratio |  |                          | 8.8     | %                        |  |   | 7.2     | %  |  |   | 1.6     | %  |
| Combinedratio                          |  |                          | 92.6    | %                        |  |   | 89.7    | %  |  |   | 2.9     | %  |
|                                        |

Premiums.    Grossand net premiums written were $139.6 million and $128.2 million for thesix months ended June 30, 2005 compared to $147.8 million of gross andnet premiums for the six months ended June 30, 2004. The decrease inour specialty reinsurance segment's gross and net writtenpremiums is consistent with our strategy to grow our specialtyinsurance lines of business. In addition, during the six months endedJune 30, 2005 our net premiums written have decreased following thepurchase of $11.3 million of ceded reinsurance protection, including$7.0 million in our specialty reinsurance property product line inorder to limit our net loss exposures to windstorm and earthquakeevents. These reinsurance treaties provide us with reinsuranceprotection on an excess of loss, quota share treaty and facultativebasis for policies written in our reinsurance product lines ofbusiness.

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

|                                   |  |                               |         |                               |  |        |         |        |  |  |  |  |  |  |
|-----------------------------------|--|-------------------------------|---------|-------------------------------|--|--------|---------|--------|--|--|--|--|--|--|
|                              |  | Sixmonths ended June 30, 2005 |         | Six months endedJune 30, 2004 |  |
|                              |  | ($ inthousands)               |         |
| Property                          |  | $                             | 65,412  |                          |  | $      | 78,174  |   |  |
| Casualty                          |  |                          | 50,325  |                          |  |   | 45,408  |   |  |
| Marine,technical risk andaviation |  |                          | 23,826  |                          |  |   | 23,890  |   |  |
| Structuredreinsurance             |  |                          | — |                          |  |   | 456     |   |  |
| Total                             |  | $                             | 139,563 |                          |  | $      | 147,828 |   |  |
|                                   |

Ourproperty reinsurance gross premiums written during the six months endedJune 30, 2005 are summarized in the table below by risk class.

|                                   |  |        |       |         |  |  |
|-----------------------------------|--|--------|-------|---------|--|--|
| Homeownersand commercial property |  |   | 81.7  | %  |
| Crophail                          |  |   | 18.3  | %  |
| 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 81.7% of our totalproperty reinsurance gross premiums written during the six months endedJune 30, 2005. Our crop hail category covers crops throughout theU.S.

Our property premiums written include contracts written onexcess of loss and quota share bases. Of our total property reinsurancegross premiums written for the six months ended June 30, 2005,27.5% represents excess of loss contracts that we believe areexposed to losses from natural catastrophe events worldwide. Themajority of our property quota share contracts are exposed to naturalperils, including natural catastrophes.

Our casualty reinsurancegross premiums written during the six months ended June 30, 2005 aresummarized in the table below by risk class.

|                                 |  |        |       |         |  |  |
|---------------------------------|--|--------|-------|---------|--|--|
| Directorsand officers'liability |  |   | 35.2  | %  |
| Other professionalliability     |  |   | 13.0  | %  |
| Other                           |  |   | 51.8  | %  |
| Total                           |  |   | 100.0 | %  |
|                                 |

Ourcasualty reinsurance gross premiums written included in our"other" casualty category, was spread across21 different risk classes, none of which accounted for more than10% of our casualty reinsurance premiums written for the sixmonths ended June 30, 2005.

Our marine, technical risk andaviation reinsurance gross premiums written during the six months endedJune 30, 2005 are summarized in the table below by risk class.

|             |  |        |       |         |  |  |
|-------------|--|--------|-------|---------|--|--|
| Oceanmarine |  |   | 80.2  | %  |
| Aviation    |  |   | 19.8  | %  |
| Total       |  |   | 100.0 | %  |
|             |

Approximately46.8%, 18.8% and 12.7% of our reinsurance segmentgross written premiums were generated through Guy Carpenter &Company, Inc., Benfield Group and Rattner MacKenzie.

Grossreinsurance premiums written are being earned over the periods ofreinsured or underlying insured risks which are typically one year.Ceded premiums were $11.3 million during the six months ended June 30,2005 under the reinsurance treaties we purchased for our property andmarine, 

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technical risk and aviation product lines.Gross premiums written and ceded premiums are earned over the period ofeach insured risk. We expect to purchase additional reinsurancetreaties during the second half of 2005 in order to further limit ournet loss exposures to property catastrophe risks.

Net premiumsearned of $106.5 million reflect the earning of premiums on contractswritten during the year ended December 31, 2004 and during the sixmonths ended June 30, 2005.

Other income.    Otherincome was $1.5 million for the six months ended June 30, 2005 andrelated to income, including fees, recognized on non-traditionalreinsurance contracts. A more detailed description of thesenon-traditional contracts is provided under "-Non-Traditional Contracts" below.

Net losses andloss expenses.    Net losses and loss expenses were $63.5 millionfor the six months ended June 30, 2005 an increase of $26.3 millioncompared to $37.2 million for the six months ended June 30, 2004. Theincrease of $26.3 million in net losses and loss expenses incurred wasdue to the increase in the number of reinsurance contracts we enteredinto and the associated net premiums earned. Net losses and lossexpenses were a function of our net premiums earned and our expectedultimate losses and loss expenses for reported and unreported claims oncontracts of reinsurance underwritten. Included in our expectedultimate losses is adverse development of $3.6 million related to ourloss estimates on contracts of reinsurance and insurance insuringclaims arising from hurricanes Charley, Frances, Ivan and Jeanne. Theactual amount of losses from the hurricanes may vary significantly fromthe estimate.

Our total net loss ratio (calculated by dividingnet losses and loss expenses by net premiums earned) was 59.6%for the six months ended June 30, 2005 and was constant with the sixmonths ended June 30, 2004. We expect during the second half of 2005 toenter into reinsurance treaties in our property reinsurance line ofbusiness to further reduce the potential impact to our total net lossratio from catastrophic events of similar magnitude as we experiencedin the second half of 2004.

Acquisitionexpenses.    Acquisition expenses were $25.8 million for the sixmonths ended June 30, 2005 an increase of $11.5 million compared to$14.3 million for the six months ended June 30, 2004. The increase inacquisition expenses was due to the increase in the number ofreinsurance contracts we entered into and the associated net premiumsearned. These acquisition expenses primarily represented brokerage andceding commissions.

Our acquisition expense ratio was24.2% for the six months ended June 30, 2005, an increase of1.3% compared to 22.9% for the six months ended June 30,2004. The increase reflects certain contracts with higher commissionrates that were written during the second and third quarters of 2004,particularly in our property reinsurance product line.

General and administrative expenses.    Direct andallocated indirect general and administrative expenses totaled $11.3million for the six months ended June 30, 2005 an increase of $0.7million compared to $10.6 million for the six months ended June 30,2004. Our general and administrative expense ratio was 8.8% ofnet premiums written for the six months ended June 30, 2005 an increaseof 1.6% compared to 7.2% for the six months ended June30, 2004 and was due to the decrease in our net premiums written.

Lloyd's

We did not commence writing businessat our Lloyd's Syndicate 4000 until the fourth quarter of 2004and accordingly there is no comparative review of the six months endedJune 30, 2005 to the six months ended June 30, 2004.

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|                                        |  |                               |        |         |  |  |
|----------------------------------------|--|-------------------------------|--------|---------|--|--|
|                                   |  | Sixmonths ended June 30, 2005 |
|                                   |  | ($ inthousands)               |
| Gross premiumswritten                  |  | $                             | 40,959 |    |
| Premiumsceded                          |  |                          | (7,336 | )  |
| Netpremiumswritten                     |  | $                             | 33,623 |    |
| Netpremiums earned                     |  | $                             | 11,157 |    |
| Net losses and lossexpenses            |  |                          | (6,019 | )  |
| Acquisitionexpenses                    |  |                          | (1,274 | )  |
| General and administrativeexpenses     |  |                          | (8,873 | )  |
| Netunderwritingloss                    |  | $                             | (5,009 | )  |
| Ratios:                                |  |                          |   |    |
| Lossand loss expenseratio              |  |                          | 53.9   | %  |
| Acquisition expenseratio               |  |                          | 11.4   | %  |
| General andadministrative expenseratio |  |                          | 26.4   | %  |
| Combinedratio                          |  |                          | 91.7   | %  |
|                                        |

Premiums.    Wecommenced underwriting specialty insurance lines at Syndicate 4000 atLloyd's in December 2004. Gross and net written premiums were$41.0 million and $33.6 million for the six months ended June 30, 2005and represented professional liability insurance business. We expectthat our gross and net premiums written will increase in future periodsas we continue to grow our Syndicate 4000 at Lloyd's and enterinto additional insurance contracts.

Net premiums earned in thesix months ended June 30, 2005 were $11.2 million and reflect theearning of premiums on contracts written during the six months endedJune 30, 2005 and during the year ended December 31, 2004. We expectthat our gross and net premiums written and net premiums earned willincrease in future periods as Syndicate 4000 at Lloyd's continuesto grow and enters into additional insurance contracts.

Losses and loss expenses.    Net losses and loss expensesincurred were $6.0 million for the six months ended June 30, 2005 andreflect a loss and loss expense ratio (calculated as losses and lossexpenses incurred divided by net premium earned) of 53.9%. Forthe six months ended June 30, 2005, given the segment's limitedoperating history and historical claims experience, we adopted anexpected loss ratio methodology to estimate our ultimate cost oflosses. As of June 30, 2005, we had not received any notifications ofsignificant reported losses that were covered under Syndicate4000's insurance contracts. However, we participate in lines ofbusiness where claims may not be reported for some period of time afterthose claims are incurred.

Acquisitionexpenses.    Acquisition expenses were $1.3 million for the sixmonths ended June 30, 2005 and reflect an acquisition expense ratio of11.4% and were a function of the number and type of insurancecontracts we entered into and the associated net premiums earned. Theseacquisition expenses primarily represented brokerage expenses.

General and administrative expenses.    Direct andallocated indirect general and administrative expenses totaled $8.9million, or 26.4%, of net premiums written for the six monthsended June 30, 2005 and were largely comprised of employee and otherLloyd's and corporate related expenses. We expect our general andadministrative expense ratio to decrease during the remainder of 2005as we continue to expand our Lloyd's business and increase ournet premiums written.

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Technical services

Six months ended June 30, 2005 and2004

|                                   |  |                              |         |                             |  |        |         |         |  |        |       |         |  |  |
|-----------------------------------|--|------------------------------|---------|-----------------------------|--|--------|---------|---------|--|--------|-------|---------|--|--|
|                              |  | Sixmonths endedJune 30, 2005 |         | Six monthsendedJune 30,2004 |  | Change |
|                              |  | ($ inthousands)              |
| Technical servicesrevenues        |  | $                            | 16,085  |                        |  | $      | 15,877  |    |  | $      | 208   |    |
| Otherincome                       |  |                         | 1,917   |                        |  |   | 277     |    |  |   | 1,640 |    |
| Directtechnical servicescosts     |  |                         | (10,860 | )                      |  |   | (10,211 | )  |  |   | (649  | )  |
| Generaland administrativeexpenses |  |                         | (5,237  | )                      |  |   | (4,812  | )  |  |   | (425  | )  |
| Nettechnical servicesincome       |  | $                            | 1,905   |                        |  | $      | 1,131   |    |  | $      | 774   |    |
|                                   |

Technicalservices revenues.    Technical services revenues were $16.1million for the six months ended June 30, 2005, which is comparable to$15.9 million for the six months ended June 30, 2004.

Otherincome.    Other income was $1.9 million for the six months endedJune 30, 2005 as compared to $0.3 million for the six months ended June30, 2004. Other income was generated from our liability assumptionprograms and primarily from a new project in Buffalo, New York, underwhich we assume specified environmental liabilities. This incomerepresents fees, reimbursements and other remediation amounts relatingto the services performed.

Direct technical servicescosts.    Direct technical services costs were $10.9 million forthe six months ended June 30, 2005, an increase of $0.7 million, or6.4%, compared to $10.2 million for the six months ended June30, 2004. The increase in direct technical services costs was primarilyattributable to increased direct labor expenses which resulted from anincrease in the number, and change in the scope and nature of,remediation projects undertaken during the six months ended June 30,2005 compared to the six months ended June 30, 2004. Direct technicalservices costs, as a percentage of revenue was 67.5% for the sixmonths ended June 30, 2005 compared to 64.3% for the six monthsended June 30, 2004, reflecting a higher relative cost associated withour remediation projects in 2005.

General and administrativeexpenses.    Direct and indirect allocated general andadministrative expenses were $5.2 million for the six months ended June30, 2005, an increase of $0.4 million, or 8.8% compared to $4.8million for the six months ended June 30, 2004. The increase isattributable to increased staffing levels, higher overhead allocationarising from the development of our infrastructure and Sarbanes-OxleySection 404 compliance efforts, and professional fees associated withthe environmental liability assumption program in Buffalo, NewYork.

Financial Condition and Liquidity

Quanta Holdingsis organized as a Bermuda holding company, and as such, has no directoperations of its own. Our assets consist of investments in oursubsidiaries through which we conduct substantially all of ourinsurance, reinsurance and technical services operations. As of June30, 2005, we had operations in Bermuda, the U.S., Ireland and the U.K.,including Syndicate 4000 at Lloyd's.

As a holding company,we will have continuing funding needs for general corporate expenses,the payment of principal and interest on current and future borrowings,taxes, and the payment of other obligations. Funds to meet theseobligations will come primarily from dividends, interest and otherstatutorily permissible payments from our operating subsidiaries. Theability of our operating subsidiaries to make these payments is limitedby the applicable laws and regulations of the domiciles in which thesubsidiaries 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.

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Financial condition

Our available-for-sale investments, excluding trading investmentsrelated to deposit liabilities, totaled $675.0 million as of June 30,2005 compared to $559.4 million at December 31, 2004. The majority ofour investment portfolio consists of fixed maturity investments whichare managed by the following external investment advisors: PacificInvestment Management Company LLC, JP Morgan Investment Management Inc.and Loomis, Sayles & Company, L.P. Custodians of our externallymanaged investment portfolios are JP Morgan Chase Bank N.A. andCitibank N.A. As of June 30, 2005, all of the fixed maturityinvestments were investment grade, with a weighted average creditrating of "AA+" based on ratings assigned byS&P. Our cash and cash equivalents totaled $97.2 million as of June30, 2005 compared to $75.3 million at December 31, 2004. The increasein our available-for-sale investments and cash and cash equivalents isprimarily due to the growth in our premiums written during the sixmonths ended June 30, 2005, the issuance of $21.6 million of JuniorSubordinated Debentures, and $20.0 million proceeds from the sale of amortality-risk-linked security, partially offset by claimsnotifications and associated loss payments we have made up to andincluding June 30, 2005. We expect that our fixed maturity investmentsand cash and cash equivalent balances will continue to increase duringthe second half of 2005 subject to continuing to pay loss and lossexpenses related to reported claims, particularly those arising fromthe hurricane events during the third quarter of 2004.

Ourinsurance and reinsurance premiums receivable balances totaled $202.6million as of June 30, 2005 compared to $146.8 million at December 31,2004. The increase in premiums receivable reflects our growth acrossall specialty insurance and Lloyd's segments during the sixmonths ended June 30, 2005 and the associated increase in the level ofpremiums written. Included in our premiums receivable are approximately$154.1 million of written premium installments that are not yetcurrently due under the terms of the related insurance and reinsurancecontracts. As of June 30, 2005, based on our review of the remainingbalance of $48.5 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$45.5 million and $273.7 million, as of June 30, 2005 compared to $41.5million and $200.5 million as of December 31, 2004. These increases aredue to the growth in our premiums written during the six months endedJune 30, 2005. These amounts represent premiums and acquisitionexpenses on written contracts of insurance and reinsurance that will berecognized in earnings in future periods. Substantially all of theseamounts will be recognized over the next 12 months.

Our reservesfor losses and loss adjustment expenses, net of reinsurancerecoverable, totaled $222.7 million as of June 30, 2005 compared to$146.3 million as of December 31, 2004. The increase in our net lossand loss expense reserves reflects the growth in our business, theassociated insured risks we assumed during the six months ended June30, 2005 and include our estimate of remaining unpaid loss expensestotaling $9.5 million relating to hurricanes Charley, Frances, Ivan andJeanne and $5.8 million relating to the environmental claim that weincurred during the six months ended June 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 discussion with clients,cedants and brokers. The actual amount of future loss payments relatingto these loss events may vary significantly from this estimate. As ofJune 30, 2005 we have received a limited amount of other reportedlosses. However, we participate in lines of business where claims maynot be reported for some period of time after those claims areincurred.

Our shareholders' equity was $437.2 million asof June 30, 2005 compared to $430.9 million as of December 31, 2004,reflecting an increase of $6.3 million that was primarily related toour net income of $7.9 million for the six months ended June 30, 2005,which was offset substantially by a net change in unrealized losses onour investment portfolios of $1.6 million during the six months endedJune 30, 2005. As of June 30, 2005, we have provided a 100%cumulative valuation allowance against our deferred tax assets in theamount of $14.4 million. These deferred tax assets were generatedprimarily from net operating losses. As a start-up company with limitedoperating history, the realization of these deferred tax assets isneither assured nor accurately determinable.

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Liquidity

Operating Cashflow

We generated net operating cashflow of approximately $124.3 million during the six months ended June30, 2005, primarily related to premiums and investment income receivedand offset by general and administrative expenses paid. In addition, wealso generated net proceeds from the issuance of Junior SubordinatedDebentures of $19.6 million. During the same period, we invested netcash of $113.6 million in our investment assets and, as of June 30,2005, had net cash and cash equivalent balances of $61.7 million.Included in our cash and cash equivalents and investments is $108.2million that is held by Lloyd's to support our underwritingactivities, $133.2 million held in trust funds for the benefit ofceding companies and to fund our obligations associated with theassumption of an environmental remediation liability, $146.9 millionthat is pledged as collateral for letters of credit, $29.6 million thatis on deposit with, or has been pledged to, U.S. state insurancedepartments and $42.9 million held in trust funds that are related toour deposit liabilities. Our cash flows from operations for the sixmonths ended June 30, 2005 provided us with sufficient liquidity tomeet operating cash requirements during that period.

Sources of cash

Our sources of cash consistprimarily of existing cash and cash equivalents, premiums written,proceeds from sales and redemptions of investment assets, capital ordebt issuances, investment income, reinsurance recoveries, and, to alesser extent, our secured bank credit facility and collections ofreceivables for technical services rendered to third parties.

OnJuly 11, 2005, Quanta Holdings and certain designated insurancesubsidiaries entered into an amended and restated credit agreement,dated July 11, 2005, providing for a secured bank letter of creditfacility and a revolving credit facility with a syndicate of lenders inthe amount of $250 million. Up to $25 million may be borrowed under thefacility on a revolving basis for general corporate purposes andworking capital requirements. The facility is secured by specifiedinvestments of the borrowers. As of June 30, 2005, we had $146.9million of secured letters of credit issued and outstanding under thefacility. As of June 30, 2005, we have not made any borrowings underthe revolving credit facility. The availability to a borrower is basedon the amount of eligible investments pledged by that borrower and theabsence of material adverse change provisions. Regulatory restrictionswill also limit the amount of investments that may be pledged by ourU.S. insurance borrowers and, consequently, the amount available forletters of credit and borrowings under the facility to thoseborrowers.

The credit agreement has certain financial covenants,including a leverage ratio (consolidated indebtedness to consolidatedtotal capital) of not greater than 0.35 to 1, a minimum consolidatednet worth of at least $301 million which shall be increased immediatelyfollowing the last day of each fiscal quarter by an amount equal to50% of the net income of the Company and its Subsidiaries andmaintenance of the Company's insurance ratings. In addition, thecredit agreement contains certain covenants restricting the activitiesof Quanta Holdings and its subsidiaries, such as the incurrence ofadditional indebtedness, liens and dividends and other payments toQuanta Holdings. Quanta Holdings has also unconditionally andirrevocably guaranteed all of the obligations of its subsidiaries tothe lenders. The facility terminates on July 11, 2008. We may alsoenter into other credit facilities to support portions of ourbusiness.

On February 24, 2005, we participated in a privateplacement of $20.0 million of floating rate capital securities (the"Trust Preferred Securities") issued byQuanta Capital Statutory Trust II ("Quanta TrustII"), a subsidiary Delaware trust formed on February 24,2004. The Trust Preferred Securities mature on June 15, 2035, areredeemable at our option at par beginning June 15, 2010, and requirequarterly distributions of interest by Quanta Trust II to the holder ofthe Trust Preferred Securities. Distributions will be payable at avariable per annum rate of interest, reset quarterly, equal to theLondon Interbank Offered Rate ("LIBOR") plus350 basis points. Quanta Trust II used the proceeds from the sale ofthe Trust Preferred Securities and the issuance of its commonsecurities to 

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purchase $20.6 million of juniorsubordinated debt securities, due March 15, 2035, in the principalamount of $20.6 million issued by us (the "Trust IIDebentures"). We are using the net proceeds of $19.6million, after the deduction of approximately $0.4 million ofcommissions paid to the placement agents in the transaction, from thesale of the Trust II Debentures to Quanta Trust II for working capitalpurposes and to support the growth of our business.

Uses of cash

In the near term, our principal cashrequirements are expected to be investments in operating subsidiaries,losses and loss adjustment expenses and other policy holder benefits,brokerage and commissions, expenses to develop and implement ourbusiness strategy, other operating expenses, premiums ceded, capitalexpenditures, the servicing of borrowing arrangements (including theJunior Subordinated Debentures), and taxes. The potential for a largeclaim under one of our insurance or reinsurance contracts means that wemay need to make substantial and unpredictable payments withinrelatively short periods of time. While our board of directorscurrently does not intend to declare dividends or make any otherdistributions to the shareholders of Quanta Holdings, our board plansto periodically reevaluate our dividend policy. Our cash requirementswill also include the payment of any future dividends to ourshareholders if and when our board of directors determines to changeour dividend policy.

We paid additional claims of $9.4 millionduring the first six months of 2005 relating to the environmental claimand the hurricane events of 2004. We expect that our cash requirementsfor the payment of these and other claims will be significant in futureperiods as we receive and settle claims, including those relating tothese specific claims.

We are in the process of hiringadditional employees in 2005 to complement the growth in our specialtyinsurance and reinsurance segments. As a result our general andadministrative expenses for the six months ended June 30, 2005 are notfully representative of our expected infrastructure, system needs andemployee base. We anticipate that our cash requirements for theseexpenses will increase in future periods as compared to the six monthsended June 30, 2005.

We incurred capital expenditures of $2.4million during the six months ended June 30, 2005 related primarily tothe purchase and development of information technology assets. Duringthe remainder of 2005, we expect capital expenditures principallyrelating to information systems, furniture and fixtures and leaseholdimprovements to be less than $10 million. We expect to fund thesecapital expenditures through cash provided by our operatingactivities.

In addition to these cash requirements, under thepurchase agreement with ESC, we will be required to pay ESC'sformer shareholders an earn-out payment if ESC achieves specifiedEBITDA targets. EBITDA generally is defined to mean earnings beforeinterest, taxes, depreciation and amortization. Under the earn-outarrangements, if EBITDA for the two-year period ending December 31,2005 is $7.5 million or greater, we will be required to pay an earn-outpayment of $5.0 million. If EBITDA is greater than $7.0 million andless than $7.5 million, then we will be required to pay a pro rataportion of the $5.0 million. We cannot, at this time, determine withany certainty whether ESC will achieve these EBITDA targets, orestimate the amount of any potential earn-out payments that would berequired if these targets are achieved.

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

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While we had sufficient liquidity to paythe losses we experienced in the past hurricane season, we may raiseadditional funds to further expand our business strategy, enter newlines of business and manage our expected growth. We may raise capitalthrough debt or equity or other securities. The amount and timing ofthis capital raise will depend on many factors, including our abilityto write new business successfully and to establish premium rates andreserves at levels sufficient to cover losses. At this time, we are notable to quantify the amount of additional capital we may raise or willrequire in the future or predict the timing of any other future capitalneeds. Any future equity or debt financing, if available at all, may beon terms that are not favorable to us. If we raise capital throughequity financings, your interest in our company will be diluted, andthe securities we issue may have rights, preferences and privilegesthat are senior to those of the shares that are currently issued andoutstanding. If we cannot maintain or obtain adequate capital to manageour business strategy and expected growth targets, our business,results of operations and financial condition may be adverselyaffected.

Commitments

We have contractual obligationsrelating to commitments under the trust preferred securities andnon-cancelable operating leases for property and office equipmentdescribed above under "Liquidity" as of June30, 2005 asfollows:

|                                          |  |                      |         |                |  |           |         |           |  |                |         |        |  |        |         |        |  |        |         |        |  |  |
|------------------------------------------|--|----------------------|---------|----------------|--|-----------|---------|-----------|--|----------------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                                     |  | Paymentsdue byperiod |
| Contractualobligations($000's)           |  | Total                |         | Lessthan1 year |  | 1-3 years |         | 3-5 years |  | Morethan5years |
|                                     |  |                 |    |           |  |      |    |      |  |           |    |   |  |   |    |   |  |   |    |   |
| Long-termdebtobligations                 |  | $                    | 61,857  |           |  | $         | — |      |  | $              | — |   |  | $      | — |   |  | $      | 61,857  |   |
| Intereston long-term debt obligations(1) |  |                 | 116,043 |           |  |      | 3,868   |      |  |           | 7,736   |   |  |   | 7,736   |   |  |   | 96,703  |   |
| Operatingleaseobligations                |  |                 | 43,050  |           |  |      | 4,677   |      |  |           | 8,493   |   |  |   | 6,342   |   |  |   | 23,538  |   |
| Total                                    |  | $                    | 220,950 |           |  | $         | 8,545   |      |  | $              | 16,229  |   |  | $      | 14,078  |   |  | $      | 182,098 |   |
|                                          |

|     |                                                                                                                                                                                         |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | The interest on the long-term debt obligation is based on aspread above LIBOR. We have reflected the interest due based upon thecurrent interest rate at June 30, 2005 on the facility. |

Off-balance sheet arrangements

Other than as describedunder "Liquidity" related to our TrustPreferred Securities offerings through the Quanta Capital StatutoryTrust I ("Quanta Trust I") and Quanta TrustII (together "Quanta Trust I and II"), as ofJune 30, 2005, we have not entered into any off-balance sheetarrangements with special purpose entities or variable interestentities. We did not consolidate Quanta Trust I and II, the issuers ofthe Trust Preferred Securities and variable interest entities, since weare not the primary beneficiary of Quanta Trust I or II. As of June 30,2005, we have recorded the $61.9 million of Debentures, which wereissued to Quanta Trust I and II, on our consolidated balance sheet. Thenet proceeds of $58.4 million from the sale of the Debentures to QuantaTrust I and II will be used for working capital purposes and to supportthe growth of our business. Distributions will be payable at a variableper annum rate of interest, reset quarterly, equal to LIBOR plus 385basis points by the Company to Quanta Trust I and equal to LIBOR plus350 basis points by the Company to Quanta Trust II as described aboveunder "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 numerous

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factors as specified by the respectiveinsurance regulatory authorities and the related insurance regulations.We capitalize our insurance operations in excess of the minimumregulatory requirements so that we may maintain adequate financialratings. Generally, a higher financial rating creates a higher demandfor insurance products. A higher financial rating will enable us bothto write more business and to be more selective in the business weunderwrite. Accordingly, allocation of capital sufficient to achievebusiness objectives is a critical aspect of any insurance organization,particularly a start-up insurance operation such as ours.

Wecurrently have sufficient capital and surplus to meet regulatory andrating agency requirements at our current rating levels. Substantiallyall of our capital has been distributed among our rated operatingsubsidiaries based on our assessment of the levels of capital that webelieve are prudent to support our expected levels of business, theapplicable regulatory requirements, and the recommendations of theinsurance regulatory authorities and rating agencies.

Postingof Security by Our Non-U.S. Operating Subsidiaries

Our Bermuda,United Kingdom, and Irish operating subsidiaries are not licensed,accredited or otherwise approved as reinsurers anywhere in the UnitedStates. Many U.S. jurisdictions do not permit insurance companies totake credit on their U.S. statutory financial statements forreinsurance to cover unpaid liabilities, such as loss and lossadjustment expense and unearned premium reserves, obtained fromunlicensed or non-admitted insurers without appropriate securityacceptable to U.S. insurance commissioners. Typically, this type ofsecurity will take the form of a letter of credit issued by anacceptable bank, the establishment of a trust, funds withheld or acombination of these elements.

As described under"Liquidity" above we entered into a securedbank credit facility with a syndicate of lenders that allows us toprovide to our insured clients up to $250 million in letters of creditas security under the terms of insurance and reinsurance contracts. Theavailability to a borrower is based on the amount of eligibleinvestments pledged by that borrower and no 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. As of June 30, 2005, we had$146.9 million of secured letters of credit issued and outstandingunder the facility.

If we fail to maintain adequate letter ofcredit facilities, and are unable to otherwise provide the necessarysecurity, U.S. insurance companies may be less willing to purchase ourreinsurance products, which could have a material adverse effect on ourresults of operations.

Ratings

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

We have received a rating of"A−" (excellent) from A.M. Best, whichis 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 cannot assure youthat we will be able to maintain this rating. A significant ratingsdowngrade would result in a substantial loss of business and businessopportunities as insureds and ceding companies purchase insurance fromcompanies with higher claims-paying and financial strength ratingsinstead of from us and would have a material adverse effect on lettersof credit outstanding under our credit facility and on certain otheragreements. We have not been rated by S&P.

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Critical Accounting Policies andEstimates

Our management makes certain judgments, estimates andassumptions in the application of accounting policies used to determineinherently subjective amounts reported in our condensed consolidatedfinancial statements. If management uses different assumptions andestimates than it currently does, it could produce materially differentestimates of the reported amounts. For a detailed discussion of ourcritical accounting policies, judgments, estimates and assumptionsmanagement uses please refer to the Form 10-K for the year endedDecember 31, 2004 as filed with the SEC on March 30, 2005. There 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 six months ended June 30, 2005, we recognized in"other income" $0.8 million and $1.8million  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 total approximately$27.2 million and $55.2 million in the three and six monthsended June 30, 2005.

Of the $0.8 million and $1.8 millionrecognized, $0.1 million and $0.3 million of other income recognizedduring the three and six months  ended June 30, 2005, relates tofees earned from a surplus relief life reinsurance arrangement with aU.S. insurance company which meets our definition of a non-traditionalcontract.   In the fourth quarter  of 2004, under thiscontract we made an arrangement with our client and assumed, throughnovation agreements, several life reinsurance  contracts it hadmade. Because we assumed these contracts, our client, which is subjectto insurance regulation in the United States and therefore is requiredto maintain a certain amount of statutory capital, may reduce itsstatutory capital requirements. In exchange for our assumption of thecontracts we received a fee. The arrangement, among other things, alsoprovides that on certain dates and during specific periods, our clienthas the right but not the obligation to recapture the life reinsurancecontracts we have assumed, provided that the underlying cedants do notreasonably withhold their consent to this recapture.   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.

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We believe the arrangement, including ourclient's option to recapture, and the assumption of the lifeinsurance contracts constitute one contract with minimal mortality,credit or other insurance or economic risk which leads us to the use ofdeposit accounting. Although we believe our client will exercise therecapture, we cannot assure you  that this will be thecase.   If our client does not recapture the underlying insurancecontracts in the future, we may be viewed as having had the risksdescribed above and, as a result, we could become the life reinsurerand may be required to account for some or all of the underlyinginsurance contracts as life insurance, recognizing life premiumswritten and life benefit reserves in our consolidated statement ofoperations. With respect to this particular arrangement, at this time,we believe that the gross life reinsurance premiums written, ofapproximately $5.0 million and $10.6 million for the three and sixmonths  ended June 30, 2005, that we would have had to recognizehad deposit accounting not been appropriate, would not have had amaterial effect on our financial position and results of operations.However, as the underlying life insurance contracts mature the effecton our financial condition and results of operations may becomematerial.

The remaining $0.7 million and $1.5 million of otherincome recognized during the three and six months  ended June 30,2005 relates to revenues earned from three reinsurance contractsaccounted for as deposits. Although these contracts did possess someunderwriting and timing risks as prescribed by SFAS No. 113, we do notbelieve we are exposed to a reasonable possibility of significantloss.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

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

Derivative ValuationRisk

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

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

Foreign Currency Risk and Functional Currency

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

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

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

Our investment guidelineslimit the amount of our investment portfolio that may be denominated inforeign currencies to 20% (as measured by market value).Furthermore, our guidelines limit the amount of foreign currencydenominated investments that can be held without a corresponding hedgeagainst the foreign currency exposure to 5% (as measured bymarket value). As of June 30, 2005, our investment portfolio included$10.3 million, or 1.4%, of our total net invested assets, ofsecurities that were denominated in foreign currencies and werepurchased by our investment managers for the purpose of improvingoverall portfolio yield. These securities were rated AAA, and weresubstantially hedged into U.S. dollars according to our investmentguidelines by entering into foreign currency forward contracts. At June30, 2005, the net fair market value of foreign currency forwardcontracts relating to foreign currency denominated investments wasnegligible.

Interest Rate Risk

Our exposure tomarket risk for changes in interest rates is concentrated in ourinvestment portfolio. Our investment portfolio primarily consists offixed income securities. Accordingly, our primary market risk exposureis to changes in interest rates. Fluctuations in interest rates have adirect impact on the market valuation of fixed income securities. Asinterest rates rise, the market value of our fixed-income portfoliofalls, and the converse is also true.

Our strategy for managinginterest rate risk includes maintaining a high quality investmentportfolio that is actively managed by our managers in accordance withour investment guidelines in order to balance our exposure to interestrates with the requirement to tailor the duration, yield, currency andliquidity characteristics to the anticipated cash outflowcharacteristics of claim reserve liabilities. As of June 30, 2005,assuming parallel shifts in interest rates, the impact of an immediate100 basis point increase in market interest rates on our net investedassets, including cash and cash equivalents, under management by thirdparty investment managers of approximately $688.7 million would havebeen an estimated decrease in market value of approximately $20.2million, or 2.9%, and the impact on our net invested assets,including cash and cash equivalents, under management by third partyinvestment managers of an immediate 100 basis point decrease in marketinterest rates would have been an estimated increase in market value ofapproximately $14.1 million, or 2.1%.

As of June 30,2005, our investment portfolio included AAA rated mortgage-backedsecurities with a market value of $223.2 million, or 31.1%,excluding trading investments related to deposit liabilities. As withother fixed income investments, the fair market value of thesesecurities fluctuates depending on market and other general economicconditions and the interest rate environment. Changes in interest ratescan also expose us to prepayment and extension risks on theseinvestments. In periods of declining interest rates, the frequency ofmortgage prepayments generally increase as mortgagees seek to refinanceat a lower interest rate cost. Mortgage prepayments result in the earlyrepayment of the underlying principal of mortgage-backed securitiesrequiring us to reinvest the 

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

Credit Risk

We have exposure tocredit risk primarily as a holder of fixed income securities. This riskis defined as the default or the potential loss in market valueresulting from adverse changes in the borrower's ability to repaythe debt. Our risk management strategy and investment policy is toinvest in debt instruments of high credit quality issuers and to limitthe amount of credit exposure with respect to particular ratingscategories and to any one issuer. We attempt to limit our overallcredit exposure by purchasing fixed income securities that aregenerally rated investment grade by Moody's Investors Service,Inc. and/or S&P. Our investment guidelines require that the averagecredit quality of our portfolio will be Aa3/AA− and that no morethan 5% of our investment portfolio's market value shallbe invested in securities rated below BBB-/Baa3. We also limit ourexposure to any single issuer to 5% or less of ourportfolio's market value at the time of purchase, with theexception of U.S. government and agency securities. As of June 30,2005, the average credit quality of our investment portfolio was AA+,and all fixed income securities held were investment grade.

Weare also exposed to the credit risk of our insurance and reinsurancebrokers to whom we make claims payments for insureds and ourreinsureds, as well as to the credit risk of our reinsurers andretrocessionaires who assume business from us. To mitigate the risk ofnonpayment of amounts due under these arrangements, we have establishedbusiness and financial standards for reinsurer and broker approval,incorporating ratings by major rating agencies and considering thefinancial condition of the counterparty and the current marketinformation.

We are also exposed to credit risk relating to ourpremiums receivable balance. As of June 30, 2005, our premiumsreceivable balance was $202.6 million. We believe that credit riskexposure related to these balances is mitigated by several factors,including but not limited to credit monitoring controls performed aspart of the underwriting process and monitoring of aged receivablebalances. In addition, as the majority of our insurance and reinsurancecontracts provide the right to offset the premiums receivable againstlosses payable, we believe that the credit risk in this area issubstantially reduced.

Effects of Inflation

Wedo not believe that inflation has had a material effect on ourconsolidated results of operations. The effects of inflation couldcause the severity of claim costs to increase in the future. Ourestimates for losses and loss expenses include assumptions, includingthose relating to inflation, about future payments for settlement ofclaims and claims handling expenses. To the extent inflation causesthese costs to increase above our estimated reserves that areestablished for these claims, we will be required to increase reservesfor losses and loss expenses with a corresponding reduction in ourearnings 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 the Company's ChiefExecutive Officer and the Interim Chief Financial Officer, theeffectiveness of the design and operation of our disclosure controlsand procedures pursuant to Rules 13a-15 and 15d-15 under the Securitiesand Exchange Act of 1934 (the "ExchangeAct"). Based upon that evaluation, the Chief ExecutiveOfficer and Interim Chief Financial Officer concluded that ourdisclosure controls and procedures were effective in ensuring that

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the information required to be disclosed byus in the reports that we file under the Exchange Act is recorded,processed, summarized and reported, within the time periods specifiedin the Securities and Exchange Commission's rules and forms.

Current Status of Material Weakness in Internal Control OverFinancial Reporting

During the period covered by this quarterlyreport, in connection with our routine monthly closing process for ourbooks at the April 2005 month-end, we discovered a mathematical errorin the calculation of policy acquisition expenses used in the reportingof our first quarter 2005 results. This mathematical error onlyaffected our first quarter results and did not affect any of ourfinancial statements for prior periods. As a result of the errordiscovered as a part of this process, we restated our financialstatements for the quarter ended March 31, 2005 as reflected in ourQuarterly Report on Form 10-Q/A filed with the Securities and ExchangeCommission on May 16, 2005. In response to our discovery of this error,we added staffing and implemented enhanced analytics and controlprocesses over the calculation of acquisition expenses. We haveevaluated the effectiveness of our internal controls for thecalculation of acquisition expenses as of the end of the period coveredby this quarterly report, and have determined that the materialweakness in internal control over financial reporting with respect tothe calculation of acquisition expenses has been remedied.

Limitations on the Effectiveness of Controls

As anon-accelerated registrant, we are currently in the process ofreviewing and formalizing our internal controls over financialreporting 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 and willcontinue to be made to our internal controls over financial reportingas a result of these efforts. We are dedicating significant resourcesto our ongoing Section 404 assessment. We will continue to work toimprove our controls and procedures and to educate and train ouremployees on our existing controls and procedures in connection withour efforts to maintain an effective controls infrastructure.

Webelieve that a control system, no matter how well designed andoperated, cannot provide absolute assurance that the objectives of thecontrol system are met, and no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, ifany, within a company have been detected. Our disclosure controls andprocedures are designed to provide reasonable assurance of achievingtheir objectives and our Chief Executive Officer and Interim ChiefFinancial Officer have concluded that such controls and procedures areeffective at the "reasonable assurance"level.

Changes in Internal Controls

Other than theremediation of the material weakness described above, there were noother changes in our internal control over financial reporting (as suchterm is defined in Rules 13a-15(f) and 15d-15(f) under the ExchangeAct), that occurred during the three months ended June 30, 2005, thathas materially affected, or is reasonably likely to materially affect,our internal control over financialreporting.

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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 legal proceedings.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS

During the six months ended June 30, 2005, theCompany issued to certain employees an aggregate of 1,090,479 optionsto purchase common stock and 105,185 performance share units. Thesetransactions were completed without registration of the relevantsecurity under the Securities Act of 1933, as amended, in reliance uponthe exemptions provided by Section 4(2) for transactions not involvinga public offering.

ITEM 4.    SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

The following matterswere submitted to a vote of security holders during the Company'sannual general shareholders meeting held on June 2, 2005.

|          |                                                                       |
|----------|-----------------------------------------------------------------------|
| 1.  | The nominees for directors wereelected based upon the followingvotes: |

|                     |  |        |            |         |  |           |           |        |  |         |  |  |  |  |
|---------------------|--|--------|------------|---------|--|-----------|-----------|--------|--|---------|--|--|--|--|
| Nominee             |  | For    |            | Against |  | Abstained |
| TobeyJ.Russ         |  |   | 44,379,850 |    |  |      | 4,382,723 |   |  | 129,797 |
| MichaelJ.Murphy     |  |   | 44,039,283 |    |  |      | 4,382,723 |   |  | 470,364 |
| RobertLippincottIII |  |   | 44,509,447 |    |  |      | 4,382,723 |   |  | 200     |
| NigelW.Morris       |  |   | 44,504,647 |    |  |      | 4,382,723 |   |  | 5,000   |
| W.RussellRamsey     |  |   | 44,100,537 |    |  |      | 4,382,723 |   |  | 409,110 |
| JamesJ.Ritchie      |  |   | 44,504,347 |    |  |      | 4,382,723 |   |  | 5,300   |
| WallaceL.Timmeny    |  |   | 44,509,647 |    |  |      | 4,382,723 |   |  | 0       |
|                     |

|          |                                                                                                                                                      |
|----------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.  | Theincrease in the number of common shares available under the 2003 LongTerm Incentive Plan from 5,850,000 to 9,350,000 received the followingvotes: |

30,328,205 votes for ratification 5,088,874votes against ratification 5,865abstentions

|          |                                                                                                                                                                                                      |
|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.  | The ratification of theselection of PricewaterhouseCoopers LLP as the independent registeredpublic accounting firm of the Company for the year ending December 31,2005 received the following votes: |

48,872,930 votes forratification 15,470 votes against ratification 3,970abstentions

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 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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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized.

|                                            |  |                                                                             |  |  |  |  |
|--------------------------------------------|--|-----------------------------------------------------------------------------|--|--|--|--|
|                                       |  | **QuantaCapital HoldingsLtd.**                                              |
| Date:    August8, 2005 |  | /s/ Tobey J.Russ                                                            |
|                                       |  | Tobey J. Russ(On behalf of theregistrant and as Principal ExecutiveOfficer) |
| Date:    August8, 2005 |  | /s/ Jonathan J.R.Dodd                                                       |
|                                       |  | Jonathan J.R. Dodd(PrincipalFinancial Officer)                              |
|                                            |

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Index toExhibits

|      |  |                                                                                                                                                            |  |  |  |  |
|------|--|------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| 31.1 |  | Certificationof the Chief Executive Officer required by Rule 13a-14(a) or Rule15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of2002.          |
| 31.2 |  | Certification of the 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 of 2002.       |
| 32.2 |  | Certification of the interim Chief FinancialOfficer pursuant to 18 U.S.C Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of2002. |
|      |

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