Edgar Filing: QUANTA CAPITAL HOLDINGS LTD

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K

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(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________________ TO __________________

Commission File number: 000-50885

QUANTA CAPITAL HOLDINGS LTD.
(Exact name of registrant as specified in its charter)

Bermuda n/a
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

1 Victoria Street
Hamilton, Bermuda HM HM 11
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: (441) 294-6350

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Shares, Par Value $0.01 Nasdaq National Market
Series A Preferred Shares, Par Value $0.01 Nasdaq National Market

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [_] No [X]

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [_] No [X]

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one).
Large Accelerated Filer [_] Accelerated Filer [X] Non-Accelerated Filer [_]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [_] No [X]

The aggregate market value of the Registrant's common shares, $0.01 par value,
held by non-affiliates of the Registrant as of June 30, 2005, was $215,681,323.
For purposes of the foregoing calculation only, all directors, executive
officers and 5% beneficial owners have been deemed affiliates.

Number of the Registrant's common shares outstanding as of March 15, 2006 was
69,946,861.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's proxy statement for the 2006 annual general meeting
of shareholders are incorporated by reference into Part III.

QUANTA CAPITAL HOLDINGS LTD.
FORM 10-K
TABLE OF CONTENTS

PART I

Page

Item 1. Business 1
Item 1A. Risk Factors 45
Item 1B. Unresolved Staff Comments 79
Item 2. Properties 79
Item 3. Legal Proceedings 79
Item 4. Submission of Matters to a Vote of Security Holders 79

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 80
Item 6. Selected Financial Data 82
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 84
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 138
Item 8. Financial Statements and Supplementary Data 140
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 140
Item 9A. Controls and Procedures 140
Item 9B. Other Information 143

PART III

Item 10. Directors and Executive Officers of the Registrant 144
Item 11. Executive Compensation 144
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 144
Item 13. Certain Relationships and Related Transactions 145
Item 14. Principal Accountant Fees and Services 145

PART IV

Item 15. Exhibits and Financial Statement Schedules 146
Signatures 150

INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

Reports of PricewaterhouseCoopers LLP, Independent Registered Public
Accounting Firm F-2

Consolidated Balance Sheets at December 31, 2005 and
December 31, 2004 (successor) F-4

Consolidated Statements of Operations and
Comprehensive (Loss) Income for the years ended December 31, 2005
(successor) and December 31, 2004 (successor), the period from May 23,
2003 (date of incorporation) to December 31, 2003 (successor) and the
period from January 1, 2003 to September 3, 2003 (predecessor) F-5

Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 2005 (successor) and December 31, 2004 (successor),
the period from May 23, 2003 (date of incorporation) to December 31, 2003
(successor) and the period from January 1, 2003 to September 3, 2003
(predecessor) F-6

Consolidated Statements of Cash Flows for the years ended December 31,
2005 (successor) and December 31, 2004 (successor), the period from May
23, 2003 (date of incorporation) to December 31, 2003 (successor) and the
period from January 1, 2003 to September 3, 2003 (predecessor) F-7

Notes to Consolidated Financial Statements F-8

PART I

ITEM 1. BUSINESS

GENERAL

In this annual report, references to the "company," "we," "us" or
"our" refer to Quanta Capital Holdings Ltd. and its subsidiaries and U.K.
branch, which include, Quanta Reinsurance Ltd., Quanta U.S. Holdings Inc.,
Quanta Reinsurance U.S. Ltd., Quanta Indemnity Company, Quanta Specialty Lines
Insurance Company, Quanta Europe Ltd., Quanta 4000 Ltd., Environmental
Strategies Consulting LLC, Quanta Technical Services LLC and Quanta Europe
Ltd.'s branch in the United Kingdom, unless the context suggests otherwise. We
refer to Quanta Reinsurance Ltd., Quanta Reinsurance U.S. Ltd., Quanta Indemnity
Company, Quanta Specialty Lines Insurance Company, Quanta Europe Ltd.,
Environmental Strategies Consulting LLC, Quanta Europe Ltd.'s branch in the
United Kingdom and our Lloyd's syndicate as Quanta Bermuda, Quanta U.S. Re,
Quanta Indemnity, Quanta Specialty Lines, Quanta Europe, ESC, Quanta U.K. and
Syndicate 4000, as the case may be. References to Quanta Holdings refer solely
to Quanta Capital Holdings Ltd. We may alter our methods of conducting our
business, such as the nature, amount, and types of risks we assume and the terms
and limits of the products we write or intend to write based on our experience
and changes in market conditions, the occurrence of catastrophic losses and
other factors outside our control.

In this annual report, amounts are expressed in U.S. dollars, except
as otherwise indicated, and the financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America, except as otherwise indicated. We have registered the mark "Quanta" in
the U.S. Patent and Trademark Office. All other brand names or trade names
appearing in this annual report are the property of their respective holders.

OVERVIEW

We are a Bermuda holding company that offers a number of specialty
insurance, specialty reinsurance products as well as risk assessment and risk
consulting services on a global basis through our subsidiaries. We were
incorporated in May 2003 and began conducting our business in September 2003. We
have written coverage for specialized classes of risk through a team of
experienced, technically qualified underwriters. Specialty lines products differ
significantly from products written in the standard market. In general, in the
standard market, insurance rates and forms are highly regulated, products and
coverages are largely uniform and have relatively predictable exposures, and
companies tend to compete for customers on the basis of price and service. In
contrast, the specialty markets provide coverage for risks that are often
unusual or difficult to place and do not fit the underwriting criteria of
standard commercial products carriers. As a result, the products that we offer
require extensive technical underwriting skills and risk assessment resources
and, in many cases, engineering expertise, in order to be profitably
underwritten. We also provide risk assessment and risk consulting products and
services to our clients.

RECENT DEVELOPMENTS

As a result of the expected losses from the 2005 hurricanes, on
October 5, 2005, A.M. Best placed the "A-" (excellent) financial strength rating
assigned to Quanta Bermuda and its subsidiaries and Quanta Europe, under review
with negative implications. In response, during the fourth quarter of 2005, we
worked closely with A.M. Best on a plan designed to maintain our "A-" rating,
which included the retrocession of substantially all the in-force business, as
of October 1, 2005, in our technical risk property and property reinsurance
lines of business (other than our program business) by a portfolio transfer to a
third-party reinsurer, the commutation of two of our casualty reinsurance
treaties back to the insurance company which had reinsured it with us and the
completion of the offerings of our common shares and series A preferred shares
in the fourth quarter of 2005. On December 21, 2005, A.M. Best affirmed the
financial strength rating of "A-" (excellent) of Quanta Bermuda and its

subsidiaries, and ascribed a negative outlook to the rating. A.M. Best defines a
negative outlook as indicating that a company is experiencing unfavorable
financial/market trends, relative to its current rating level and, if continued,
the company has a good possibility of having its rating downgraded. In
connection with A.M. Best's December 2005 affirmation of our ratings and
continued review with negative outlook, A.M. Best cited significant challenges
and uncertainties associated with the successful execution of management's
revised business plans, management's ability to diversify and grow our business
profitably, and the risk for upward development of Hurricanes Katrina, Rita and
Wilma losses.

On March 2, 2006, A.M. Best announced that it had downgraded the
financial strength rating assigned to Quanta Bermuda and its subsidiaries and
Quanta Europe, to "B++" (very good), under review with negative implications.
The A.M. Best "A" (excellent) rated Lloyd's market, including our Lloyd's
syndicate, was not subject to the rating downgrade. We believe that adverse
developments during the fourth quarter of 2005 relating to the 2005 hurricane
losses and our other reserve increases were significant contributors to the
decision by A.M. Best. Based on our discussions with A.M. Best, in order to
maintain our rating, we believe that we will be required to demonstrate
acceptable results and change our business model appropriately to show that we
can grow our business profitably. This, however, will be very difficult to
accomplish under a "B++" rating. In addition, we believe we will need to
successfully implement a more favorable cost structure and reduce the amount of
risk that we assume on a single loss event or catastrophic event based on
initiatives that we have begun to implement. We also believe that A.M. Best will
continue to evaluate our available capital and the probable loss exposures
associated with our business lines to ensure our capital is in compliance with
A.M. Best's standards relative to our rating. We intend to continue to work with
A.M. Best to understand the different requirements it has for our business in
order to maintain or improve our financial strength rating and remove any
qualification to our rating. However, the downgrade and qualification of our
rating with negative implications has significantly adversely affected our
business, our opportunities to write new and renewal business and our ability to
retain key employees. Based on the deterioration in our business, A.M. Best may
further downgrade our financial strength ratings. We can make no assurances as
to what rating actions A.M. Best may take now or in the future or whether A.M.
Best will further downgrade our rating or remove any qualification to our
rating.

We expect the downgrade of our rating and qualification of our rating
with negative implications to continue to have a significant adverse effect on
our business. Currently, we are not writing new business in our professional
liability, environmental and fidelity and crime insurance product lines or in
our reinsurance and structured products lines and we are running off our surety
line. Certain of our insurance and many of our reinsurance contracts contain
termination rights triggered by the A.M. Best rating downgrade. Additionally,
many of our other insurance contracts and certain of our reinsurance contracts
provide for cancellation at the option of the policyholder regardless of our
financial strength rating, including the program manager of our residential
builders' and contractors' program, or HBW program. As of March 29, 2006, we had
received notice of cancellation on approximately 2.3% of our in-force policies,
calculated using original contract gross premiums written related to those
cancelled policies as a percentage of total gross premiums written during 2005.
A cancellation typically results in the termination of the policy and our
ongoing obligations and the return of premiums to our client that usually
approximates our unearned premium reserve as of the date of the cancellation.
Based on our discussions with the program manager under our HBW program, we
understand that it will divert a substantial portion of the HBW program business
to other carriers. As a result, we estimate that the gross and net premiums
written under the HBW program during 2006 will be less than 25% of the gross and
net premiums written during 2005. We have also been notified by several
significant clients in our insurance and reinsurance product lines that they do
not intend to renew their contracts with us.

We have also been removed from the approved listing of several of our
important brokers, including Aon Corporation and Marsh Inc. The downgrade of our
financial rating or the continued qualification of our current rating continues
to cause concern about our viability among brokers and other marketing sources,
resulting in a movement of business away from us to other stronger or more

highly rated carriers. We believe the recent downgrade of our financial rating
is also adversely affecting our Lloyd's operations.

We are working diligently to implement key steps designed to preserve
shareholder value and respond to the rating actions taken by A.M. Best. A
special committee of our Board of Directors has engaged Friedman, Billings,
Ramsey & Co., Inc. and J.P. Morgan Securities Inc., as financial advisors, to
assist us in evaluating strategic alternatives, including the potential sale of
some or all of our businesses, the run off of certain product lines or the
business or a combination of alternatives. Our financial advisors will also help
us evaluate the potential use of excess capital to repay debt or to return value
to our shareholders.

We are also closely analyzing our business lines, their positioning
and internal operations, and identifying steps we should take to improve our
position. We believe that we currently have sufficient assets to pay our
foreseen liabilities as they become due. We maintain a global platform
conducting business in the United States, Bermuda and Europe. We also believe we
have strong underwriting capabilities and experience in key product lines. We
plan to continue to operate our environmental consulting services through ESC
and certain program business lines and to continue our operations through the
A.M. Best "A" rated Lloyd's market under our existing Lloyd's syndicate. We are
evaluating whether we continue to operate our remaining business lines, which
may include the use of strategic alliances, fronting agreements and other
arrangements. In connection with the evaluation of our business, we are also
evaluating the possibility of expanding our business to help diversify our
business mix and build our product lines along a middle market strategy that is
supportable with a "B++" rating and with customers who can benefit from our
underwriting capabilities and risk management capacities. This could include
writing policies with lower limits and lower aggregate loss exposures and in
markets we believe provide us a greater ability to deal with the broker or
insured in establishing policy terms and managing particular claims. We may seek
to broaden the number of brokers we do business with, such as by targeting
smaller regional brokers who represent smaller companies who can benefit from
our underwriting capabilities and risk management capacities. We may also seek
to work with existing broker relationships to reach additional customers that we
can serve.

Prior to the recent A.M. Best action, we had begun taking steps to
reduce our costs, including the reduction of personnel following the exit of our
technical risk property and property reinsurance lines, and reducing certain
infrastructure costs, such as the reduction of consulting costs, the reduction
of our office space and consolidation of our personnel in Bermuda. In connection
with our evaluation of our business lines, we have accelerated steps to reduce
infrastructure costs and personnel expenses. We believe that a more efficient
expense structure is critical in allowing us to produce profitable results and
more easily deploy our resources to those lines of business that become more
attractive under our current A.M. Best ratings and as market conditions and our
business change.

We have determined to run off our surety line. We also will consider
running off other selected lines as an alternative to sale of all or portions of
our business. If our Board of Directors concludes that no other alternatives
would be in the best interests of our shareholders, it may determine that the
best alternative is to place all our insurance and reinsurance businesses in run
off and eventually wind up our operations over some period of time, which is not
currently determinable. If the run off alternative is selected, then during 2006
and future periods we expect to continue to pay losses and expenses as they
become due and will continue to earn investment income on our investment
portfolio.

of time sufficient to allow for possible recovery. We believe we have sufficient
assets to pay our currently foreseen liabilities as they become due and we have
no immediate intent to liquidate the investments securities affected by our
decision. However, due to the general uncertainties surrounding our business
resulting from A.M. Best's March 2006 downgrade of our financial strength
ratings and our decision to explore strategic alternatives, we concluded that
there are no absolute assurances that we will have the ability to hold the
affected investments for a sufficient period of time. It is possible that the
investment securities' fair values could change in subsequent periods, resulting
in further material impairment charges.

OUR WEBSITE

We maintain a website at www.quantaholdings.com where we make
available, free of charge, our annual, quarterly and other reports, proxy
statements and other information generally on the same day as we electronically
file such material with, or furnish it to, the U.S. Securities and Exchange
Commission. Information contained on our website is not part of this annual
report.

ORGANIZATION

Quanta Holdings is a Bermuda holding company formed on May 23, 2003.
We conduct our operations principally through our subsidiaries domiciled in
Bermuda, Ireland and the United States and a branch in the United Kingdom. We
may change our corporate organization from time to time as we conduct our
business.

OUR PRODUCT LINES AND GEOGRAPHIES

Due to the recent downgrade of our financial strength ratings by A.M.
Best in March 2006, we are currently closely analyzing our business lines,
positioning in the market and internal operations and identifying steps we
should take to preserve shareholder value and improve our position. After
completing this analysis, we may implement significant changes in the manner in
which we have historically conducted our business. A special committee of our
Board of Directors, with the assistance of financial advisors, is also
evaluating strategic alternatives, including the potential sale of some or all
of our businesses, the run off of certain product lines or the business or a
combination of alternatives. For the fiscal period covered by this annual
report, we organized our business on a matrix of five product lines and three
geographies. During 2005, our two traditional product lines were specialty
insurance and specialty reinsurance. We also had programs and structured
products lines during 2005. The products offered to our clients were written
either as traditional insurance or reinsurance policies or were provided as a
program, a structured product or a combination of a traditional policy with a
program or a structured product. Our fifth product line was our technical
services line. A summary of our financial information by product line and
geography is set forth in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained herein and in Note 3 to
our consolidated financial statements which are included in "Item 8. Financial
Statements and Supplementary Data." Some of our product lines are aggregated for
purposes of the segment disclosures included in these sections. The geographies
in which we conduct our business are the United States, Bermuda and Europe. The
location of the risks that are the subject of our products may be anywhere in
the world.

SPECIALTY INSURANCE

During 2005, we offered specialty insurance lines providing tailored
solutions to our clients in order to respond to distinctive risk
characteristics. We primarily wrote business in those lines where we believe we
have specialized underwriting expertise. We wrote specialty insurance on a
traditional, structured and programs basis. As a result, our specialty insurance
business included our HBW program and other programs businesses. Our commitment
to specialized underwriting requires experienced underwriters, market knowledge,
risk assessment and loss control resources, analytic capabilities, a flexible
underwriting platform, geographic reach and financial markets experience. We
wrote

specialty insurance mostly in the United States and Europe and to a lesser
extent in Bermuda.

We participate in the Lloyd's of London market through Syndicate 4000,
which was created in December 2004. We are the market lead on a significant
number of policies in the syndicate, which allows us to deal with the broker or
insured in establishing policy terms and managing particular claims. We have an
experienced and a dedicated team of managers and underwriters that support our
Lloyd's business and have devoted a significant amount of our capital to our
Lloyd's business. Syndicate 4000 provides us access to the A.M. Best "A" rated
Lloyd's market in London as well as other jurisdictions. Additionally, our
Lloyd's membership provides strong brand recognition, extensive broker and
direct distribution channels and worldwide licensing. Our Lloyd's syndicate
writes traditional specialty insurance products including professional liability
(professional indemnity and directors' and officers' coverage), fidelity and
crime (financial institutions) and specie and fine art for risks primarily
outside the United States. The gross and net written premium generated by our
Lloyd's syndicate is included in our professional liability product line. As a
result of our recent ratings downgrade by A.M. Best, Lloyd's has informed us
that in order for Syndicate 4000 to continue underwriting in the Lloyd's of
London market during the 2007 underwriting year, Syndicate 4000 must diversify
its capital base with one or more third-party capital sources. This capital,
including the third-party source, must be in place by November 30, 2006. Based
on the amount of capital provided by any third-party source, we believe we will
be able to remove some of the funds we have deposited to support our
underwriting capacity of our Lloyd's syndicate. However, we can make no
assurances that we will be successful in obtaining any third-party source of
capital to support our Lloyd's syndicate. If we fail to meet Lloyd's capital
diversification requirements by November 30, 2006, we will no longer be able to
participate in the Lloyd's of London market in future underwriting years, which
will have a material adverse effect on our business. For further discussion, see
"Item 1.Business--Regulation--U.K. Regulation--Regulation of Syndicate 4000 at
Lloyd's."

We have also written European Union sourced insurance business through
Quanta Europe, our Irish subsidiary, since the fourth quarter of 2004, as well
as insurance business in the London market through Quanta Europe's U.K. branch,
since February 2005. In 2005, Quanta Europe wrote traditional specialty
insurance products including professional liability (professional indemnity and
directors' and officers' coverage), fidelity and crime (financial institutions)
and environmental liability.

In product lines for which we provide coverage of the insured's
premises or physical site analysis (such as environmental and certain marine and
aviation coverages), many of our underwriters have engineering backgrounds or
experience in disciplines such as hydrology, geology, and civil, mechanical and
materials engineering. In product lines for which we provide coverage that
involves the analysis of business practices and financial documents, many of our
professionals have accounting, actuarial, econometric or banking backgrounds. We
support our underwriting officers with advanced analytic tools, risk assessment
capabilities, structured product resources and disciplined capital management
and technology.

The recent downgrade of our financial strength rating by A.M. Best has
had, and will continue to have, a significant negative effect on our ability to
continue to write coverage in our specialty insurance product line. Currently,
we are not writing new business in our professional liability, environmental and
fidelity and crime insurance product lines and we are running off our surety
product line. In addition, some of our insurance contracts in this product line
are subject to cancellation due to our ratings downgrade to "B++." We have also
been notified by several significant clients in our insurance product lines that
they do not intend to renew their contracts with us. We believe the recent
downgrade of our financial rating is also adversely affecting our Lloyd's
operations.

In 2005 our specialty insurance product line focused on professional
liability, environmental liability, fidelity and crime, trade credit, political
risk and surety. Other than the technical risk property line that we exited in
the fourth quarter of 2005, our specialty insurance product lines that we wrote
in 2005 were as follows:

Professional Liability. We wrote directors' and officers' liability
insurance, errors and omissions insurance, employment practices liability and
fiduciary liability insurance. We wrote both excess and primary insurance.
Excess layers of coverage means that there is at least one layer of insurance
coverage beneath our coverage that is provided by another insurer or insurers.
In addition to directors' and officers' liability, employers' professional
liability and fiduciary liability insurance for publicly traded and privately
held companies, we offered error and omissions insurance policies to financial
institutions, lawyers, technology firms, consultants, architects, engineers,
accountants and other miscellaneous professionals. At Syndicate 4000, we wrote
financial institution, professional indemnity and directors' and officers'
coverage.

Environmental Liability. This product line includes specialty
insurance products addressing exposures arising from pollution incidents. We
offered the following three types of environmental liability policies:

o Our environmental site protection policy helps protect against
remediation costs and third-party claims for bodily injury,
property damage and remediation costs, resulting from
pre-existing or new pollution incidents at property owned or
operated by an insured. Through separate supplemental coverage
sections, this policy may also help to protect an insured against
third-party claims arising from pollution incidents at, or
migrating from, non-owned disposal sites and during
transportation, and can protect the insured against expenses it
incurs as a result of the interruption of its business operations
due to a pollution incident.

o Our remediation cost cap policy helps protect the insured against
remediation costs with respect to a scheduled remediation project
that exceed the insured's retention (which is the amount or
portion of risk that an insured retains for its own account),
such as those due to unknown pollutants, known pollutants in
quantities greater than expected or changes made by the
regulatory authority to the cleanup standard or to the scope of
work.

o Our contractors environmental protection policy helps protect
contractors and their clients against third-party claims for
bodily injury, property damage and remediation costs due to
pollution incidents arising from the contractor's covered
operations.

Our clients in this product line included manufacturers and other
fixed site operators, commercial contractors, real estate redevelopment firms,
merger and acquisition participants and financial institutions. We targeted
clients facing complex risks allowing us to draw on our multidisciplinary
expertise and to establish ourselves as the insurer of choice for clients
requiring a sophisticated approach to their environmental liabilities. We also
targeted short-term, renewable middle market business.

Fidelity and Crime. Under this product line, we wrote financial
institution blanket bonds, commercial crime, kidnap and ransom, computer crime
and unauthorized trading insurance for financial and non-financial corporations.
Our financial clients included commercial banks, capital market and financial
services firms and insurance companies. In the United States, we wrote fidelity
and crime lines using our U.S. subsidiaries for U.S. sourced business.

Trade Credit and Political Risk. Under this product line, we focused
on providing coverage in some emerging markets to corporations and other
entities seeking to limit their exposure to the credit worthiness of their
commercial trade partners or to political uncertainty in those countries which
could interfere with the execution of commercial contracts they have entered
into. We wrote this business primarily in the London market and offered our
services to large industrial companies, global trading companies and major
financial institutions involved in emerging market trade and finance.

Surety. Our surety product line focused on providing surety bonds for
specific contractual, compliance or financial obligations to meet regulatory,
statutory or legal requirements. In particular, we provided bonding for
self-insured workers' compensation, land reclamation, the closure of landfills
and their maintenance after closure, court appeals and various forms of
performance and compliance guarantee exposures. We have determined to run off
our surety line.

SPECIALTY REINSURANCE

The recent downgrade of our financial strength rating by A.M. Best has
had, and will continue to have, a significant negative effect on our ability to
continue to write coverage in our specialty reinsurance product line. Currently,
we are not writing new business in our specialty reinsurance product line. In
addition, many of our reinsurance contracts in this product line are subject to
cancellation due to our ratings downgrade to "B++." We have also been notified
by several significant clients in our reinsurance product lines that they do not
intend to renew their contracts with us.

Reinsurance can be written either through treaty or facultative
reinsurance arrangements. Treaty reinsurance contracts are arrangements that
provide for automatic reinsuring of a type or category of risk underwritten by
the ceding company. In facultative reinsurance, the ceding company cedes, and
the reinsurer assumes, all or part of a specific risk or risks. Facultative
reinsurance provides protection to ceding companies for losses relating to
individual insurance contracts issued to individual insureds. During 2005, we
generally wrote our reinsurance business on a treaty basis. For purposes of our
segment results presented in this annual report, the gross and net written
premiums generated by our program business is included in our specialty
insurance technical risk property line.

In 2005, our treaty reinsurance contracts were written on either a
quota share basis, also known as proportional or pro rata, or on an excess of
loss basis. Under quota share reinsurance, we share the premiums as well as the
losses and expenses in an agreed proportion with the cedent. Under excess of
loss reinsurance, we generally receive a specified premium for the risk assumed
and indemnify the cedent against all or a specified portion of losses and
expenses in excess of a specified dollar or percentage amount. In both types of
contracts, we may provide a ceding commission to the client.

In writing treaty reinsurance contracts, we do not separately evaluate
each of the individual risks assumed under the contracts, and we are largely
dependent on the individual underwriting decisions made by the reinsured.
Accordingly, we must carefully review and analyze the cedent's risk management
and underwriting pricing, reserving and claims handling practices as well as the
financial condition of the cedent in deciding whether to provide treaty
reinsurance and in appropriately pricing the treaty. During 2005, we generally
focused our reinsurance business on medium-sized insurance and reinsurance
companies with capital and surplus of between $100 million and $1 billion.

The majority of our facultative reinsurance business was written on an
excess of loss basis. The underwriting process for facultative reinsurance of
property and casualty exposures is similar to that followed by the underwriters
for those products of our insurance product line.

During the fourth quarter of 2005, we exited our property reinsurance
line of business, and commuted two of our casualty reinsurance treaties back to
the insurance company which had reinsured it with us. The remaining reinsurance
operations we wrote in 2005 include marine and aviation reinsurance and casualty
reinsurance. We provided treaty reinsurance for ocean marine, inland marine,
technical risk and aviation. We obtained this business principally through major
industry reinsurance intermediaries with units specializing in these lines. Our
client target list included insurance and reinsurance companies of all sizes who
have dedicated experienced underwriters and claims professionals in these lines.
We wrote this business on both a proportional and excess of loss reinsurance
basis.

In our casualty reinsurance line, we covered third party liability
exposures from ceding clients on a treaty basis. We wrote many different kinds
of reinsurance but had a significant emphasis on professional liability
including directors' and officers' liability. We wrote treaty reinsurance on a
pro rata, per risk and catastrophe excess of loss basis. We wrote primarily on
an excess of loss basis but if the treaty covered a significant amount of excess
of loss insurance, we generally preferred to participate on a quota share basis.

PROGRAMS

Programs rely on third parties, called program managers, who are
engaged in the business of managing one or a combination of the underwriting,
administration and claim related activities of a group of distinct specialty
insurance policies under the supervision of an insurance company. Traditionally,
program managers team up with an insurance company, which provides the insurance
policies and capacity and supervises the program manager. Each group of policies
and the related relationship with the program manager is called a program.

During 2005, our largest program was our residential builders' and
contractors' program that provides general liability, builders' risk and excess
liability insurance coverages and reinsurance warranty coverages for new home
contractors throughout the U.S. We refer to this program as the HBW program. The
program manager for the HBW program works solely through a network of preferred
agents, both retail and wholesale. The program manager is required to comply
with our written underwriting guidelines relating to the language of the
insurance policy and the rating, quoting, issuing and executing of our insurance
policies. The program manager also provides us with statistical data. The
program manager is subject to limitations on the amount of insurance it may
write in this program and on its authority to make decisions relating to these
insurance policies.

Our agreements with the program manager under our HBW program provide
for cancellation at the option of the program manager regardless of our
financial strength rating. HBW gross premiums written during the year ended
December 31, 2005 totaled approximately $165.9 million, of which approximately
$140.3 million was casualty premium, $15.0 million was warranty premium and
$10.6 million was property premium, by class of risk. HBW net premiums written
during the year ended December 31, 2005 totaled approximately $108.9 million, of
which approximately $84.7 million was casualty premium, $15.0 million was
warranty premium and $9.2 million was property premium, by class of risk. Based
on our discussions with the program manager, we understand that it will divert a
substantial portion of the HBW program business to other carriers. However, we
expect to continue to write a small portion of the casualty business through our
Lloyd's syndicate. We understand that the new carriers can begin writing
casualty business in some states beginning in March 2006, but will need time to
file and obtain approval of rate and policy forms with regulatory authorities in
other states in which the program manager is writing. Until the new carriers are
able to obtain these approvals, we will continue to write casualty business for
the program manager. Other than the business that we intend to write through our
Lloyd's syndicate, we expect that substantially all of the HBW program business
will be diverted to other carriers by December 31, 2006. Consequently, we
estimate that the gross and net premiums written under the HBW program during
2006 will be less than 25% of the gross and net premiums written during 2005.
While we expect to be able to continue to write business through our Lloyd's
syndicate, we expect that the premiums written under our HBW program during 2007
will be significantly less than 2006 as the HBW program manager is able to move
that business to new carriers.

In addition to the HBW program, in 2005, we also had three other
programs, including, the Angel program, the PWIB program and the BTIS program.
Under the Angel program, we wrote employment practices and directors and
officers insurance for small and medium sized privately held companies. PWIB is
a property program that insures poultry and swine containment facilities. BTIS
is a small artisans program that insures service, repair and remodelers as well
as small general contractors. We expect that, as a result of the ratings
downgrade, our ability to continue to write business under our PWIB and Angel
programs will be materially and adversely affected. We are also in the process
of

reviewing and evaluating other programs that we may be able to write with our
A.M. Best rating of "B++."

Our programs team focuses on identifying programs that match our focus
on technical underwriting and that meet our financial criteria. When evaluating
a potential new program and program manager, generally we consider numerous
factors, including whether: (1) the program manager has deep industry knowledge
of a particular class of business with an experienced underwriting team and/or
technical underwriting processes, (2) there is sufficient historical data to be
able to validate loss ratio assumptions and track developments of program
components over time, (3) there is an alignment of interest between the program
manager and us with respect to performance of the book from a loss ratio, not
volumetric, perspective, and (4) the program has a pre-established
infrastructure and operational procedures, particularly with regard to claims,
reinsurance and information technology systems. We intend to work with program
managers who have a disciplined approach to program management and technical
underwriting, have an effective operational infrastructure and distribution
relationship and share risk on the business they underwrite. After this due
diligence and analysis is conducted, our team formulates policies and procedures
to implement new programs and proves management and oversight of ongoing
programs. In considering pricing for the products to be offered by the program
manager, we evaluate the expected frequency and severity of losses, the costs of
providing the necessary coverage (including the administering of policy
benefits, sales and other administrative and overhead costs) and margin for
profit.

We oversee and monitor the programs and program managers. Our
operations review team consists of industry professionals with backgrounds in
information technology, claims administration and litigation, actuarial science,
legal matters, accounting and financial controls. We believe our databases and
models enable us to better identify and estimate the expected loss experience of
particular products and are employed in the design of our products and the
establishment of rates and forms. We seek to monitor pricing adequacy on our
products by region, risk and risk class. Subject to regulatory considerations,
we seek to make timely premium and coverage modifications where we determine
them to be appropriate.

STRUCTURED PRODUCTS

In 2005, our structured product team offered products independently or
together with the specialty insurance and reinsurance teams. Structured
insurance involves coverage and policy forms tailored to meet an individual
client's or cedent's strategic and financial objectives that are not efficiently
met by traditional insurance and reinsurance products. These objectives include,
among others, the desire to reduce volatility within the insurance pricing
cycle, to adjust the exposure in specific geographic areas or lines of business,
to finance increased self-insured retentions and to minimize existing and
potential liabilities from events, such as a merger or acquisition. Structured
insurance coverage also addresses capacity shortfalls in the traditional
insurance market, such as environmental liability.

During 2005, our structured products included structured property and
casualty insurance, structured directors' and officers' liability insurance,
deferred executive compensation insurance, alternative surety coverage, finite
risk insurance and surplus relief life reinsurance, which are policies under
which our aggregate risk and return are generally capped at a finite amount.
Purchasers of structured insurance coverage included corporations, insurers and
other financial institutions and municipalities. Because of the constantly
changing industry and regulatory framework, as well as the changing market
demands facing insurance companies, the approaches utilized in structured
insurance programs are constantly evolving. The contract forms that we used in
our structured insurance business are primarily insurance policies, financial
contracts and derivative contracts.

Our structured insurance team also wrote casualty insurance. In most
instances, the casualty coverages provided were in support of structured
insurance or structured reinsurance transactions as part of one of our programs,
or blended with protection and coverage provided by other underwriting groups
within our insurance and reinsurance operations. Our casualty product line
included coverage for general liability, and we expect to also write such
specialty programs as clash coverage and excess of aggregate coverage. In 2005,
we focused on coverages requiring highly technical and statistical or actuarial
underwriting of specific or individual risks.

In general, structured reinsurance products contractually limit the
risks assumed by us. These contracts often include a fixed premium for the
transfer of a portion of the risk combined with a variable or adjustable premium
for financing by the client of the remaining risks, often covering multiple
years and multiple business segments. Contracts are usually structured to
encourage cedents to minimize losses by including significant profit sharing by
the reinsurer with the cedent. Thus, the ultimate cost of a structured product
often depends on the individual cedent's own performance. The risks underlying
structured reinsurance transactions can include risks from any of our product
lines, as well as credit risk, life insurance-related risks, accident and
health, and others.

Structured reinsurance products are often written over a period of
time greater than one year (typically three years). Due to the importance of
investment income from these products, both parties direct considerable
attention to cash flow modeling and to the impact of the anticipated loss
payment pattern. As a result of the lengthy underwriting process, the market is
characterized by a relatively small number of large transactions. The contract
forms which we used in our structured reinsurance business include reinsurance
policies, financial contracts and derivative contracts.

TECHNICAL SERVICES

We provide environmental consulting services through ESC. ESC serves
manufacturers and service providers primarily in the electronics, manufacturing,
waste disposal, mining and energy sectors. ESC also serves real estate firms,
insurance companies, buy-out firms, law firms, and the clients of these firms
and companies. Its customers are primarily private sector businesses in the
United States. ESC provides the following consulting services:

o Investigation, Remediation and Engineering Services. ESC's
engineering services include investigation, remediation and
engineering activities in the following areas: Comprehensive
Environmental Response Compensation and Liability Act (CERCLA)
Superfund sites, Resource Conservation and Recovery Act (RCRA)
actions, voluntary cleanups, brownfields programs, engineering
design, field management of remediation, operation and
maintenance of remedial systems, bioremediation and chemical
oxidation, environmental biotechnology and advanced chemical
diagnosis, merger and acquisition follow-up, asbestos/lead
paint/mold management and facility decommissioning and
demolition.

o Assessment Services. ESC's environmental assessment services
include risk management, merger and acquisition due diligence,
environment, health and safety fire protection, and security
audits, liability identification, Phase I and Phase II site
assessments, management systems and health and ecological risk
assessments. Events Analysis Corporation, a wholly-owned
subsidiary of ESC, conducts environmental, health and safety, and
fire protection inspections of buildings occupied by certain
federal government agencies.

o Other Technical Services. ESC also provides other services to
customers in the environmental area, including litigation
support, technical support for environmental insurance claims and
policy applications, regulatory compliance plans, regulatory
permits, training, technical reviews, policy and procedure
manuals, estimates of remediation costs for disclosure purposes
and property redevelopment services.

o Information Management Services. ESC's information management
services group develops technology-based solutions for the
control and management of environmental and facility information.
This group creates customized software applications that manage
data using database and geographic information system software.
The applications are web-based, providing clients with facility
management capabilities over the Internet.

Several of our insurance and reinsurance product lines require
substantial specialized technical engineering, loss control and claims
management skills. To support our engineering needs, our technical services
product line performs construction, occupancy, protection and exposure reviews,
including materials, mechanical and civil engineering inspections for property
coverage and coverage of similar physical damage at the client's location that
we intend to insure or reinsure. Our technical services product line also values
and manages the potential economic losses associated with typical property risks
by using operational, critical process, logistical and resource engineering
studies. Further, it provides loss control reviews and specific risk management
recommendations for facilities in order to reduce claim frequency and severity,
including developing reports that use catastrophe-modeling software. ESC serves
as the platform for establishing our technical talent and providing risk
evaluation services. ESC has provided these services to the underwriters in our
environmental liability insurance line. We expect ESC's operations will be
adversely affected to the extent our environmental insurance product line and
our other insurance and reinsurance product lines that have used ESC's
consulting services are no longer able to continue to write coverage or lose
business opportunities due to the recent A.M. Best downgrade of our financial
strength ratings.

In addition to these consulting services, we also provided liability
assumption programs through Quanta Technical Services and its subsidiaries under
which these subsidiaries assume specified liabilities associated with
environmental conditions for which we provided consulting and required
remediation services, which may be insured or guaranteed by us. For example, in
2003 we entered into a transaction for a closed rayon plant in Axis, Alabama in
which we provided risk assessment, insurance and financial structuring and
assumed an environmental liability. In 2005, we also entered into a project in
Buffalo, New York under which we assume specified environmental liabilities and
perform remediation services. We continue to provide environmental remediation
and monitoring for these projects. We are currently evaluating whether, or to
what extent, we will continue to offer this liability assumption program
following our March 2006 ratings downgrade. Presently, we anticipate that it
will be difficult to continue to provide these programs under an A.M. Best
rating of "B++."

GEOGRAPHIES

We have used our Bermuda operations primarily to write our reinsurance
products on a non-admitted basis with ceding client companies located in the
United States, Europe and Asia. We also wrote professional liability insurance
on a non-admitted basis placed by Bermuda brokers for U.S. insureds and, to a
lesser extent, European insureds. Lastly, during 2005, we wrote structured
insurance and reinsurance products including life surplus relief, trade credit
and political risk coverages.

In the United States, we underwrite U.S. insurance and reinsurance
business on an admitted basis through Quanta Indemnity, which is a U.S. licensed
insurer with licenses in approximately 44 states. We also wrote insurance from
the United States on an excess and surplus lines basis and U.S. reinsurance on a
non-admitted basis through Quanta Specialty Lines. Quanta Specialty Lines is
licensed in the State of Indiana and we intend to operate it as an excess and
surplus lines and non-admitted insurer in all other states. During 2005, we
engaged in all the product lines described above in the United States.

In Europe, we operate through Quanta Europe in Dublin, Ireland and,
through Quanta U.K., its branch, in London, England. We also operate through
Syndicate 4000 in London. Quanta Europe is authorized to conduct non-life
insurance business and underwrites E.U. sourced insurance and

reinsurance business from Ireland. Quanta U.K. has recently begun to underwrite
E.U. sourced insurance and reinsurance business in the United Kingdom and
introduce E.U. sourced insurance and reinsurance business to Quanta Europe in
Dublin. Through Quanta Europe and Quanta U.K., during 2005 we wrote
environmental liability, professional liability, crime and fidelity, surety,
trade credit and political risk specialty insurance coverages. In addition, we
wrote structured insurance and reinsurance products through Quanta Europe.
Syndicate 4000 currently writes mainly professional liability (professional
indemnity and directors' and officers' coverage) and crime and fidelity
(financial institutions) specialty insurance. It also writes specie and fine art
coverage.

CEDED REINSURANCE

We cede a portion of our written premiums through quota share and
excess of loss treaty and facultative reinsurance contracts, as well as other
agreements, which provide substantially similar financial protections. We use
ceded reinsurance to lower our net exposure to our planned net limit and risk of
individual loss, to control our aggregate exposures to a particular risk or
class of risks and to reduce our overall risk of loss. We also purchase
retrocessional coverage, which is reinsurance of a reinsurer's business.
Reinsurance companies cede risks under retrocessional agreements to other
reinsurers, known as retrocessionaires, for reasons similar to those that cause
primary insurers to purchase reinsurance. The amount of ceded reinsurance and
retrocessional protection that we purchase varies based on business segment
market conditions, pricing terms and credit risk, as well as other factors. This
protection may be more costly, difficult to obtain or unobtainable as a result
of our recent rating downgrade by A.M. Best.

For business exposed to catastrophic losses, we seek to limit our
aggregate exposure by insured or reinsured, by industry, by peril, by type of
contract and by geographic zone. We monitor and limit our exposure through a
combination of aggregate limits, underwriting guidelines and reinsurance. We
also periodically reevaluate the probable maximum loss for these exposures by
using third-party software and modeling techniques. We seek to limit the
probable maximum loss to a pre-determined percentage of our total shareholders'
equity.

Ceded reinsurance and retrocessional protection do not relieve us of
our obligations to our insureds or reinsureds. We must pay these obligations
without the benefit of reinsurance to the extent our reinsurers or
retocessionaires do not pay us. We evaluate and monitor the financial condition
of our reinsurers and monitor concentrations of credit risk. We seek to purchase
reinsurance from entities rated "A-" or better by S&P or A.M. Best, and we
regularly monitor its collectibility, making balance sheet provisions for
amounts we consider potentially uncollectible and requesting collateral where
possible. We apply the same financial analysis and approval processes to the
selection of reinsurance and other financial protection counterparties as we do
to the underwriting of our surety, professional liability and similar lines of
business.

RELATIONSHIPS WITH BROKERS

Other than the program business which is generated through agents,
during 2005 we produced substantially all of our remaining business through
insurance and reinsurance brokers worldwide who receive a brokerage commission
usually equal to a percentage of gross premiums. Brokerage commissions are
generally negotiated on a policy by policy basis. For further information
regarding our customers who accounted for 10% or more of our consolidated
revenues for the period covered by this annual report, see Note 13 to our
consolidated financial statements which are included in "Item 8. Financial
Statements and Supplementary Data."

We sourced almost all of our business, other than the program
business, through a limited number of brokers in 2005. Financial strength
ratings are an important factor used by brokers and other marketing sources in
assessing the financial strength and quality of insurers. As a result of the
downgrade of our financial strength rating by A.M. Best, we have been removed
from the approved listing from several of our important brokers, including two
of our largest brokers, Aon Corporation and

Marsh Inc. The approved listing is a list of insurance carriers that brokers are
allowed to recommend to provide insurance coverage to the brokerage house's
clients. The downgrade of our financial rating or the continued qualification of
our current rating could continue to cause concern about our viability among
brokers and other marketing sources, resulting in a movement of business away
from us to other stronger or more highly rated carriers. We may seek to broaden
the number of brokers we do business with, such as by targeting smaller regional
brokers who represent smaller companies who can benefit from our underwriting
capabilities and risk management capacities. We may also seek to work with
existing broker relationships to reach additional customers that we can serve.
Our failure to maintain or develop relationships with brokers in response to the
March 2006 A.M. Best rating action and from whom we expect to receive our
business would have a material adverse effect on us.

A number of insurance companies have been subpoenaed by regulators in
connection with investigations relating to business and accounting practices in
the insurance industry. To date, we have not been served any subpoenas. We have
received, and have responded to, inquiries from the North Carolina Department of
Insurance, the Colorado Department of Insurance and Lloyd's. From January 1,
2004 to September 30, 2004 we were party to placement service agreements, known
as PSAs and market service agreements, known as MSAs, with Aon Corporation and
Marsh Inc. and have paid a total of $31,000 under these agreements as of
December 31, 2005. We have accrued approximately $1.0 million in addition to the
amount we have already paid under these agreements. At this time, it is not
possible for us to determine the impact of any outcome of these investigations
on our future results of operations. In addition, we do not know what the
ramifications of the brokers' stated intent to formulate a different commission
structure will be on our future results of operations, financial condition or
liquidity as brokers seek our participation in this commission structure.

CLAIMS MANAGEMENT

We are establishing several dedicated insurance claims teams in our
product lines and we also plan to outsource the review of highly technical or
unusually complicated claims where warranted. Our claims team includes claims
professionals and attorneys. These teams strive to investigate, evaluate and
settle claims as efficiently as possible. We continue to refine our claims
handling guidelines and claims reporting and control procedures. We seek to
monitor our claims in accordance with these guidelines.

Generally, we involve members of the claims staff in the underwriting
process. When a claim is reported, we conduct an initial review of the validity
of the claim and communicate the assessment of the availability of coverage and,
if possible, the proposed method of handling the claim to the insured. At that
time, the claims professionals also communicate with our actuaries, underwriters
and management. We base the authority for payment and establishing reserves on
the level and experience of our claims personnel.

We have established procedures to record reported insurance claims
upon receipt of notice of the claim. To assist with the adjustment and tracking
of losses, we have established an information database for all insurance claims.
The database is also used for management reporting and accumulation of
significant events for which we have exposures.

As any potential insurance claim develops, the claims teams will draw
on internal and external resources to settle the claim. We are also establishing
networks of external legal and claims experts to augment our own in-house teams.
From time to time, we may also enter into agreements with third-party
administrators and settlement firms to outsource certain claims functions
relating to specific claims. Insurance claims for our program business are
generally handled by third-party administrators of those programs who have
limited authority and are subject to regular review and audit by our internal
claims teams.

With respect to reinsurance contracts, claims are mainly managed by
the claims department of the ceding company or primary insurer. As individual
claims become larger and more complex, we may

seek, at our discretion and expense, to assume or participate in the
administration of specific claims.

In addition to managing reported claims and conferring with underlying
carriers and ceding companies, our claims professionals will conduct periodic
audits of specific claims and the overall claims procedures of our clients.
Through these audits, we will seek to evaluate their claims-handling practices,
including the organization of their claims departments, their fact-finding and
investigation techniques, their loss notification procedures, the adequacy of
their reserves, their negotiation and settlement practices and their adherence
to claims-handling guidelines. In addition, prior to accepting certain
reinsurance risks, our underwriters may request that our claims professionals
conduct pre-underwriting claims audits of prospective ceding or primary writing
companies.

RESERVES

We are required to establish reserves for losses and loss expenses
under applicable insurance laws and regulations and U.S. GAAP. These reserves
are balance sheet liabilities representing estimates of future amounts required
to pay losses and loss expenses for insured and/or reinsured claims that have
occurred at or before the balance sheet date, whether already known to us or not
yet reported. Our policy is to establish these losses and loss reserves
prudently after considering all information known to us as of the date they are
recorded.

Loss reserves fall into two categories: case reserves for reported
losses and loss expenses associated with a specific reported insured claim and
reserves for incurred but not reported, or IBNR, losses and loss expenses. We
have established these two categories of loss reserves as follows:

o Case reserves -- Following our analysis of a notice of claim
received from an insured, broker or ceding company, we determine
whether a case reserve is appropriately priced and, if so, we
establish a case reserve for the estimated amount of its ultimate
settlement and its estimated loss expenses. We establish case
reserves based upon the availability of coverage and may
subsequently supplement or reduce the reserves as our claims
department deems necessary. We also review our case reserves on a
quarterly basis.

o IBNR reserves -- We estimate and establish reserves for loss
amounts incurred but not yet reported, including expected
development of reported claims. These IBNR reserves include
estimated loss expenses. We calculate IBNR reserves by using
generally accepted actuarial techniques. We rely on the most
recent information available, including pricing information,
industry information and our historical reported claims data. We
will revise these reserves for losses and loss expenses as
additional information becomes available and as claims are
reported and paid. We also review our IBNR reserves on a
quarterly basis.

Loss reserves represent our best estimate, at a given point in time,
of the ultimate settlement and administration cost associated with incurred
claims. Our ultimate liability may exceed or be less than these estimates. The
process of estimating loss reserves requires significant judgment due to a
number of variables. Internal and external events, such as fluctuations in
inflation, judicial trends, legislative changes and changes in claims handling
procedures, will affect these variables. We are not able to directly quantify
many of these items, particularly on a prospective basis. There may also be
significant lags between the occurrence of the insured event and the time it is
actually reported to us.

Several aspects of our insurance and reinsurance products further
complicate the actuarial reserving techniques for loss reserves as compared to
other insurance and reinsurance carriers. Among these aspects are the
differences in our policy forms from more traditional forms, the lack of
complete historical data for losses and our expectation that losses in excess of
our attachment levels will be characterized by low frequency and high severity
claims. All of these factors tend to limit the amount of relevant loss
experience that we can use to gauge the emergence, severity and payout

characteristics of our loss reserves.

We use statistical and actuarial methods to estimate our ultimate
expected losses and loss expenses. Several years may pass between the time an
insured or reinsured reports a loss to us and the time we settle our liability.
During this period, we will learn additional facts and trends related to the
loss. As we learn these additional facts and trends, we will adjust case
reserves and incurred but not reported reserves as necessary. These adjustments
will sometimes require us to increase our overall reserves and at other times
will require us to reallocate incurred but not reported reserves to specific
case reserves.

We base reserves for losses and loss expenses in part upon our
estimates of losses. Initially, it may be difficult for us to estimate losses
based upon our own historical claim experiences because of our lack of operating
history. Therefore, we utilize commercially available models to evaluate future
trends and estimate our ultimate claims costs.

U.S. GAAP does not permit us to establish loss reserves until the
occurrence of an actual loss event. Once such an event occurs, we establish
reserves based upon estimates of total losses as a result of the event and our
estimate of the portion of the loss we have insured or reinsured. As a result,
we set aside only loss reserves applicable to losses incurred up to the
reporting date, with no allowance for the provision of a contingency reserve to
account for expected future losses. We will estimate and recognize losses
arising from future events at the time the loss is incurred.

To assist us in establishing appropriate reserves for losses and loss
expense, we analyze a significant amount of insurance industry information with
respect to the pricing environment and loss settlement patterns. In combination
with our individual pricing analyses, we use this industry information to guide
our loss and loss expense estimates. We will regularly review these estimates,
and we will reflect adjustments, if any, in earnings in the periods in which
they are determined. We have engaged, and we expect that we will continue, from
time to time, to engage, independent external actuarial specialists to review
specific reserving methods and results.

With respect to the year ended December 31, 2005, in establishing our
reserves for losses and loss expenses, we reviewed reserve estimates of an
actuary employed with our company and of an external actuary specialist. We
recorded these reserves as of the year ended December 31, 2005 based on the
highest aggregate reserve amount of the estimates we reviewed. While we believe
that we are able to make a reasonable estimate of our ultimate losses, we may
not be able to predict our ultimate claims experience as reliably as other
companies that have had insurance and reinsurance operations for a substantial
period of time, and we cannot assure you that our losses and loss expenses will
not exceed our total reserves.

RISK MANAGEMENT

We delegate underwriting authority to the leaders of our product lines
and to the leaders of our geographic locations. We have issued detailed letters
of underwriting authority to each of our leaders of our product lines and to
each of our underwriters. We review these letters annually. These letters
contain underwriting eligibility criteria and quantifiable limits depending on
the product line. We have implemented a plan to compensate our underwriting
officers based on the long-term returns on allocated capital of their respective
product lines and intend to regularly review and revise our profitability
guidelines to reflect changes in market conditions, interest rates, capital
structure and market-expected returns.

With respect to our specialty insurance lines, we believe we employ a
disciplined approach to underwriting and risk management that relies heavily
upon the collective underwriting expertise of our management and staff. We
believe this expertise is guided by the following underwriting principles:

o Our own independent pricing or risk review of insurance and
facultative risks;

o Acceptance of only those risks that we believe will earn a level
of profit commensurate with the risk they present; and

o Limitation of the business we accept to only that business that
is consistent with our corporate risk objectives.

With respect to our reinsurance lines, before we review any treaty
proposal, we consider the appropriateness of reinsuring the client, by
evaluating the quality of its management and its risk management strategy. In
addition, we required each reinsurance property treaty to include significant
information on the nature of the perils to be included and detailed aggregate
information as to the location or locations of the risks covered, together with
relevant underwriting considerations. If a submission meets the preceding
underwriting criteria, we evaluate the proposal in terms of its risk/reward
profile to assess the adequacy of the proposed pricing and its potential impact
on our overall return on capital as well as our corporate risk objectives.

We utilize a risk-adjusted return on capital approach to manage and
allocate capital to different lines of business. This approach is based on risk
management methodologies from actuarial science and capital markets. We believe
that this approach can guide our risk-based pricing of each line or product to
achieve our targeted return of capital.

We seek to integrate our in-house actuarial staff into our
underwriting and decision making process. We use outside consultants as
necessary to develop the appropriate analysis for pricing. We perform actuarial
and risk analysis using commercial data and models licensed from third parties.

To monitor the catastrophe and correlation risk of our reinsurance
business, we subscribe to and utilize natural catastrophe-modeling tools. We
will look to supplement these models if necessary and are currently enhancing
these models to improve their predictive capabilities in the unusual high
severity events such as those experienced during the 2005 hurricane season.

In addition to technical and analytical practices, our underwriters
use a variety of means, including specific contract terms, to manage our
exposure to loss. We include aggregate policy limits in the contracts of most of
the business we write. Additionally, our underwriters use contract exclusions
and terms and conditions, as appropriate, to further eliminate particular risk
exposures that our underwriting team deems to be unacceptable.

We have also established an internal audit function to review our
underwriting processes. The head of the internal audit function reports to the
audit committee.

Based on our discussions with A.M. Best, we believe that we will need
to, among other things, reduce the amount of risk that we assume on a single
loss event or catastrophic event. Currently, we are seeking to reduce our net
ultimate loss limits in most of our product lines by offering lower gross policy
limits to our clients and by purchasing additional reinsurance coverage to the
extent available.

INVESTMENTS

Our board of directors established our investment policies and
mandated a list of authorized investments for company funds. Management
implements our investment strategy with the assistance of external managers, who
use guidelines which are created by us and compliant with the investment
mandates of our board to establish their portfolios. Our investment guidelines
specify minimum criteria on the overall credit quality, liquidity and
risk-return characteristics of our investment portfolio and include limitations
on the size of particular holdings, as well as restrictions on investments in
different asset classes. The board of directors monitors our overall investment
returns and reviews compliance with our investment guidelines.

Our investment strategy seeks to preserve principal and maintain
liquidity while trying to maximize total return through a high quality,
diversified portfolio. Investment decision making is guided mainly by the nature
and timing of our expected liability payouts, management's forecast of our cash
flows and the possibility that we will have unexpected cash demands, for
example, to satisfy claims due to catastrophic losses. Our investment portfolio
currently consists mainly of highly rated and liquid fixed income securities.
However, to the extent our insurance liabilities are correlated with an asset
class outside our minimum criteria, our investment guidelines will allow a
deviation from those minimum criteria provided such deviations reduce overall
risk.

Our investment guidelines require compliance with applicable local
regulations and laws. Without board approval, we will not purchase financial
futures, forwards, options, swaps and other derivatives, except for instruments
that are purchased as part of our business, for purposes of hedging capital
market risks (including those within our structured product transactions), or as
replication transactions, which are defined as a set of derivative, insurance
and/or securities transactions that when combined produce the equivalent
economic results of an investment meeting our investment guidelines. While we
expect that the majority of our investment holdings will be denominated in U.S.
dollars, we may make investments in other currency denominations depending upon
the currencies in which loss reserves are maintained, or as may be required by
regulation or law.

COMPETITION

INSURANCE AND REINSURANCE

The insurance and reinsurance industry is highly competitive.
Competition varies depending on the type of business being insured or reinsured.
We have competed on an international and regional basis with major U.S.,
Bermuda, European and other international insurers and reinsurers and certain
underwriting syndicates. If we seek to broaden the markets in which we do
business, we will encounter additional competition. Many of these competitors
have more, and in some cases substantially more, capital and greater marketing
and management resources than we expect to have, and may offer a broader range
of products and more competitive pricing than we expect to, or will be able to,
offer. Because we have a limited operating history, many of our competitors also
have greater name and brand recognition than we have.

In the specialty market we currently operate in, competition tends to
focus more on availability, service and other value-based considerations than on
price. If we provide additional specialty insurance products to a broader market
of clients, we anticipate that competition will mostly be based on product and
underwriting expertise, premiums charged and other terms and conditions offered.

Competition in the types of business that we underwrite is based on
many factors, including:

o financial ratings assigned by independent rating agencies;

o management's experience in the line of insurance or reinsurance
to be written;

o strength of client or broker relationships;

o premiums charged and other terms and conditions offered;

o services provided, products offered and scope of business, both
by size and geographic location; and

o reputation and quality of claims service.

Increased competition could result in fewer applications for coverage,
lower premium rates

and less favorable policy terms, which could adversely impact our growth and
profitability. In addition, capital markets participants have recently created
alternative products that are intended to compete with reinsurance products. We
are unable to predict the extent to which new, proposed or potential initiatives
may affect the demand for our products or the risks that may be available for us
to consider underwriting.

TECHNICAL SERVICES

The environmental consulting industry is also highly competitive.
There are numerous professional engineering and consulting firms and other
organizations that provide many of the services offered by us. These competitors
range from small local firms to large national firms. The larger,
well-established companies have substantially greater financial, management and
marketing resources than we do. The smaller competitors tend to be highly
specialized technical companies. We believe that the most important competitive
factors in this industry include reputation, performance, price, geographic
location and availability of technically skilled personnel.

FINANCIAL STRENGTH RATINGS

Financial strength ratings by independent agencies are an important
factor in establishing the competitive position of insurance and reinsurance
companies and are important to our ability to market and sell our products.
Rating organizations continually review the financial positions of insurers.
A.M. Best maintains a letter scale rating system ranging from "A++" (superior)
to "F" (in liquidation). The objective of A.M. Best's rating system is to
provide an opinion of an insurer's or reinsurer's financial strength and ability
to meet ongoing obligations to its policyholders. These ratings reflect only our
ability to pay policyholder claims. They are not a recommendation to buy, sell
or hold our shares. These ratings are subject to periodic review by, and may be
revised or revoked at the sole discretion of, A.M. Best.

REGULATION

The business of insurance and reinsurance is regulated in most
countries, although the degree and type of regulation varies significantly from
one jurisdiction to another. Reinsurers are generally subject to less direct
regulation than primary insurers. However, the EU has recently adopted a
directive which when introduced in each Member State, will introduce full
regulation of reinsurers, broadly in line with current regulation for direct
insurance. In Bermuda we operate under relatively less intensive regulatory
regimes. However, in the United States and United Kingdom, licensed insurers and
reinsurers, and in Ireland, licensed insurers, must comply with more complex
financial supervision standards. Accordingly, Quanta Europe is subject to
extensive financial regulation in Ireland, Quanta U.K. is subject to extensive
regulation under applicable statutes in Ireland and the United Kingdom,
Syndicate 4000 is subject to extensive regulation from Lloyd's in the United
Kingdom and Quanta Specialty Lines and Quanta Indemnity are subject to extensive
financial regulation under applicable statutes in the United States.

BERMUDA REGULATION

As a holding company, Quanta Holdings is not subject to Bermuda
insurance regulations.

The Insurance Act, which regulates the insurance business of Quanta
Bermuda and Quanta U.S. Re, provides that no person may carry on any insurance
business in or from within Bermuda unless registered as an insurer under the
Insurance Act by the Bermuda Monetary Authority, or the BMA, which is
responsible for the day-to-day supervision of insurers. Under the Insurance Act,
insurance business includes reinsurance business. The BMA, in deciding whether
to grant registration, has broad discretion to act as the BMA thinks fit in the
public interest. The BMA is required by the Insurance Act to determine whether
the applicant is a fit and proper body to be engaged in the insurance business
and, in particular, whether it has, or has available to it, adequate knowledge
and expertise. The registration of an applicant as an insurer is subject to its
complying with the terms of its registration and such other conditions as the
BMA may impose from time to time. The BMA granted its approval for the
registration of Quanta Bermuda as a Class 4 insurer and Quanta U.S. Re as a
Class 3 insurer.

An Insurance Advisory Committee appointed by the Bermuda Minister of
Finance advises the BMA on matters connected with the discharge of the BMA's
functions. Sub-committees of the Insurance Advisory Committee supervise and
review the law and practice of insurance in Bermuda, including reviews of
accounting and administrative procedures.

The Insurance Act imposes on Bermuda insurance companies solvency and
liquidity standards and auditing and reporting requirements and grants to the
BMA powers to supervise, investigate and intervene in the affairs of insurance
companies. Certain significant aspects of the Bermuda insurance regulatory
framework are set forth below.

CLASSIFICATION OF INSURERS

The Insurance Act distinguishes between insurers carrying on long-term
business and insurers carrying on general business. There are four
classifications of insurers carrying on general business with Class 4 insurers
subject to the strictest regulation. Quanta Bermuda is registered as a Class 4
insurer and Quanta U.S. Re as a Class 3 insurer. We do not intend, at this time,
to obtain a license for Quanta Bermuda or Quanta U.S. Re to carry on long-term
business. Long-term business includes life insurance and disability insurance
with terms in excess of five years. General business broadly includes all types
of insurance that is not long-term business.

CANCELLATION OF INSURER'S REGISTRATION

An insurer's registration may be canceled by the BMA on certain
grounds specified in the Insurance Act, including failure of the insurer to
comply with its obligations under the Insurance Act or if, in the opinion of the
BMA, the insurer has not been carrying on business in accordance with sound
insurance principles.

PRINCIPAL REPRESENTATIVE

An insurer is required to maintain a principal office in Bermuda and
to appoint and maintain a principal representative in Bermuda. For the purpose
of the Insurance Act, the principal office of Quanta Bermuda and Quanta U.S. Re
is at our principal executive offices in Bermuda, and Quanta Bermuda's and
Quanta U.S. Re's principal representatives are presently Jonathan J.R. Dodd and
J. Scott Bradley, respectively. Without a reason acceptable to the BMA, an
insurer may not terminate the appointment of its principal representative, and
the principal representative may not cease to act as such, unless 30 days'
notice in writing to the BMA is given of the intention to do so. It is the duty
of the principal representative, forthwith on reaching the view that there is a
likelihood of the insurer for which the principal representative acts becoming
insolvent or that a reportable event has, to the principal representative's
knowledge, occurred or is believed to have occurred, to notify the BMA and,

within 14 days of such notification, to make a report in writing to the BMA
setting out all of the particulars of the case that are available to the
principal representative. Examples of such a reportable "event" include failure
by the insurer to comply substantially with a condition imposed upon the insurer
by the BMA relating to a solvency margin or liquidity or other ratio.

INDEPENDENT APPROVED AUDITOR

Every registered insurer must appoint an independent auditor (the
"approved auditor") who will annually audit and report on the statutory
financial statements and the statutory financial return of the insurer, both of
which, in the case of Quanta Bermuda and Quanta U.S. Re, is required to be filed
annually with the BMA. The approved auditor of Quanta Bermuda and Quanta U.S. Re
must be approved by the BMA and may be the same person or firm which audits
Quanta Bermuda's and Quanta U.S. Re's financial statements and reports for
presentation to its shareholders. Quanta Bermuda's and Quanta U.S. Re's approved
auditor is currently PricewaterhouseCoopers LLP.

LOSS RESERVE SPECIALIST

As a registered Class 4 and Class 3 insurer, each of Quanta Bermuda
and Quanta U.S. Re, respectively will be required to submit an opinion of an
approved loss reserve specialist with its statutory financial return in respect
of its loss and loss adjustment expense provisions. We have appointed Ollie W.
Sherman of Tillinghast Towers Perrin, as our qualified casualty actuary approved
by the BMA to submit the required report.

STATUTORY FINANCIAL STATEMENTS

An insurer must prepare annual statutory financial statements. The
Insurance Act prescribes rules for the preparation and substance of such
statutory financial statements (which include, in statutory form, a balance
sheet, an income statement, a statement of capital and surplus and notes
thereto). The insurer is required to give detailed information and analyses
regarding premiums, claims, reinsurance and investments. The statutory financial
statements are not prepared in accordance with U.S. GAAP and are distinct from
the financial statements prepared for presentation to the insurer's shareholders
under the Companies Act, which financial statements will be prepared in
accordance with U.S. GAAP. Each of Quanta Bermuda and Quanta U.S. Re, as a
general business insurer, is required to submit the annual statutory financial
statements as part of the annual statutory financial return. The statutory
financial statements and the statutory financial return do not form part of the
public records maintained by the BMA.

ANNUAL STATUTORY FINANCIAL RETURN

Quanta Bermuda and Quanta U.S. Re are required to file with the BMA
statutory financial returns no later than four months after their financial year
end (unless specifically extended). The statutory financial return for an
insurer includes, among other matters, a report of the approved auditor on the
statutory financial statements of such insurer, the solvency certificates, the
declaration of statutory ratios, the statutory financial statements, the opinion
of the loss reserve specialist and a schedule of reinsurance ceded. The solvency
certificates must be signed by the principal representative and at least two
directors of the insurer who are required to certify, among other matters,
whether the minimum solvency margin has been met and whether the insurer
complied with the conditions attached to its certificate of registration. The
approved auditor is required to state whether in his opinion it was reasonable
for the directors to so certify. Where an insurer's accounts have been audited
for any purpose other than compliance with the Insurance Act, a statement to
that effect must be filed with the statutory financial return.

MINIMUM SOLVENCY MARGIN AND RESTRICTIONS ON DIVIDENDS AND
DISTRIBUTIONS

Under the Insurance Act, the value of the general business assets of a
Class 4 insurer, such as

Quanta Bermuda must exceed the amount of its general business liabilities by an
amount greater than the prescribed minimum solvency margin. Quanta Bermuda is
required, with respect to its general business, to maintain a minimum solvency
margin equal to the greatest of:

(A) $100,000,000;

(B) 50% of net premiums written (being gross premiums written less
any premiums ceded by Quanta Bermuda, but Quanta Bermuda may not
deduct more than 25% of gross premiums when computing net
premiums written); and

Quanta Bermuda is prohibited from declaring or paying any dividends
during any financial year if it is in breach of its minimum solvency margin or
minimum liquidity ratio or if the declaration or payment of such dividends would
cause it to fail to meet such margin or ratio. In addition, if it has failed to
meet its minimum solvency margin or minimum liquidity ratio on the last day of
any financial year, Quanta Bermuda will be prohibited, without the approval of
the BMA, from declaring or paying any dividends during the next financial year.
Quanta Bermuda is also prohibited from declaring or paying in any financial year
dividends of more than 25% of its total statutory capital and surplus (as shown
on its previous financial year's statutory balance sheet) unless it files with
the BMA at least seven days before payment of such dividends an affidavit
stating that it will continue to meet the required margins.

Quanta Bermuda is prohibited, without the approval of the BMA, from
reducing by 15% or more its total statutory capital as set out in its previous
year's financial statements, and any application for such approval must include
an affidavit stating that it will continue to meet the required margins. In
addition, at any time it fails to meet its solvency margin, Quanta Bermuda will
be required, within 30 days (45 days where total statutory capital and surplus
falls to $75 million or less) after becoming aware of such failure or having
reason to believe that such failure has occurred, to file with the BMA a written
report containing certain information.

Under the Insurance Act, the value of the general business assets of a
Class 3 insurer, such as Quanta U.S. Re must exceed the amount of its general
business liabilities by an amount greater than the prescribed minimum solvency
margin. Quanta U.S. Re is required, with respect to its general business, to
maintain a minimum solvency margin equal to the greatest of:

(A) $1,000,000

(B) Net Premium Income ("NPI") Prescribed Amount

Up to $6,000,000 20% of NPI

Greater than $6,000,000 The aggregate of $1,200,000 and 15%
of the amount by which NPI exceeds
$6,000,000 in that year.

In general, net premium income equals gross premium income after
deduction of any premium ceded by the insurer for reinsurance; or

Quanta U.S. Re is prohibited from declaring or paying any dividends
during any financial year if it is in breach of its minimum solvency margin or
minimum liquidity ratio or if the declaration or payment of such dividends would
cause it to fail to meet such margin or ratio. In addition, if it has failed to
meet its minimum solvency margin or minimum liquidity ratio on the last day of
any financial

year, Quanta U.S. Re will be prohibited, without the approval of the BMA, from
declaring or paying any dividends during the next financial year. Quanta U.S. Re
is prohibited, without the approval of the BMA, from reducing by 15% or more its
total statutory capital as set out in its previous year's financial statements,
and any application for such approval shall provide such information as the BMA
may require. In addition, at any time it fails to meet its solvency margin,
Quanta U.S. Re will be required, within 30 days after becoming aware of such
failure or having reason to believe that such failure has occurred, to file with
the BMA a written report containing certain information.

Additionally, under the Companies Act, neither Quanta Holdings nor
Quanta Bermuda nor Quanta U.S. Re may declare or pay a dividend, or make a
distribution from contributed surplus, if there are reasonable grounds for
believing that it is, or would after the payment be, unable to pay its
liabilities as they become due, or the realizable value of its assets would be
less than the aggregate of its liabilities and its issued share capital and
share premium accounts. For further discussion of our share capital and share
premium accounts, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition and
Liquidity--Liquidity--Dividends and Redemptions."

MINIMUM LIQUIDITY RATIO

The Insurance Act provides a minimum liquidity ratio for general
business insurers. An insurer engaged in general business is required to
maintain the value of its relevant assets at not less than 75% of the amount of
its relevant liabilities. Relevant assets include cash and time deposits, quoted
investments, unquoted bonds and debentures, first liens on real estate,
investment income due and accrued, accounts and premiums receivable and
reinsurance balances receivable. There are certain categories of assets which,
unless specifically permitted by the BMA, do not automatically qualify as
relevant assets, such as unquoted equity securities, investments in and advances
to affiliates and real estate and collateral loans. The relevant liabilities are
total general business insurance reserves and total other liabilities less
deferred income tax and sundry liabilities (by interpretation, those not
specifically defined).

SUPERVISION, INVESTIGATION AND INTERVENTION

The BMA may appoint an inspector with extensive powers to investigate
the affairs of an insurer if the BMA believes that an investigation is required
in the interest of the insurer's policyholders or persons who may become
policyholders. In order to verify or supplement information otherwise provided
to the BMA, the BMA may direct an insurer to produce documents or information
relating to matters connected with the insurer's business.

If it appears to the BMA that there is a risk of the insurer becoming
insolvent, or that it is in breach of the Insurance Act or any conditions
imposed upon its registration, the BMA may, among other things, direct the
insurer (1) not to take on any new insurance business, (2) not to vary any
insurance contract if the effect would be to increase the insurer's liabilities,
(3) not to make certain investments, (4) to realize certain investments, (5) to
maintain in, or transfer to the custody of, a specified bank, certain assets,
(6) not to declare or pay any dividends or other distributions or to restrict
the making of such payments and/or (7) to limit its premium income.

DISCLOSURE OF INFORMATION

In addition to powers under the Insurance Act to investigate the
affairs of an insurer, the BMA may require certain information from an insurer
(or certain other persons) to be produced to it. Further, the BMA has been given
powers to assist other regulatory authorities, including foreign insurance
regulatory authorities, with their investigations involving insurance and
reinsurance companies in Bermuda but subject to restrictions. For example, the
BMA must be satisfied that the assistance being requested is in connection with
the discharge of regulatory responsibilities of the foreign regulatory
authority. Further, the BMA must consider whether cooperation is in the public

interest. The grounds for disclosure are limited and the Insurance Act provides
sanctions for breach of the statutory duty of confidentiality.

CERTAIN OTHER CONSIDERATIONS

Although Quanta Holdings is incorporated in Bermuda, it is classified
as a non-resident of Bermuda for exchange control purposes by the BMA. Pursuant
to its non-resident status, Quanta Holdings may engage in transactions in
currencies other than Bermuda dollars and there are no restrictions on its
ability to transfer funds (other than funds denominated in Bermuda dollars) in
and out of Bermuda or to pay dividends to U.S. residents who are holders of its
common shares.

Under Bermuda law, exempted companies are companies formed for the
purpose of conducting business outside Bermuda from a principal place of
business in Bermuda. As "exempted" companies, Quanta Holdings, Quanta Bermuda
and Quanta U.S. Re may not, without the express authorization of the Bermuda
legislature or under a license or consent granted by the Minister of Finance,
participate in certain business transactions, including: (1) the acquisition or
holding of land in Bermuda (except that held by way of lease or tenancy
agreement which is required for its business and held for a term not exceeding
50 years, or which is used to provide accommodation or recreational facilities
for its officers and employees and held with the consent of the Bermuda Minister
of Finance, for a term not exceeding 21 years); (2) the taking of mortgages on
land in Bermuda to secure an amount in excess of $50,000; or (3) the carrying on
of business of any kind for which it is not licensed in Bermuda, except in
certain limited circumstances such as doing business with another exempted
undertaking in furtherance of Quanta Holdings' business, Quanta Bermuda's
business or Quanta U.S. Re's business (as the case may be) carried on outside
Bermuda. Quanta Bermuda and Quanta U.S. Re both are licensed insurers in
Bermuda, and it is expected that they will be able to carry on activities from
Bermuda that are related to and in support of their insurance business in
accordance with their licenses.

Shares may be offered or sold in Bermuda only in compliance with the
provisions of the Investment Business Act of 2003 of Bermuda, which regulates
the sale of securities in Bermuda. In addition the BMA must approve all
issuances and transfers of shares of a Bermuda exempted company.

The Bermuda government actively encourages foreign investment in
"exempted" entities like Quanta Holdings that are based in Bermuda, but which do
not operate in competition with local businesses. Quanta Holdings, Quanta
Bermuda and Quanta U.S. Re are not currently subject to taxes computed on
profits or income or computed on any capital asset, gain or appreciation, or any
tax in the nature of estate duty or inheritance tax or to any foreign exchange
controls in Bermuda; however, Quanta U.S. Re will be taxed as a U.S.
corporation.

Under Bermuda law, non-Bermudians (other than spouses of Bermudians)
may not engage in any gainful occupation in Bermuda without the specific
permission of the appropriate governmental authority. Such permission may be
granted or extended upon showing that, after proper public advertisement, no
Bermudian, or spouse of a Bermudian or individual holding a permanent resident
certificate is available who meets the minimum standards for the advertised
position. We employ primarily non-Bermudians. None of the executive officers of
Quanta Holdings is a Bermudian, and all of these officers work in Bermuda under
work permits. The Bermuda government recently announced a new policy that places
a six-year term limit on individuals with work permits, subject to certain
exceptions for key employees.

IRISH REGULATION

Quanta Europe is incorporated under the laws of Ireland and has a
registered office in Ireland. As a non-life insurance company, Quanta Europe is
subject to the regulation and supervision of the Irish Financial Services
Regulatory Authority (which has recently re-branded itself as the Financial
Regulator), or IFSRA, pursuant to the Insurance Acts and Regulations and is
authorized to undertake various classes of non-life insurance business.

Quanta Europe is primarily regulated under the Insurance Acts and
Regulations. In addition, Quanta Europe is subject to supervisory requirements
imposed by IFSRA. These include the guidelines

referred to in this section.

In addition to the obligations imposed on Quanta Europe by the
Insurance Acts and Regulations, IFSRA has granted the authorization subject to
certain conditions as is typical for Irish authorized insurers. The following
are the main conditions that have been imposed:

o Quanta Europe must not exceed the projected premium levels set out in
the business plan submitted as part of its application for
authorization without the consent of IFSRA. Any consent will be
subject to Quanta Europe agreeing to any capitalization requirements
determined by IFSRA;

o Quanta Europe will not be permitted to reduce the level of its initial
capital without the consent of IFSRA;

o Quanta Europe may not make any dividend payments without IFSRA's prior
approval;

o no loans may be made by Quanta Europe without prior notification to
and approval of IFSRA;

o the management accounts (which are the revenue account, profit and
loss account, balance sheet and statement of solvency) of Quanta
Europe must be submitted to IFSRA on a quarterly basis for at least
the initial three years of Quanta Europe's operation;

o Quanta Europe must maintain a minimum solvency margin equal to 200% of
the solvency margin laid down by the Insurance Acts and Regulations
(and a solvency ratio (of free assets to net premium) of 50%); and

o Quanta Europe must adhere to IFSRA's policy restricting the
reinsurance business written by a direct insurer. Under this policy, a
direct insurer is prohibited from engaging in reinsurance except to an
extent that is not significant (to a maximum of 10% to 20% of its
overall business) and subject to certain conditions. In practice IFSRA
expects a direct writer to write reinsurance in very limited
circumstances.

ANNUAL RETURNS

Quanta Europe must file annual statutory insurance returns with IFSRA
in the format prescribed by the European Communities (Non-Life Insurance
Accounts) Regulations, 1995. Insurers must also pay annual supervision fees.

EUROPEAN PASSPORT

Ireland is a member of the European Economic Area (the "EEA"). The EEA
comprises each of the countries of the European Union (EU) (being, as at March
2006, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland,
Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden, the United Kingdom,
Estonia, Latvia, Lithuania, Czech Republic, Hungary, Malta, Cyprus, Poland,
Slovakia and Slovenia) and Iceland, Liechtenstein and Norway. The EEA was
established by a 1992 agreement the effect of which is to create an area of free
movement of goods and services (including insurance services) within EEA
countries. A consequential effect of the EEA agreement is that the rules on
passporting of insurance services that apply between EU member states (described
below) are extended to Iceland, Liechtenstein and Norway.

Ireland has implemented the EU's Third Non-Life Insurance Directive
(92/49/EEC). This Directive introduced a single system for the authorization and
financial supervision of non-life insurers by their home member state. Under
this system, Quanta Europe is permitted to carry on the classes of insurance
business for which it is authorized in Ireland in any other EEA Member State by
way of

freedom to provide services provided that it has notified IFSRA of its intention
to do so and subject to complying with such conditions as may be required by the
jurisdiction in which the insurance activities are carried out for reasons of
the general good and such other conditions as are permitted under EU law and may
be required by the regulator of that jurisdiction with respect to the carrying
on of insurance business in that jurisdiction. IFSRA has notified the other
Member States concerned and has informed Quanta Europe that it has done so. As a
result, Quanta Europe is entitled to conduct business by way of freedom to
provide services in these Member States.

We do not intend to license Quanta Europe or admit it as an insurer in
any jurisdiction other than Ireland and the other EEA member states.

In addition to being entitled to conduct business under the freedom to
provide services, Quanta Europe has established a branch in the United Kingdom
and is writing certain EU and EEA sourced insurance and reinsurance business
through this branch. This branch is supervised by IFSRA.

QUALIFYING SHAREHOLDING

The Insurance Acts and Regulations require that anyone acquiring or
disposing of a "qualifying holding" in an Irish authorized insurer or anyone who
proposes to increase that holding or to decrease it below specified levels must
first notify IFSRA of their intention to do so. Any Irish-authorized insurer
that becomes aware of any acquisition or disposal of a qualifying holding in
that insurer or which result in a holding reaching or being reduced below one of
the "specified levels" is required to notify IFSRA.

IFSRA has three months from the date of submission of a notification
within which to oppose any such proposed acquisition if IFSRA is not satisfied
as to the suitability of the acquiror "in view of the necessity to ensure sound
and prudent management of the insurance undertaking."

A "qualifying holding" means a direct or indirect holding in an
insurer that represents 10% or more of the capital or of the voting rights of
the insurer or that makes it possible to exercise a significant influence over
the management of the insurer. The specified levels are 20%, 33% and 50%, or
such other level of ownership that results in the insurer becoming the
acquiror's subsidiary.

Any person having a shareholding of 10% or more of our issued share
capital would be considered to have an indirect qualifying holding in Quanta
Europe, whether or not those shares confer 10% or more of our voting rights.
IFSRA will need to pre-clear any change that results in the direct or indirect
acquisition of a qualifying holding in Quanta Europe or a change that results in
an increase in a holding to one of the specified levels.

Quanta Europe is be required, at such times as may be specified by
IFSRA, and at least once a year, to notify IFSRA of the names of shareholders
possessing qualifying holdings and the size of such holdings.

TRANSACTIONS WITH RELATED COMPANIES

Under the Insurance Acts and Regulations, prior to entering into any
transaction of a material nature with a related company or companies (including,
in particular, the provision of loans to and acceptance of loans from a related
company or companies) Quanta Europe must submit to IFSRA a draft of any contract
or agreement which is to be entered into by Quanta Europe in relation to the
transaction. In addition to the above, there is a requirement that Quanta Europe
notify IFSRA on an annual basis of transactions with related companies in excess
of 10,000 Euro.

FINANCIAL REQUIREMENTS

Quanta Europe is required to maintain technical reserves calculated in
accordance with the Insurance Acts and Regulations. Assets representing its
technical reserves are required to cover Quanta

Europe's underwriting liabilities.

Quanta Europe is obligated to prepare annual accounts (comprising
balance sheet, profit and loss account and notes) in accordance with the
provisions of the European Communities (Insurance Undertakings: Accounts)
Regulations, 1996 (the "Insurance Accounts Regulations"). Such accounts must be
filed with IFSRA and with the Registrar of Companies in Ireland.

Additionally, Quanta Europe is required to establish and maintain an
adequate solvency margin and a minimum guarantee fund, both of which must be
free from all foreseeable liabilities and not available for other purposes such
as use as reserves. Currently, the solvency margin is calculated as the higher
amount of a percentage of the annual amount of premiums (premiums basis) or the
average burden of claims for the last three years (or seven years if Quanta
Europe writes any credit, storm, hail or frost insurance) (claims basis). If in
any year the solvency margin calculated for Quanta Europe is lower than that for
the previous year, the solvency margin will be the previous year's solvency
margin multiplied by the ratio of technical reserves (net of reinsurance) at the
end of the last financial year to technical reserves (net of reinsurance) at the
beginning of the year. The ratio cannot be greater than one. IFSRA may revalue
downward the assets eligible to constitute the solvency margin in certain
circumstances.

The minimum guarantee fund is equal to one third of the solvency
margin requirement as set out above, subject to a minimum. It is not an
additional fund and is included in the solvency margin. Where an insurer is part
of an insurance group, the solvency margin must be recalculated to eliminate any
double counting of capital within the group. If Quanta Europe writes any credit
insurance it will be required to maintain a further reserve, known as an
equalization reserve, in respect of that business. Quanta Europe is obliged to
have a minimum paid up share capital of not less than 635,000 Euro which can
form part of the solvency margin.

INVESTMENT RESTRICTIONS

The Insurance Acts and Regulations limit the categories of assets that
may be used to represent technical reserves and the required solvency margin.
They also impose asset diversification, localization and currency matching rules
and limit the use of derivatives in relation to assets used to represent
technical reserves.

The localization rules require that assets representing technical
reserves in respect of EU risks be localized in the EU. The documents of title
must be held in the EU and the assets themselves must comply with the tests for
localization set out in the Insurance Acts and Regulations. The currency
matching rules require that a proportion of the assets representing risks
arising in any currency must be held in assets denominated or readily realizable
in that currency.

RESTRICTIONS ON NON-INSURANCE ACTIVITIES

Under the Insurance Acts and Regulations, Quanta Europe is required to
limit its activities to the business of non-life insurance and operations
arising directly from that business.

BOOKS AND RECORDS

Quanta Europe is required to maintain proper records of its business
at its registered office in Ireland.

IFSRA GUIDELINES

In addition to the Insurance Acts and Regulations, Quanta Europe is
expected to comply with certain guidelines issued by IFSRA from time to time.
The following are the most relevant guidelines:

o All insurers supervised by IFSRA are obliged to appoint a compliance
officer, who must carry out the duties and functions set forth in the
guidelines. The compliance officer may simultaneously hold other
offices within the insurer.

o All directors of insurers supervised by IFSRA are required to certify
to IFSRA on an annual basis that the insurer has complied with all
relevant legal and regulatory requirements throughout the year.

o Every insurer must adopt an appropriate asset management policy having
regard to its liabilities profile.

o All insurers must formulate a clear and prudent policy on the use of
derivatives for all purposes and, furthermore, have controls in place
to ensure that the policy is implemented.

o All non-life insurers are required to provide an annual actuarial
opinion as to the adequacy of their reserves.

o All insurers must carefully evaluate their reinsurance cover and their
selection of appropriate reinsurers.

Other less relevant, but nonetheless applicable, guidelines include
guidelines on the treatment of installment income from premium installment
payment plans, guidelines on the treatment of foreign exchange movements and
guidelines on on-site supervisory visits by IFSRA. We anticipate that further
guidelines will be issued by IFSRA from time to time in the future.

WITHDRAWAL OF AUTHORIZATION

An insurer supervised by IFSRA may have its authorization revoked by
IFSRA, if IFSRA is satisfied that the insurer:

o has not used its authorization for the last 12 months, has expressly
renounced its authorization or has ceased to carry on business covered
by the authorization for more than six months;

o has been convicted of certain offences under the Insurance Acts and
Regulations;

o no longer fulfils the conditions for authorization required by the
Insurance Acts and Regulations;

o has been unable to take measures contained in a restoration plan or
finance scheme envisaged by the Insurance Acts and Regulations;

o fails seriously in its obligations under the Insurance Acts and
Regulations;

o fails to comply with a requirement to produce certain documentation
pursuant to an investigation; or

o fails to comply with a direction from IFSRA as provided for in the
Insurance Acts and Regulations.

IFSRA may also suspend an authorization in certain circumstances. If
IFSRA revokes the authorization of an insurer, the right of that insurer to
continue its activities in another EEA member state, whether by way of freedom
of services or through a right of establishment of a branch, will immediately
cease.

APPROVAL OF DIRECTORS AND MANAGERS

In addition to the restrictions set forth above, IFSRA must approve
the appointment of any new directors or managers of Quanta Europe, including
managers of Quanta U.K.

SUPERVISION, INVESTIGATION AND INTERVENTION

The Insurance Acts and Regulations confer on IFSRA wide-ranging powers
in relation to the supervision and investigation of insurers, including the
following:

o IFSRA has power to require an insurer to submit returns and documents
to it in such form as may be prescribed by regulation and to require
that they be attested by directors and officers of the insurer. IFSRA
may also require that they be attested by independent professionals
and that they be published. Additionally, IFSRA has a right to
disclose any such returns or documents to the supervisory authorities
of other EU Member States;

o IFSRA may require information in relation to the insurer or any
connected body;

o IFSRA has power to direct that an investigation of an insurer's
affairs be carried out in order to be satisfied that the insurer is
complying or has the ability to continue to comply with its
obligations under the Insurance Acts and Regulations. If necessary
IFSRA may seek a High Court order prohibiting the free disposal of an
insurer's assets;

o In certain circumstances, including where IFSRA believes that an
insurer may be unable to meet its liabilities or provide the required
solvency margin, IFSRA may direct the insurer to take measures
including: closing to new business, limiting its premium income,
restricting its investments in certain assets, realizing assets,
maintaining assets in Ireland and any further measures specified in
the direction;

o If IFSRA considers that policyholders' rights are threatened, it can
require the insurer concerned to produce a financial recovery plan,
covering the next three years and to maintain a higher solvency
margin; IFSRA is prohibited from issuing a certificate that the
insurer meets the required solvency margin while it believes that
policyholders' rights are threatened;

o If the solvency margin of the insurer falls below the minimum
guarantee fund, IFSRA must require the insurer to submit a short-term
finance scheme; and

o IFSRA may confer wide ranging powers on "authorized officers" in
relation to insurers for the purpose of the Insurance Acts and
Regulations. These powers include permitting an authorized officer to
search a premises and remove documents. An authorized officer may also
be empowered to compel persons to provide information and
documentation and to prepare a report on specified aspects of the
business or activities of an insurer and other prescribed persons.

Auditors to an insurer have a statutory duty to report to IFSRA in
certain circumstances.

Certain breaches of the Insurance Acts and Regulations may constitute
criminal offences and render the persons found guilty of such offences liable to
fines and/or imprisonment.

CERTAIN OTHER IRISH LAW CONSIDERATIONS

Quanta Europe is subject to the laws and regulations of Ireland. The
Irish Companies Acts, 1963 to 2005 (the "Companies Acts") and the common law
include the following restrictions applicable to Quanta Europe:

o Irish law requires the directors of a company to act in good faith for
the benefit of the company and for example, prohibits the gratuitous
use of corporate assets for the benefit of directors and persons
connected with them;

o Irish company law applies capital maintenance rules. In particular,
Quanta Europe is restricted to declaring dividends only out of
"profits available for distribution." Profits available for
distribution are a company's accumulated realized profits less its
accumulated realized losses. Such profits may not include profits
previously utilized either by distribution or capitalization and such
losses do not include amounts previously written-off in a reduction or
reorganization of capital;

o Irish law restricts a company from entering into certain types of
transactions with its directors and officers by either completely
prohibiting such transactions or permitting them only subject to
conditions;

o Irish law restricts the giving of financial assistance by a company in
connection with the purchase of its own shares or those of its holding
company;

o All Irish companies are obliged to file prescribed returns (including,
in most cases, audited accounts) in the Companies Registration Office
annually and on the happening of certain events such as the creation
of new shares, a change in directors or the passing of certain
shareholder resolutions;

o A private limited company cannot offer shares or debentures to the
public. Quanta Europe is a private limited company;

o A statutory body known as the Office of the Director of Corporate
Enforcement (the "ODCE") has power to carry out investigations into
the affairs of Irish companies in circumstances prescribed in the
Companies Acts. The powers of the ODCE include the prosecution (both
civil and criminal) of persons for suspected breaches of the Companies
Acts; and

o Certain civil and criminal sanctions exist for breaches of the
Companies Acts.

Quanta Europe is also required to comply with laws such as Irish Data
Protection law.

U.K. REGULATION

REGULATION OF QUANTA EUROPE'S BRANCH IN THE U.K.

Under U.K. law, a company may only engage in insurance and/or
reinsurance business if it is authorized to do so. Quanta Europe is permitted to
do so through a U.K. branch office which is one of its sources of business.

REGULATION OF SYNDICATE 4000 AT LLOYD'S

Our Syndicate 4000 at Lloyd's operations are subject to regulation by
the Financial Services Authority, as established by the Financial Services and
Markets Act 2000. Our Syndicate 4000 at Lloyd's operations are also subject to
regulation by the Council of Lloyd's. The Financial Services Authority has been
granted broad authorization and intervention powers as they relate to the
operations of all insurers, including Lloyd's syndicates, operating in the
United Kingdom. Syndicate 4000 and its sole member, our subsidiary, Quanta 4000
Limited are subject to rules imposed under regulations and byelaws made, and
amended from time to time, by the Council of Lloyd's under powers conferred on
it by Lloyd's Act 1982. Lloyd's prescribes, in respect of its managing agents
and corporate members, certain minimum standards relating to their management
and control, solvency and various other

requirements. The Financial Services Authority monitors the Lloyd's market to
ensure that managing agents' compliance with the systems and controls prescribed
by Lloyd's enables those managing agents to comply with its relevant
requirements, and it also regulates managing agents directly. If it appears to
the Financial Services Authority that either Lloyd's is not fulfilling its
regulatory responsibilities, or that managing agents are not complying with the
applicable regulatory sections or market requirements prescribed by Lloyd's, the
Financial Services Authority may exercise broad powers of intervention.

We participate in the Lloyd's market through Syndicate 4000 at
Lloyd's. Chaucer Syndicates Limited is the managing agent for Syndicate 4000.
Quanta 4000 Limited, which has been a corporate member of Lloyd's since December
2004, is the sole member of Syndicate 4000. By entering into a membership
agreement with Lloyd's, Quanta 4000 Limited undertakes to comply with all
Lloyd's byelaws and regulations as well as the provisions of the Lloyd's Acts
and the Financial Services and Markets Act. Syndicate 4000, as well as Quanta
4000 Limited and its directors, are subject to the Lloyd's regulatory regime.

Underwriting capacity of a member of Lloyd's must be supported by
providing a deposit in the form of cash, securities or letters of credit (which
are referred to as "Funds at Lloyd's") in an amount determined by Lloyd's equal
to a specified percentage of the member's underwriting capacity. This amount is
determined by Lloyd's through application of a risk based capital formula. The
consent of the Council of Lloyd's may be required when a syndicate proposes to
increase its underwriting capacity for the following underwriting year. Where an
underwriting year makes a loss, the loss may be met by application of the Funds
at Lloyd's of the members who participated on the underwriting year.

In December 2004, the Financial Services Authority introduced a new
set of rules for the determination of the capital resources requirement for all
insurers. The capital resources requirement is similar in effect to a required
solvency margin. The new rules took effect from December 31, 2004. Lloyd's is
required to apply these rules to members of Lloyd's. Under these requirements,
Lloyd's must demonstrate that each member's capital resources requirement is
covered by that member's capital resources, which consist of its Funds at
Lloyd's and its share of capital resources held at syndicate level, and, to the
extent that those resources are insufficient, the Society's own capital
resources. Under the requirements, the managing agent of the syndicate must
carry out a capital assessment of the syndicate in order to determine whether
any additional capital should be held by the syndicate on account of any
particular risks arising from its business or operational infrastructure. This
assessment (known as an "individual capital assessment") is reviewed and may be
challenged by Lloyd's. It could result in the capital resources requirement of
the member effectively being increased. The need for the member to meet its
capital resources requirement can increase the amount of Funds at Lloyd's
required to be maintained by the member, and therefore the cost of its business
at Lloyd's, and reduce the amount of profits distributed to the member.
Syndicate 4000's individual capital assessment for the year ending December 31,
2006 has been reviewed and approved by Lloyd's. However, as a result of our
recent ratings downgrade by A. M. Best, Lloyd's has informed us that in order
for Syndicate 4000 to continue underwriting in the Lloyd's of London market
during the 2007 underwriting year, Syndicate 4000 must diversify its capital
base with one or more third-party capital sources. This capital, including the
third-party source, must be in place by November 30, 2006. Based on the amount
of capital provided by any third-party source, we believe we will be able to
remove some of the funds we have deposited to support our underwriting capacity
of our Lloyd's syndicate. However, we can make no assurances that we will be
successful in obtaining any third-party source of capital to support our Lloyd's
syndicate. If we fail to meet Lloyd's capital diversification requirements by
November 30, 2006, we will no longer be able to participate in the Lloyd's of
London market in future underwriting years, which will have a material adverse
effect on our business. For further discussion, see "Item 1A. Risk
Factors--Risks Related to our Business--Continued or increased premium levies by
Lloyd's for the Lloyd's central fund and cash calls for trust fund deposits or a
significant downgrade of Lloyd's A.M. Best rating would materially and adversely
affect us."

Ordinarily an underwriting year of a Lloyd's syndicate will accept
business over the course of

one year and then remain open for two further years, before being closed by
"reinsurance to close" into the next underwriting year of the same syndicate or
into an underwriting year of another syndicate. Following reinsurance to close,
any profit of the underwriting year becomes available for distribution to
members, and Lloyd's will release the Funds at Lloyd's of the members to the
extent not required to support other underwriting years on which the members
participate or to meet the loss made by the underwriting year, if it made a
loss. If the managing agent of a Lloyd's syndicate concludes that an
underwriting year cannot be closed as at the end of its third open year by
reinsurance to close or the reinsurance to close cannot be concluded on
commercially acceptable terms, it must determine that the underwriting year
remain open and be placed into run off. While it remains in run off the profits
of the underwriting year will not be distributed to its members (although it is
likely in such a scenario that the underwriting year will make a loss, so that
there will be no profits) and there cannot be a release of the Funds at Lloyd's
of the members without the consent of Lloyd's, such consent only being
considered where a member has surplus Funds at Lloyd's.

The Council of Lloyd's has wide discretionary powers to regulate
members' underwriting at Lloyd's. It may, for instance, change the basis on
which syndicate expenses are allocated or vary the Funds at Lloyd's ratio or the
investment criteria applicable to the provision of Funds at Lloyd's. Exercising
any of these powers might affect the amount of a corporate member's overall
premium limit (the amount of business which the member is permitted to accept in
any underwriting year) and consequently the return on an investment in the
corporate member in a given underwriting year. In particular, it should be noted
that the annual business plans of a syndicate are subject to the review and
approval of the Lloyd's Franchise Board. The Lloyd's Franchise Board was
formally constituted on January 1, 2003 and has now become the managing agent's
principal interface with the Council of Lloyd's. The main goal of the Franchise
Board is to seek to create and maintain a commercial environment at Lloyd's in
which underwriting risk is prudently managed while providing maximum long term
returns to capital providers.

The reinsurance to close of an underwriting year on which a corporate
member participates does not legally discharge the member from liability for the
insurance obligations of the underwriting year. Instead, it provides to the
member a full indemnity from the reinsuring underwriting year in respect of
these obligations. Therefore, even after all the underwriting years on which a
member has participated have been reinsured to close, the member is required to
stay in existence and to remain a non-underwriting member of Lloyd's.
Accordingly, although Lloyd's will release the member's Funds at Lloyd's, there
nevertheless continues to be an administrative and financial burden for
corporate members between the time of reinsurance to close of the underwriting
years on which they participated and the time their insurance obligations are
extinguished, including the completion of financial accounts in accordance with
the Companies Act 1985.

Whenever a member of Lloyd's is unable to pay its debts to
policyholders, including by the application of its Funds at Lloyd's, such debts
may, at the discretion of the Council of Lloyd's, be paid by the Lloyd's Central
Fund. The Central Fund is also capable of providing other benefits to members of
Lloyd's, such as supplementing their coverage of their capital resources
requirement, where necessary. In order to ensure that the Central Fund is
properly funded, members of Lloyd's are required annually to make contributions
to the Central Fund and to make an interest-bearing subordinated loan to Lloyd's
whose proceeds are held in the Central Fund. Both the contribution and the
amount of the loan are determined as a percentage of the member's underwriting
capacity. If Lloyd's determines that the Central Fund needs to be increased
further, it has the power to require members of Lloyd's to make further Central
Fund contributions of up to 3% of their underwriting capacity. Lloyd's also
makes other charges on its members and the syndicates on which they participate,
including an annual subscription charge and an overseas business charge, and has
power to impose additional charges under Lloyd's Powers of Charging Byelaw.

U.S. REGULATION

We are developing our U.S. business through Quanta Indemnity, a U.S.
licensed insurance

company that is licensed to write insurance and reinsurance in 44 states and is
an accredited reinsurer in Washington D.C., and by writing insurance on an
excess and surplus lines basis in many states in the United States through
Quanta Specialty Lines.

HOLDING COMPANY ACTS

State insurance holding company system statutes and related
regulations provide a regulatory apparatus that is designed to protect the
financial condition of domestic insurers operating within a holding company
system. All insurance holding company statutes require disclosure and, in some
instances, prior approval of material transactions between the domestic insurer
and an affiliate. These transactions typically include sales, purchases,
exchanges, loans and extensions of credit, reinsurance agreements, service
agreements, guarantees and investments between an insurance company and its
affiliates, involving in the aggregate specified percentages of an insurance
company's admitted assets or policyholders surplus, or dividends that exceed
specified percentages of an insurance company's surplus or income.

The state insurance holding company system statutes may discourage
potential acquisition proposals, such as other U.S. insurers whom we may wish to
acquire, and may delay, deter or prevent a change of control of Quanta Holdings,
Quanta U.S. Holdings, Quanta Indemnity or Quanta Specialty Lines including
through transactions, and in particular unsolicited transactions, that we or our
shareholders might consider to be desirable.

Before a person can acquire control of a domestic insurer or
reinsurer, prior written approval must be obtained from the insurance
commissioner of the state where the domestic insurer is domiciled. Prior to
granting approval of an application to acquire control of a domestic insurer,
the state insurance commissioner where the insurer is domiciled will consider
such factors as the financial strength of the applicant, the integrity and
management of the applicant's board of directors and executive officers, the
acquiror's plans for the future operations of the domestic insurer and any
anti-competitive results that may arise from the closing of the acquisition of
control. Generally, state statutes provide that "control" over a domestic
insurer is presumed to exist if any person, directly or indirectly, owns,
controls, holds with the power to vote, or holds proxies representing, ten
percent or more of the voting securities of the domestic insurer. Because a
person acquiring ten percent or more of the common shares of Quanta Holdings
would indirectly acquire the same percentage of Quanta Specialty Lines' and
Quanta Indemnity's common stock, the U.S. insurance change of control laws will
likely apply to such a transaction.

Typically, the holding company statutes will also require each of our
U.S. subsidiaries periodically to file information with state insurance
regulatory authorities, including information concerning capital structure,
ownership, financial condition and general business operations.

REGULATION OF DIVIDENDS AND OTHER PAYMENTS FROM INSURANCE SUBSIDIARIES

The ability of a U.S. insurer to pay dividends or make other
distributions is subject to insurance regulatory limitations of the insurance
company's state of domicile. Generally, these laws require prior regulatory
approval before an insurer may pay a dividend or make a distribution above a
specified level. In many U.S. jurisdictions, including the State of Indiana
where Quanta Specialty Lines is domiciled and the State of Colorado where Quanta
Indemnity is domiciled, this level currently is set at the greater of (1) 10% of
the insurer's statutory surplus as of the end of the last preceding calendar
year or (2) levels of the insurer's net income for the prior calendar year. In
addition, the laws of many U.S. jurisdictions require an insurer to report for
informational purposes to the insurance commissioner of its state of domicile
all declarations and proposed payments of dividends and other distributions to
security holders.

The dividend limitations imposed by the state laws are based on
statutory financial results, determined by using statutory accounting practices
which differ in certain respects from accounting

principles used in financial statements prepared in conformity with U.S. GAAP.
The significant differences relate to treatment of deferred acquisition costs,
deferred income taxes, required investment reserves, reserve calculation
assumptions and surplus notes. In connection with the acquisition of a U.S.
insurer, insurance regulators in the United States often impose, as a condition
to the approval of the acquisition, additional restrictions on the ability of
the U.S. insurer to pay dividends or make other distributions. These
restrictions generally prohibit the U.S. insurer from paying dividends or making
other distributions for a number of years without prior enhanced regulatory
approval.

INSURANCE REGULATORY INFORMATION SYSTEM RATIOS

The NAIC Insurance Regulatory Information System ("IRIS") was
developed by a committee of state insurance regulators and is intended primarily
to assist state insurance departments in executing their statutory mandates to
oversee the financial condition of insurance companies operating in their
respective states. IRIS identifies 11 industry ratios and specifies "usual
values" for each ratio. Departure from the usual values of the ratios can lead
to inquiries from individual state insurance commissioners regarding different
aspects of an insurer's business. Insurers that report four or more unusual
values are generally targeted for regulatory review.

ACCREDITATION

The NAIC has instituted its Financial Regulatory Accreditation
Standards Program ("FRASP") in response to federal initiatives to regulate the
business of insurance. FRASP provides a set of standards designed to establish
effective state regulation of the financial condition of insurance companies.
Under FRASP, a state must adopt certain laws and regulations, institute required
regulatory practices and procedures, and have adequate personnel to enforce
these laws and regulations in order to become an "accredited" state. Accredited
states are not able to accept certain financial examination reports of insurers
prepared solely by the regulatory agency in an unaccredited state.

RISK-BASED CAPITAL REQUIREMENTS

In order to enhance the regulation of insurer solvency, the NAIC
adopted in December 1993 a formula and model law to implement risk-based capital
requirements for property and casualty insurance companies. These risk-based
capital requirements change from time to time and are designed to assess capital
adequacy and to raise the level of protection that statutory surplus provides
for policyholder obligations. The risk-based capital model for property and
casualty insurance companies measures three major areas of risk facing property
and casualty insurers:

o underwriting, which encompasses the risk of adverse loss developments
and inadequate pricing;

o declines in asset values arising from credit risk; and

o declines in asset values arising from investment risks.

Insurers having less statutory surplus than required by the risk-based
capital calculation will be subject to varying degrees of regulatory action,
depending on the level of capital inadequacy. Equity investments in common stock
typically are valued at 85% of their market value under the risk-based capital
guidelines.

Under the approved formula, an insurer's statutory surplus is compared
to its risk-based capital requirement. If this ratio is above a minimum
threshold, no company or regulatory action is necessary. Below this threshold
are four distinct action levels at which a regulator can intervene with
increasing degrees of authority over an insurer as the ratio of surplus to
risk-based capital requirement decreases. The four action levels include:

o insurer is required to submit a plan for corrective action,

o insurer is subject to examination, analysis and specific corrective
action,

o regulators may place insurer under regulatory control, and

o regulators are required to place insurer under regulatory control.

GUARANTY FUNDS AND ASSIGNED RISK PLANS

Most states require all admitted insurance companies to participate in
their respective guaranty funds that cover various claims against insolvent
insurers. Solvent insurers licensed in these states are required to cover the
losses paid on behalf of insolvent insurers by the guaranty funds and are
generally subject to annual assessments in the state by its guaranty fund to
cover these losses. Some states also require licensed insurance companies to
participate in assigned risk plans which provide coverage for automobile
insurance and other lines for insureds which, for various reasons, cannot
otherwise obtain insurance in the open market. This participation may take the
form of reinsuring a portion of a pool of policies or the direct issuance of
policies to insureds. The calculation of an insurer's participation in these
plans is usually based on the amount of premium for that type of coverage that
was written by the insurer on a voluntary basis in a prior year. Participation
in assigned risk pools tends to produce losses which result in assessments to
insurers writing the same lines on a voluntary basis.

CREDIT FOR REINSURANCE

Licensed reinsurers in the United States are subject to insurance
regulation and supervision that is similar to the regulation of licensed primary
insurers. However, the terms and conditions of reinsurance agreements generally
are not subject to regulation by any governmental authority with respect to
rates or policy terms. This contrasts with primary insurance policies and
agreements, the rates and terms of which generally are regulated by state
insurance regulators. As a practical matter, however, the rates charged by
primary insurers do have an effect on the rates that can be charged by
reinsurers.

A primary insurer ordinarily will enter into a reinsurance agreement
only if it can obtain credit for the reinsurance ceded on its statutory
financial statements. In general, credit for reinsurance is allowed in the
following circumstances:

o if the reinsurer is licensed in the state in which the primary insurer
is domiciled or, in some instances, in certain states in which the
primary insurer is licensed;

o if the reinsurer is an "accredited" or otherwise approved reinsurer in
the state in which the primary insurer is domiciled or, in some
instances, in certain states in which the primary insurer is licensed;

o in some instances, if the reinsurer (a) is domiciled in a state that
is deemed to have substantially similar credit for reinsurance
standards as the state in which the primary insurer is domiciled and
(b) meets financial requirements; or

o if none of the above apply, to the extent that the reinsurance
obligations of the reinsurer are secured appropriately, typically
through the posting of a letter of credit for the benefit of the
primary insurer or the deposit of assets into a trust fund established
for the benefit of the primary insurer.

As a result of the requirements relating to the provision of credit
for reinsurance, Quanta

Bermuda and Quanta U.S. Re, Quanta Europe and Quanta U.K. are indirectly subject
to some regulatory requirements imposed by jurisdictions in which ceding
companies are licensed. Because we do not anticipate that Quanta Bermuda, Quanta
U.S. Re, Quanta Europe nor Quanta U.K. will be licensed, accredited or otherwise
approved by or domiciled in any state in the United States, primary insurers are
only willing to cede business to Quanta Bermuda, Quanta U.S. Re, Quanta Europe
or Quanta U.K., if we provide adequate security to allow the primary insurer to
take credit on its balance sheet for the reinsurance it purchases. We typically
provide this security through the posting of a letter of credit or deposit of
assets into a trust fund for the benefit of the primary insurer.

STATUTORY ACCOUNTING PRINCIPLES

Statutory accounting principles, or SAP, is a basis of accounting
developed to assist insurance regulators in monitoring and regulating the
solvency of insurance companies. It is primarily concerned with measuring an
insurer's surplus to policyholders. Accordingly, statutory accounting focuses on
valuing assets and liabilities of insurers at financial reporting dates in
accordance with appropriate insurance law and regulatory provisions applicable
in each insurer's domiciliary state.

U.S. GAAP is concerned with a company's solvency, but it is also
concerned with other financial measurements, such as income and cash flows.
Accordingly, U.S. GAAP gives more consideration to appropriate matching of
revenue and expenses and accounting for management's stewardship of assets than
does SAP. As a direct result, different assets and liabilities and different
amounts of assets and liabilities will be reflected in financial statements
prepared in accordance with U.S. GAAP as opposed to SAP.

Statutory accounting practices established by the NAIC and adopted, in
part, by State Insurance Departments, will determine, among other things, the
amount of statutory surplus and statutory net income of our U.S. insurance
subsidiaries, which will affect, in part, the amount of funds they have
available to pay dividends to us.

OPERATIONS OF QUANTA BERMUDA, QUANTA U.S. RE, QUANTA EUROPE AND QUANTA
U.K.

Quanta Bermuda and Quanta U.S. Re are not, and Quanta Europe and
Quanta U.K., will not be, admitted to do business in the United States. The
insurance laws of each state of the United States and of many other countries
regulate or prohibit the sale of insurance and reinsurance within their
jurisdictions by non-domestic insurers and reinsurers that are not admitted to
do business within such jurisdictions. We do not intend to allow Quanta Bermuda,
Quanta U.S. Re, Quanta Europe and Quanta U.K. to maintain an office or solicit,
advertise, settle claims or conduct other insurance activities in any
jurisdiction without a license, unless they can do so subject to an exemption
from the licensing requirement or as an approved or accredited surplus lines
insurer. We intend to operate Quanta Europe, Quanta U.K., and Quanta Bermuda and
Quanta U.S. Re in compliance with the U.S. state and federal laws; however, it
is possible that a U.S. regulatory agency may raise inquiries or challenges to
these subsidiaries' insurance and reinsurance activities in the future.

FEDERAL REGULATION

Although state regulation is the dominant form of regulation for
insurance and reinsurance business, from time to time Congress has shown concern
over the adequacy and efficiency of the state regulation. Proposals have
included the possible introduction of federal regulation in addition to, or in
lieu of, the current system of state regulation of insurers. Federal legislation
is also being discussed that would require all states to adopt uniform standards
relating to the regulation of products, licensing, rates and market conduct. It
is not possible to predict the future impact of any potential federal
regulations or other possible laws or regulations on our U.S. subsidiaries'
capital and operations, and the enactment of such laws or the adoption of such
regulations could materially adversely affect our business.

The Gramm-Leach-Bailey Act ("GLBA") which made fundamental changes in
the regulation of the financial services industry in the United States was
enacted on November 12, 1999. The GLBA permits the transformation of the already
converging banking, insurance and securities industries by permitting mergers
that combine commercial banks, insurers and securities firms under one holding
company, a "financial holding company." Bank holding companies and other
entities that qualify and elect to be treated as financial holding companies may
engage in activities, and acquire companies engaged in activities, that are
"financial" in nature or "incidental" or "complementary" to such financial
activities. Such financial activities include acting as principal, agent or
broker in the underwriting and sale of life, property, casualty and other forms
of insurance and annuities.

Until the passage of the GLBA, the Glass-Steagall Act of 1933 had
limited the ability of banks to engage in securities-related businesses, and the
Bank Holding Company Act of 1956, as amended had restricted banks from being
affiliated with insurers. With the passage of the GLBA, among other things, bank
holding companies may acquire insurers, and insurance holding companies may
acquire banks. The ability of banks to affiliate with insurers may affect our
U.S. subsidiaries' product lines by substantially increasing the number, size
and financial strength of potential competitors.

The Terrorism Risk Insurance Act of 2002, or TRIA, was enacted by the
U.S. Congress and became effective in November 2002 in response to the
tightening of supply in some insurance markets resulting from, among other
things, the terrorist attacks of September 11, 2001. TRIA generally requires
U.S. property and casualty insurers, including Quanta Indemnity and Quanta
Specialty Lines, to offer terrorism coverage for certified acts of terrorism to
their policyholders at the same limits and terms as for other coverages.
Exclusions or sub-limited coverage may be established, but solely at the
policyholder's discretion. The U.S. Treasury has the power to extend the
application of TRIA to our non-U.S. insurance operating subsidiaries as well.

TRIA created a temporary federal reinsurance program to reduce U.S.
insurers' risk of financial loss from certified acts of terrorism. TRIA's
requirement to offer coverage, as well as the federal reinsurance program, has
been extended and is now scheduled to expire on December 31, 2007. While federal
reinsurance is available, coverage under the federal reinsurance program is
limited. Accordingly, the requirements under TRIA may negatively affect our
results of operation and our business.

MATERIAL TAX CONSIDERATIONS

The following is a summary of our taxation under certain tax laws,
does not purport to be a comprehensive discussion of all the tax considerations
that may be relevant and is for general information only. The discussion is
based upon current law. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could be retroactive and could affect
the tax consequences discussed herein. Statements contained in this report as to
the beliefs, expectations and conditions of Quanta Holdings and its subsidiaries
as to the application of such tax laws or facts represent the view of management
as to the application of such laws and do not represent the opinions of counsel.

YOU SHOULD CONSULT YOUR OWN TAX ADVISOR CONCERNING THE U.S. FEDERAL,
STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF OWNING OUR SECURITIES.

TAXATION OF QUANTA HOLDINGS AND SUBSIDIARIES

CERTAIN BERMUDA TAX CONSIDERATIONS

Bermuda does not currently impose any income, corporation or profits
tax, withholding tax, capital gains tax, capital transfer tax, estate duty or
inheritance tax on us or our shareholders, other than shareholders ordinarily
resident in Bermuda, if any. There is currently no Bermuda withholding or other
tax on principal, interest or dividends paid to holders of the shares, other
than holders ordinarily

resident in Bermuda, if any. We cannot assure you that we or our shareholders
will not be subject to any such tax in the future.

Quanta Holdings has received written assurance dated May 27, 2003 from
the Bermuda Minister of Finance under the Exempted Undertakings Tax Protection
Act 1966 of Bermuda, as amended, if any legislation is enacted in Bermuda
imposing tax computed on profits or income, or computed on any capital asset,
gain or appreciation, or any tax in the nature of estate duty or inheritance
tax, then the imposition of that tax would not be applicable to Quanta Holdings
or to any of its operations, shares, debentures or obligations until March 28,
2016; provided, that the assurance is subject to the condition that it will not
be construed to prevent the application of such tax to people ordinarily
resident in Bermuda, or to prevent the application of any taxes payable by
Quanta Holdings in respect of real property or leasehold interests in Bermuda
held by it. Quanta Bermuda and Quanta U.S. Re also received such written
assurance dated June 23, 2003. We cannot assure you that we will not be subject
to any such tax after March 28, 2016.

CERTAIN IRISH TAX CONSIDERATIONS

We intend that Quanta Europe a company incorporated in Ireland, will
be managed and controlled, in Ireland and, therefore, will be resident in
Ireland for Irish tax purposes and subject to Irish corporation tax on its
worldwide profits (including revenue profits and capital gains). Income derived
by Quanta Europe, once authorized, from an Irish trade (that is, a trade that is
not carried on wholly outside of Ireland) will be subject to Irish corporation
tax at the current rate of 12.5%. Other income (that is income from passive
investments, income from non-Irish trades and income from certain dealings in
land) will generally be subject to Irish corporation tax at the current rate of
25%.

The Irish Revenue Commissioners have published a statement indicating
that deposit interest earned by an insurance company on funds held for
regulatory purposes will be regarded as part of its trading income, and
accordingly will be part of the profits taxed at 12.5%. This statement also
indicates acceptance of case law which states that investment income of an
insurance company will likewise be considered as trading income where it is
integral to the insurance trade and available for satisfying the liabilities of
the insurance business.

Other investment income earned by Quanta Europe will generally be
taxed in Ireland at a rate of 25%. Capital gains realized by Quanta Europe will
generally be subject to Irish corporation tax at an effective rate of 20%.

If Quanta Europe carries on a trade in the United Kingdom, or the U.K.
through a permanent establishment in the U.K., profits realized from such a
trade in the U.K. will be subject to Irish corporation tax notwithstanding that
such profits may also be subject to taxation in the U.K. A credit against the
Irish corporation tax liability is available for any U.K. tax paid on such
profits, subject to the maximum credit being equal to the Irish corporation tax
payable on such profits.

If we list our shares on a stock exchange in an EU Member State or
country with which Ireland has a tax treaty, and provided that such shares are
substantially and regularly traded on that exchange, Irish dividend withholding
tax will not apply to dividends and other distributions paid by Quanta Europe,
once capitalized, to Quanta Holdings provided Quanta Holdings has made an
appropriate declaration, in prescribed form, to Quanta Europe.

We expect that none of Quanta Holdings and its subsidiaries, other
than Quanta Europe, will be resident in Ireland for Irish tax purposes unless
the central management and control of such companies is, as a matter of fact,
located in Ireland. A company not resident in Ireland for Irish tax purposes can
be subject to Irish corporation tax if it carries on a trade through a branch or
agency in Ireland or disposes of certain specified assets (e.g., Irish land,
minerals, or mineral rights, or shares deriving the greater part of their value
from such assets). In such cases, the charge to Irish corporation tax is limited
to trading income connected with the branch or agency, and capital gains on the
disposal of

assets used in the branch or agency which are situated in Ireland at or before
the time of disposal, and capital gains arising on the disposal of specified
assets, with tax imposed at the rates discussed above. A company not resident in
Ireland is otherwise subject to Irish income tax at the standard rate, currently
20%, on other taxable income arising from sources within Ireland, and to capital
gains tax at the current rate of 20% of the taxable gain, on disposals of
certain specified assets, Irish land, minerals, exploration and exploitation
rights, and unquoted shares directly or indirectly deriving the greater part of
their value from such assets.

Insurance companies are subject to an insurance premium tax in the
form of a stamp duty charged at 2% of premium income. It applies to general
insurance business, mainly business other than:

o Reinsurance;

o Life insurance;

o Certain, maritime, aviation and transit insurance; and

o Health insurance.

It applies to a premium in respect of a policy where the risk is
located in Ireland. Legislation provides that risk is located in Ireland:

o In the case of insurance of buildings together with their
contents, where the building is in Ireland;

o In the case of insurance of vehicles, where the vehicle is
registered in Ireland;

o In the case of insurance of four months or less duration of
travel or holiday if the policyholder took out the policy in
Ireland; and

Otherwise where the policyholder is resident in Ireland, or if not an
individual, if its head office is in Ireland or its branch to which the
insurance relates is in Ireland.

See "Item 1A. Risk Factors--Risks Related to our Business--We may be
subject to additional Irish tax or U.K. tax."

CERTAIN UNITED KINGDOM TAX CONSIDERATIONS

The following is a summary of certain U.K. tax considerations under
current U.K. law relating to Quanta Holdings and its subsidiaries.

U.K. Taxation of Quanta Holdings, Quanta Bermuda, Quanta Europe,
Quanta U.S. Holdings and Quanta Specialty Lines

U.K. Residence. Neither Quanta Holdings, Quanta Bermuda, Quanta
Europe, Quanta U.S. Holdings nor Quanta Specialty Lines is incorporated in the
U.K. Accordingly, they should not be treated as being resident in the U.K.
unless their central management and control is exercised in the U.K. The concept
of central management and control is indicative of the highest level of control
of a company, which is wholly a question of fact. We intend to manage Quanta
Holdings, Quanta Bermuda, Quanta Europe, Quanta U.S. Holdings, Quanta Specialty
Lines and Quanta Indemnity so they are not resident in the U.K. for U.K.
corporation tax purposes. Quanta 4000, as a company incorporated in the U.K., is
treated as being resident in the U.K. and is subject to U.K. corporation tax on
its worldwide income and gains. The maximum rate of U.K. corporation tax is 30%.

U.K. Permanent Establishment. As a matter of U.K. domestic tax law, a
company not resident in the U.K. for U.K. corporation tax purposes can be
subject to U.K. corporation tax if it carries on a trade in the U.K. through a
permanent establishment in the U.K. but the charge to U.K. corporation tax is
limited to profits (including revenue profits and capital gains) connected with
such permanent establishment. The term "permanent establishment" is defined for
these purposes in a manner that is consistent with various internationally
recognized characteristics commonly used in the U.K.'s double tax treaties. The
maximum rate of U.K. corporation tax is 30%.

We intend that Quanta Europe will operate in such a manner that it
will carry on a trade in the U.K. through a permanent establishment in the U.K.
(i.e. Quanta U.K.). We intend that Quanta Europe will be entitled to the
benefits of the tax treaty between the U.K. and Ireland. On the basis that
Quanta U.K. should constitute a permanent establishment of Quanta Europe in the
U.K. for the purposes of that tax treaty, Quanta Europe will be subject to U.K.
corporation tax to the extent of any profits attributable to the permanent
establishment in the U.K., as determined under the provisions of the U.K. --
Ireland tax treaty.

We intend to operate in such a manner that none of Quanta Holdings nor
any of its subsidiaries (other than Quanta Europe) will carry on a trade in the
U.K. through a permanent establishment in the U.K. Whether a trade is being
carried on in the U.K. through a permanent establishment in the U.K. is an
inherently factual determination. Since U.K. case law and U.K. statute fail to
definitively identify activities that constitute a trade being carried on in the
U.K. through a permanent establishment in the U.K., we cannot assure you that HM
Revenue & Customs will not contend successfully that Quanta Holdings or any of
its subsidiaries (other than Quanta Europe) has been or will be carrying on a
trade in the U.K. through a permanent establishment in the U.K. We believe that
the U.S. subsidiaries of Quanta Holdings qualify for benefits under the tax
treaty between the U.K. and the United States. If any of our U.S. subsidiaries
qualifying for such benefits were to be carrying on a trade in the U.K. through
a U.K. permanent establishment, they would only be subject to U.K. corporation
tax if the U.K. permanent establishment constituted a permanent establishment
for the purposes of that treaty and then only to the extent that any profits
were attributable to that permanent establishment in the U.K. determined in
accordance with the provisions of the U.K. -- United States tax treaty.

The U.K. has no tax treaty with Bermuda and if any of Quanta Holdings
or our subsidiaries in Bermuda were to be carrying on a trade in the U.K.
through a U.K. permanent establishment, they would be subject to U.K.
corporation tax attributable to that permanent establishment in accordance with
the provisions of U.K. tax law.

There are circumstances in which companies that are neither resident
in the U.K. nor entitled to the protection afforded by a tax treaty between the
U.K. and the jurisdiction in which they are resident may be exposed to income
tax in the U.K. on income arising in the U.K. (other than by deduction or
withholding) but we intend to operate in such a manner that none of us will fall
within the charge to income tax in the U.K. (other than by deduction or
withholding) in this respect.

If we or any of our subsidiaries, other than any subsidiary
incorporated in the U.K. as a contact office for Quanta Bermuda, were treated as
being resident in the U.K. for U.K. corporation tax purposes, or, other than
Quanta Europe were to be carrying on a trade in the U.K. through a permanent
establishment in the U.K., the results of our operations and your investment
could be materially adversely affected.

U.K. EXCISE TAXES

The U.K. imposes Insurance Premium Tax, or IPT, on insurance premiums
on policies in respect of risks located in the U.K. Certain types of insurance
risks located in the U.K. are exempt from IPT, including reinsurance. IPT is
generally collected from the insurer, although the economic cost of the IPT is
usually passed to the insured by way of an IPT-inclusive premium. The rate of
IPT is 5% and is based on the amount of the gross premium.

CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following discussion is a summary of certain U.S. federal income
tax considerations relating to Quanta Holdings, Quanta Bermuda, Quanta Europe,
Quanta U.S. Holdings, Quanta Specialty Lines, Quanta Indemnity and Quanta U.S.
Re and the ownership of our shares by investors. As discussed further in this
annual report and based on our expected business, properties, ownership,
organization, source of income and manner of operation, we believe that (1) no
U.S. Person that owns shares in Quanta Holdings directly or indirectly through
foreign entities should be subject to treatment as a 10% U.S. Shareholder of a
controlled foreign corporation, or CFC, and (2) Quanta Holdings should not be
considered a passive foreign investment company, for the period ended December
31, 2003 or for the years ended December 31, 2004 or 2005. We have not sought
and do not intend to seek an opinion of legal counsel as to whether or not we
were a passive foreign investment company for the period ended December 31, 2003
or for the years ended December 31, 2004 or 2005.

This summary is based upon the Internal Revenue Code, the Treasury
Regulations promulgated under the Internal Revenue Code, rulings and other
administrative pronouncements issued by the IRS, judicial decisions, the tax
treaty between the United States and Bermuda, or the "Bermuda Treaty" and the
tax treaty between the United States and Ireland, or the "Irish Treaty", all as
currently in effect, and all of which are subject to differing interpretations
or to change, possibly with retroactive effect. No assurance can be given that
the IRS would not assert, or that a court would not sustain, a position contrary
to any of the tax consequences described below. No advance ruling has been or
will be sought from the IRS regarding any matter discussed in this annual
report. This summary is for general information only, and does not purport to
discuss all aspects of U.S. federal income taxation that may be important to a
particular investor in light of such investor's investment or tax circumstances,
or to investors subject to special tax rules, such as shareholders who own
directly, or indirectly through certain foreign entities or through the
constructive ownership rules of the Internal Revenue Code, 10% or more of the
voting power or value of Quanta Holdings (or how those ownership rules may apply
in certain circumstances), tax-exempt organizations, dealers in securities,
banks, insurance companies, persons that hold shares that are a hedge or that
are hedged against interest rate or insurance risks or that are part of a
straddle or conversion transaction, or persons whose functional currency is not
the U.S. dollar. This summary generally does not discuss the federal alternative
minimum tax and federal taxes other than income tax or other U.S. taxes such as
state or local income taxes. This summary assumes that an investor will acquire
and hold our shares as capital assets, which generally means as property held
for investment. Special rules, not discussed herein, apply to U.S. persons who
are partners in a partnership investing in shares. Prospective investors should
consult their tax advisors concerning the consequences, in their particular
circumstances, of the ownership of shares under U.S. federal, state, local and
other tax laws.

For U.S. federal income tax purposes and purposes of the following
discussion, a "U.S. Person" means (1) a citizen or resident of the United
States, (2) a corporation or other entity created or organized in the United
States or under the laws of the United States or of any of its political
subdivisions, (3) an estate the income of which is subject to U.S. federal
income tax without regard to its source or (4) a trust if a court within the
United States is able to exercise primary supervision over the administration of
the trust and one or more U.S. Persons have the authority to control all
substantial decisions of the trust, as well as certain electing trusts.

U.S. Taxation of Quanta Holdings, Quanta Bermuda, Quanta Europe,
Quanta U.S. Holdings, Quanta Specialty Lines, Quanta U.S. Re and
Quanta Indemnity

U.S. Income and Branch Profits Tax. A foreign corporation deemed to be
engaged in the conduct of a trade or business in the U.S. will generally be
subject to U.S. federal income tax (at a current maximum rate of 35%), as well
as a 30% branch profits tax in certain circumstances, on its income which is
treated as effectively connected with the conduct of that trade or business
unless the corporation is entitled to relief under an applicable income tax
treaty, as discussed below. Quanta Holdings, Quanta Europe and Quanta Bermuda
intend to operate in such a manner that they will not be

considered to be conducting a trade or business within the United States for
purposes of U.S. federal income taxation. Whether a trade or business is being
conducted in the United States is an inherently factual determination. Because
the Internal Revenue Code, Treasury Regulations and court decisions fail to
identify definitively activities that constitute being engaged in a trade or
business in the United States, we cannot assure you that the IRS will not
contend successfully that Quanta Holdings, Quanta Bermuda and/or Quanta Europe
are or will be engaged in a trade or business in the United States. Such income
tax, if imposed, would be based on effectively connected income computed in a
manner generally analogous to that applied to the income of a U.S. corporation,
except that a foreign corporation is entitled to deductions and credits only if
it timely files a U.S. federal income tax return (which requirement may be
waived if the foreign corporation establishes that it acted reasonably and in
good faith in its failure to timely file such return). Quanta Holdings, Quanta
Europe and Quanta Bermuda intend to file protective U.S. federal income tax
returns on a timely basis in order to preserve the right to claim income tax
deductions and credits if it is ever determined that they are subject to U.S.
federal income tax.

An insurance enterprise resident in Bermuda generally will be entitled
to the benefits of the Bermuda Treaty if (1) more than 50% of its shares are
owned beneficially, directly or indirectly, by individual residents of the
United States or Bermuda or U.S. citizens and (2) its income is not used in
substantial part, directly or indirectly, to make disproportionate distributions
to, or to meet certain liabilities of, persons who are neither residents of
either the United States or Bermuda nor U.S. citizens. Quanta Bermuda believes
it is entitled to the benefits of the Bermuda Treaty. Assuming Quanta Bermuda is
entitled to the benefits under the Bermuda Treaty, it will not be subject to
U.S. federal income tax on any insurance income found to be effectively
connected with a U.S. trade or business unless that trade or business is
conducted through a permanent establishment in the United States. Whether
business is being conducted in the United States through a permanent
establishment is an inherently factual determination. Quanta Bermuda intends to
conduct its activities so as not to have a permanent establishment in the United
States, although we cannot assure you that it will achieve this result.

A company resident in Ireland will generally be entitled to the
benefit of the Irish Treaty if (1) more than 50% of its shares are owned
beneficially, directly or indirectly, by individual residents of the United
States or Ireland or U.S. citizens and (2) deductible amounts paid for certain
purposes to persons who are neither residents of either the U.S. or Ireland, nor
U.S. citizens do not exceed 50% of the Irish company's income. An Irish company
which does not meet those standards may nevertheless be entitled to the benefits
of the Irish Treaty with respect to an item of income if the Irish company is
engaged in the active conduct of a trade or business in Ireland, and the item of
income is connected with or incidental to that trade or business. Quanta Europe
believes it is entitled to the benefits of the Irish Treaty. Assuming Quanta
Europe is entitled to the benefits of the Irish Treaty, it will not be subject
to U.S. federal income tax on any income found to be effectively connected with
a U.S. trade or business unless that trade or business is conducted through a
permanent establishment in the United States. Quanta Europe intends to conduct
its activities in a manner so that it does not have a permanent establishment in
the United States, although we cannot assure you that it will achieve this
result.

If a non-U.S. company is characterized as engaged in an insurance
business in the United States, a portion of its net investment income will be
characterized as effectively connected with such U.S. trade or business. The
amount so characterized depends on a formula. It is unclear whether applicable
income tax treaties apply to the characterization of net investment income and,
if so, such benefit would only apply if the non-U.S. insurance company is
eligible for such treaty benefit.

Foreign corporations also are subject to U.S. withholding tax at a
rate of 30% of the gross amount of certain "fixed or determinable annual or
periodical gains, profits and income" derived from sources within the United
States (such as dividends and certain interest on investments), to the extent
such amounts are not effectively connected with the foreign corporation's
conduct of a trade or business in the United States. The tax rate is subject to
reduction by applicable treaties. The

Bermuda Treaty does not provide such a reduction. Dividends, if any, paid by
Quanta U.S. Holdings to Quanta Holdings, therefore, will be subject to 30% U.S.
withholding tax. The United States also imposes an excise tax on insurance and
reinsurance premiums paid to foreign insurers or reinsurers with respect to
risks located in the United States. The rate of tax applicable to premiums paid
to Quanta Bermuda is 4% for insurance premiums and 1% for reinsurance premiums.
The excise tax does not apply to premiums paid to Quanta Europe assuming that
Quanta Europe is entitled to the benefits of the Irish Treaty, to the extent
that Quanta Europe does not reinsure the risk with a reinsurer which is not
entitled to the benefits of a bilateral tax treaty with the United States in
which the United States has waived the excise tax.

Quanta U.S. Holdings is a Delaware corporation and Quanta Specialty
Lines is an Indiana corporation. Quanta U.S. Re is a Bermuda corporation that
will be taxed as a U.S. corporation pursuant to an election under section 953(d)
of the Internal Revenue Code. Each will be subject to taxation in the United
States on its worldwide income at regular corporate rates.

Personal Holding Companies. Quanta Holdings' U.S. subsidiaries could
be subject to additional U.S. tax on a portion of their income earned from U.S.
sources if any of them is considered to be a personal holding company, or "PHC"
for U.S. federal income tax purposes. A corporation generally will be classified
as a PHC for U.S. federal income tax purposes in a given taxable year if (1) at
any time during the last half of such taxable year, five or fewer individuals
(without regard to their citizenship or residency) own or are deemed to own
(pursuant to certain constructive ownership rules) more than 50% of the stock of
the corporation by value and (2) at least 60% of the corporation's adjusted
ordinary gross income, as determined for U.S. federal income tax purposes, for
such taxable year consists of "PHC income." PHC income includes, among other
things, dividends, certain interest, certain royalties, annuities and, under
certain circumstances, rents. For purposes of the 50% test, each partner of an
investment partnership who is an individual will be treated as owning his/her
proportionate share of any stock owned by the partnership. Additionally, certain
entities (such as tax-exempt organizations and pension funds) will be treated as
individuals. The PHC rules contain an exception for foreign corporations.

If any of Quanta Holdings' U.S. subsidiaries were a PHC in a given
taxable year, such corporation would be subject to PHC tax on its "undistributed
PHC income" at a rate of 15%. For taxable years beginning after December 31,
2008, the PHC tax rate would be the highest marginal rate on ordinary income
applicable to individuals.

Although Quanta Holdings believes that none of its U.S. subsidiaries
is a PHC, we cannot provide assurance that this will be the case because of
factors including legal and factual uncertainties regarding the application of
the constructive ownership rules, the makeup of Quanta Holdings' shareholder
base, the gross income of Quanta Holdings' U.S. subsidiaries and other
circumstances that could change the application of the PHC rules to Quanta
Holdings and its subsidiaries. In addition, if any of Quanta Holdings' U.S.
subsidiaries were to become PHCs we cannot be certain that the amount of PHC
income would be immaterial.

EMPLOYEES

As of March 31, 2006, we employ approximately 318 full-time employees.
Approximately 187 employees work in our specialty insurance, specialty marine
and aviation reinsurance programs and structured product lines. They primarily
include underwriting officers, underwriters, actuaries, attorneys, claims
personnel and administrative personnel. Approximately 131 work in our technical
services product line. Of these employees, approximately 87 are professional
staff with degrees in engineering, geological sciences, toxicology, chemistry,
public health, biology, environmental science, and/or environmental management.
Their backgrounds are in industry, consulting, and federal and state regulatory
agencies.

In order to retain the services of Jonathan J.R. Dodd, our chief
financial officer, and a number of other key employees, we have entered into
retention agreements with these employees that provide for specified severance
payments in the event of their termination without cause or following a change
of control. These agreements also contain non-competition and non-solicitation
provisions. However, generally, our other employees do not have non-competition
agreements with us or agreements requiring us to employ them over a fixed term.
Therefore, these other employees may voluntarily terminate their employment with
us at any time and are not restricted from seeking employment with our
competitors or others who may seek their expertise.

ITEM 1A. RISK FACTORS

Because of the following factors, as well as other variables affecting
our operating results, past financial performance may not be a reliable
indicator of future performance, and historical trends should not be used to
anticipate results or trends in future periods. Though we have attempted to list
comprehensively important cautionary risk factors, we wish to caution investors
and others that other factors may in the future prove to be important in
affecting our business or results of operations.

RISKS RELATED TO OUR BUSINESS

ON MARCH 2, 2006, A.M. BEST DOWNGRADED OUR FINANCIAL STRENGTH RATING
TO "B++" (VERY GOOD) AND PLACED OUR RATING UNDER REVIEW WITH NEGATIVE
IMPLICATIONS. OUR CURRENT FINANCIAL STRENGTH RATING OF "B++" (VERY
GOOD) UNDER REVIEW WITH NEGATIVE IMPLICATIONS HAS HAD, AND WILL
CONTINUE TO HAVE, A SIGNIFICANT ADVERSE EFFECT ON OUR ABILITY TO
CONDUCT OUR BUSINESS ALONG OUR CURRENT PRODUCT LINES AND ON OUR
ABILITY TO EXECUTE OUR BUSINESS STRATEGY. AS A RESULT OF THE
DETERIORATION IN OUR BUSINESS, A.M. BEST MAY FURTHER DOWNGRADE OUR
RATINGS.

Competition in the types of insurance and reinsurance business that we
underwrite and reinsure are based on many factors, including the perceived
financial strength of the insurer and ratings assigned by independent rating
agencies. A.M. Best is generally considered to be a significant rating agency
with respect to the evaluation of insurance and reinsurance companies. Its
ratings are based on a quantitative evaluation of a company's performance with
respect to profitability, leverage and liquidity and a qualitative evaluation of
spread of risk, investments, reinsurance programs, reserves and management. In
addition, its rating of us takes into consideration the fact that we have
recently commenced our operations. Insurance ratings are used by customers,
brokers, reinsurers and reinsurance intermediaries as an important means of
assessing the financial strength and quality of insurers. In addition, the
rating of a company seeking reinsurance, also known as a ceding company, may be
adversely affected by the lack of a rating of its reinsurer. Therefore, the lack
of a rating or a poor rating will dissuade a ceding company from reinsuring with
us and will influence a ceding company to reinsure with a competitor of ours. A
decline in a company's rating indicating a reduced financial strength or other
adverse financial developments can cause concern about the viability of the
downgraded insurer among its agents, brokers and policyholders, resulting in a
movement of business away from the downgraded carrier to other stronger or more
highly rated carriers.

On March 2, 2006, A.M. Best announced that it had downgraded the
financial strength rating assigned to Quanta Bermuda and its subsidiaries and
Quanta Europe, to "B++" (very good), under review with negative implications.
The A.M. Best "A" (excellent) rated Lloyd's market, including our Lloyd's
syndicate, was not subject to the rating downgrade. The recent downgrade of our
financial rating has had, and will continue to have, a significant adverse
effect on our ability to conduct our business along our current product lines
and our ability to execute our business strategy. Our recent downgrade will also
have a material negative impact on our ability to retain existing business,
expand our portfolios and renew our existing policies and agreements on terms
advantageous to us or at all. In addition, some of our insurance and many of our
reinsurance contracts contain termination rights triggered by the A.M. Best
rating downgrade. Some of these insurance and reinsurance contracts also require
us to post additional security as a result of the downgrade. Furthermore, many
of our other insurance contracts and certain of our reinsurance contracts
provide for cancellation at the option of the policyholder regardless of our
financial strength rating. A ratings downgrade by A.M. Best below "B++" would
also constitute a default under our credit facility and under certain other
agreements and trigger termination provisions or require the posting of
additional security in many of our other insurance and reinsurance contracts.
The obligations under the credit facility are currently fully secured by
investments and cash. If a default occurs under the credit agreement, our
lenders may require us to cash collateralize a portion or all of the outstanding
letters of credit issued under the facility, which may be accomplished through
the substitution or liquidation of collateral. The lenders would also have the
right, among other things, to cancel outstanding letters of credit issued under
the

facility.

A.M. Best continues to reevaluate its capital adequacy models and
other factors it uses in the evaluation of our business. Additionally, as a
result of the deterioration in our business due to the recent ratings downgrade,
A.M. Best may further downgrade our ratings. We can make no assurances as to
what rating actions A.M. Best may take now or in the future or whether A.M. Best
will further downgrade our rating or will remove any qualification of our
rating.

THE DOWNGRADE OF OUR RATINGS BY A.M. BEST PERMITS CLIENTS TO TERMINATE
THEIR CONTRACTS WITH US. MANY OTHER CLIENTS MAY TERMINATE THEIR
CONTRACTS WITH US REGARDLESS OF OUR FINANCIAL STRENGTH RATING,
INCLUDING THE PROGRAM MANAGERS UNDER OUR PROGRAMS. BASED ON OUR
DISCUSSIONS WITH THE PROGRAM MANAGER OF OUR RESIDENTIAL BUILDERS' AND
CONTRACTORS' PROGRAM, OR HBW PROGRAM, WE EXPECT THAT THE PROGRAM
MANAGER WILL DIVERT A SUBSTANTIAL PORTION OF ITS BUSINESS TO OTHER
CARRIERS DURING 2006.

Certain of our insurance and many of our reinsurance contracts contain
termination rights triggered by the A.M. Best rating downgrade. Furthermore,
many of our other insurance contracts and certain of our reinsurance contracts
provide for cancellation at the option of the policyholder regardless of our
financial strength rating. A cancellation typically results in the termination
of the policy and our ongoing obligations and the return of premiums to our
client that usually approximates our unearned premium reserve as of the date of
the cancellation. Whether a client would exercise such rights would depend,
among other things, on the reasons for the downgrade, the extent of the
downgrade, the prevailing market conditions, whether we have posted security in
respect of our obligations and the pricing and availability of replacement
coverage. We cannot predict in advance how many of our clients will actually
exercise such rights or the effect such cancellations will have on our financial
condition or future prospects. However, depending on the number of contracts
involved, such an effect could be materially adverse. As of March 29, 2006, we
had received notice of cancellation on approximately 2.3% of our in-force
policies, calculated using original contract gross premiums written related to
those cancelled policies as a percentage of total gross premiums written during
2005. Based on our discussions with the program manager under our HBW program,
we understand that it will divert a substantial portion of the HBW program
business to other carriers. As a result, we estimate that the gross and net
premiums written under the HBW program during 2006 will be less than 25% of the
gross and net premiums written during 2005. Gross unearned premiums relating to
these cancellations that we have returned or expect to return to our clients
total approximately $5.0 million. We expect that we will receive additional
cancellations.

The program manager of our HBW program may terminate its agreements
with us regardless of our financial strength. HBW gross premiums written during
the year ended December 31, 2005 totaled approximately $165.9 million, of which
approximately $140.3 million was casualty premium, $15.0 million was warranty
premium and $10.6 million was property premium, by class of risk. HBW net
premiums written during the year ended December 31, 2005 totaled approximately
$108.9 million, of which approximately $84.7 million was casualty premium, $15.0
million was warranty premium and $9.2 million was property premium, by class of
risk. Based on our discussions with the program manager, we understand that it
will divert a substantial portion of the HBW program business to other carriers.
However, we expect to continue to write a small portion of the casualty business
through our Lloyd's syndicate. We understand that the new carriers can begin
writing casualty business in some states beginning in March 2006, but will need
time to file and obtain approval of rate and policy forms with regulatory
authorities in other states in which the program manager is writing. Until the
new carriers are able to obtain these approvals, we will continue to write
casualty business for the program manager. Other than the business that we
intend to write through our Lloyd's syndicate, we expect that substantially all
of the HBW program business will be diverted to other carriers by December 31,
2006. Consequently, we estimate that the gross and net premiums written under
the HBW program during 2006 will be less than 25% of the gross and net premiums
written during 2005. While we expect to be able to continue to write business
through our Lloyd's syndicate, we expect that the premiums

written under our HBW program during 2007 will be significantly less than 2006
as the HBW program manager is able to move that business to new carriers.

AS A RESULT OF THE RECENT DOWNGRADE OF OUR FINANCIAL STRENGTH RATING
BY A.M. BEST, WE ARE CLOSELY ANALYZING OUR BUSINESS LINES, POSITIONING
IN THE MARKET AND INTERNAL OPERATIONS AND IDENTIFYING STEPS WE SHOULD
TAKE TO PRESERVE SHAREHOLDER VALUE AND IMPROVE OUR POSITION, INCLUDING
THE EXPLORATION OF STRATEGIC ALTERNATIVES. THE IMPLEMENTATION OF ANY
CHANGES BASED ON SUCH ANALYSIS OR OF ANY STRATEGIC ALTERNATIVES
INVOLVE SUBSTANTIAL UNCERTAINTIES AND RISK, AND OUR RESULTS OF
OPERATIONS, BUSINESS AND FINANCIAL STRENGTH RATING MAY BE MATERIALLY
AND ADVERSELY IMPACTED IF WE DO NOT SUCCEED IN IMPLEMENTING SUCH
INITIATIVES.

We are exploring strategic alternatives, including the potential sale
of some or all of our business, the run off of certain product lines or the
business or a combination of alternatives. In addition, in anticipation of the
impact of the recent rating action by A.M. Best, we are working diligently to
implement key steps designed to preserve shareholder value. We are closely
analyzing our business lines, their positioning and internal operations, and
identifying steps we should take to improve our position. In this regard, we
plan to continue to operate our environmental consulting services through ESC
and certain program business lines and to continue our operations through the
A.M. Best "A" rated Lloyd's market under our existing Lloyd's syndicate. We are
evaluating whether we continue to operate our remaining business lines, which
may be through the uses of strategic alliances, fronting agreements and other
arrangements. We will also consider running off selected lines or all lines
ourselves as an alternative to sale. In connection with the evaluation of our
business, we are also reviewing if opportunities exist to expand our business to
help diversify our business mix and build our product lines along a middle
market strategy that is supportable with a "B++" rating. These initiatives and
their implementation involve significant uncertainties and risks that may result
in restructuring charges and unforeseen expenses and costs associated with
exiting lines of business and complications or delays, including, among others
things, the risk of failure. We may also face increased competition in any new
markets we may enter. If we do not succeed in implementing the above initiatives
on a timely basis, our results of operations, business and financial strength
rating may be materially and adversely impacted. While our future operating
performance and financial strength rating depends greatly on the success of
these efforts, even if we successfully implement any of these measures, there
can be no assurance that any of these measures alone may improve our results of
operations, preserve shareholder value or maintain or improve our financial
strength rating.

IF OUR BOARD OF DIRECTORS DETERMINES THAT NO OTHER STRATEGIC
ALTERNATIVE WOULD BE IN THE BEST INTERESTS OF OUR SHAREHOLDERS, IT MAY DETERMINE
THAT THE BEST COURSE OF ACTION IS TO RUN OFF ANY OR ALL OF OUR PRODUCT LINES.
UNFAVORABLE CLAIMS EXPERIENCE RELATED TO THE RUN OFF OF ANY OR ALL OF OUR LINES
OF BUSINESS MAY OCCUR AND COULD RESULT IN LOSSES AND POSSIBLY LIQUIDATION.

As a result of the recent downgrade of our financial strength rating
by A.M. Best, we are exploring strategic alternatives, including the potential
sale of some or all of our business, the run off of certain product lines or the
business or a combination of alternatives. If our Board of Directors determines
that no other strategic alternative would be in the best interests of our
shareholders, it may determine that the best course of action is to run off any
or all of our product lines. Unfavorable claims experience related to the run
off of any or all of our lines of business may occur and could result in losses.
Further, we may incur losses attributable to our inability to recover amounts
from retrocessionaires or ceding companies either due to disputes with the
retrocessionaires or ceding companies or their financial condition. If our
reserves for amounts recoverable from retrocessionaires or ceding companies, as
well as reserves associated with the underlying reinsurance exposures are
insufficient, it could result in losses.

Once in run off there are various options available to bring our
business to a conclusion including pursuing an arrangement with policyholders in
which we or an independent third-party estimate and pay out all existing and
contingent liabilities in accordance with the arrangement under a procedure
which is approved by a statutory majority of policyholders. Thereafter, we could
be

liquidated. Under Bermuda law this is referred to as a solvent scheme of
arrangement and is, in effect, a global commutation of our business.

Alternatively, a program of individual commutations could be pursued
with a similar result. Following either a scheme or individual commutation
program, we would be placed into liquidation as a solvent entity (a voluntary
liquidation approved by shareholders). In the event that we were to become
insolvent, we would have to be liquidated under the supervision of the Bermuda
Supreme Court during which a court appointed liquidator of our company may or
may not pursue a scheme of arrangement to shorten the time otherwise required to
wind up our business.

In a winding up or liquidation as described above, a liquidator would
be appointed and would sell or otherwise dispose of our remaining assets, pay
our existing liabilities, including contingent obligations (which would have to
be estimated in advance of payment) and distribute net proceeds, if any, to our
shareholders in one or more liquidation distributions. In a liquidation, we may
not receive any material amounts for the sale or other disposition of our
assets. Further, in a liquidation, we will have significant obligations,
including the costs incurred by the independent liquidator appointed and the
work required to estimate liabilities and realize assets.

Additionally, if we do not generate sufficient revenue to support our
continued operations, we will be required to reduce our cash balance to support
our continued operations and the amount of any liquidation proceeds available
for distribution to our shareholders would thereby be reduced. Accordingly, the
amount and timing of distributions, if any, to shareholders in a liquidation
cannot be determined because such would depend on a variety of factors,
including the amount of proceeds received from any asset sales or dispositions,
the time and amount required to resolve outstanding obligations and the amount
of any reserves for future contingencies. If we were to become insolvent, it is
unlikely that there will be distributions payable to our shareholders.
Shareholders will rank last in order of priority of distribution in a
liquidation.

OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION HAVE BEEN
AND COULD CONTINUE TO BE ADVERSELY AFFECTED BY THE CATASTROPHIC EVENTS
THAT OCCURRED IN 2004 AND 2005, AND FUTURE CATASTROPHIC EVENTS MAY
HAVE A MATERIAL ADVERSE EFFECT ON OUR ABILITY TO WRITE NEW AND RENEWAL
BUSINESS AND ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

Although we are no longer writing property reinsurance business that
is exposed to catastrophes, certain lines of business that we have underwritten,
including marine and aviation reinsurance and environmental, have large
aggregate exposures, including to natural and man-made disasters such as
hurricane, typhoon, windstorm, flood, earthquake, acts of war, acts of terrorism
and political instability. Additionally, we remain in the program business with
property exposure and specie and fine arts products that have exposure to
natural and man-made disasters such as hurricane, typhoon, windstorm, flood,
earthquake, acts of war, acts of terrorism and political instability. Our loss
experience generally has and, despite our exit from the property reinsurance and
the technical risk property insurance markets, we expect that it will continue
to include infrequent events of great severity. Our preliminary estimates of our
exposure to ultimate claim costs associated with Hurricanes Katrina, Rita and
Wilma are based on available information, claims notifications received to date,
industry loss estimates, output from industry models, a review of affected
contracts and discussions with brokers and clients. During the year ended
December 31, 2005, we recognized net losses, including the impact of
reinstatement premiums, from Katrina, Rita and Wilma of $87.4 million and in the
future we may recognize additional net losses related to these and other
catastrophes. If our actual losses from Hurricanes Katrina, Rita and Wilma are
materially greater than our estimated losses, our financial strength rating,
business, results of operations and financial condition could be materially
adversely affected.

We purchase reinsurance for our insurance and reinsurance operations
in order to mitigate the volatility of losses upon our financial results. Based
on our current estimate of losses related to Hurricanes Katrina and Rita, we
have exhausted our reinsurance and retrocessional protection with

respect to Hurricane Katrina and our marine reinsurance with respect to
Hurricane Rita. If our Hurricane Katrina losses prove to be greater than
currently anticipated, we have no further reinsurance and retrocessional
coverage available for that windstorm. If our marine reinsurance losses for
Hurricane Rita prove greater than currently anticipated, we will have no further
retrocessional coverage available for marine reinsurance losses for that
windstorm. Additionally, the occurrence of additional large loss events could
reduce the reinsurance coverage that is available to us and could weaken the
financial condition of our reinsurers, which could have a material adverse
effect on our results of operations.

Losses from these types of catastrophic events could eliminate our
shareholders' equity and statutory surplus (which is the amount remaining after
all liabilities, including loss reserves, are subtracted from all admitted
assets, as determined under statutory accounting principles). Increases in the
values and geographic concentrations of insured property and the effects of
inflation have resulted in increased severity of industry losses in recent years
and we expect that those factors will increase the severity of catastrophe
losses in the future.

WE ARE DEPENDENT ON OUR EXECUTIVES, MEMBERS OF OUR UNDERWRITING TEAMS
AND OTHER KEY EMPLOYEES TO CONTINUE TO OPERATE OUR BUSINESS AND
IDENTIFY, EVALUATE AND COMPLETE ANY STRATEGIC TRANSACTION. WE MAY NOT
BE ABLE TO RETAIN OUR PERSONNEL, WHICH MAY HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS.

The recent downgrade of our financial strength ratings by A.M. Best
and our decision to evaluate strategic alternatives has placed, and will
continue to place, significant demands on our management and other key
employees. Our ability to continue to operate our business and identify,
evaluate and complete any strategic transaction depends on our ability to retain
our executives and key employees, including our teams of underwriters. These
employees may desire to seek new employment as a result of the downgrade of our
financial strength ratings by A.M. Best. Our failure to retain members of our
management team, key employees, including our underwriting teams, and other
personnel could significantly and negatively affect our business and complete
any strategic transaction. In order to retain the services of Jonathan J.R.
Dodd, our chief financial officer, and a number of other key employees, we have
entered into retention agreements with these employees that provide for
specified severance payments in the event of their termination without cause or
following a change of control. However, we do not have an employment agreement
with Robert Lippincott III, our interim chief executive officer and president.
Therefore, our employees, other than those employees with whom we have entered
into a retention agreement, are not restricted from seeking employment with our
competitors or others who may seek their expertise, including newly formed
insurance companies who may be seeking employees as they prepare to enter the
same market segments in which we compete.

AS A RESULT OF RECENT MANAGEMENT CHANGES AND UNCERTAINTIES PERTAINING
TO THESE CHANGES, MANAGEMENT'S ATTENTION COULD BE DIVERTED FROM OUR
OPERATIONS, EMPLOYEE RETENTION COULD BE JEOPARDIZED AND OUR BUSINESS
COULD BE ADVERSELY AFFECTED.

During 2004 and 2005, we have experienced a number of management
changes. Recently, we have appointed an interim chief executive officer and are
searching for a permanent chief executive officer as well as a chief claims
officer. Our future success depends to a large degree on our ability to identify
and retain an experienced and qualified permanent chief executive officer, on
our ability to retain key employees, including our underwriting teams, and on
the ability of our management team to effectively manage our business, retain
employees and integrate with key personnel. While our interim chief executive
officer has been a board member since March 2005, he had not been engaged in the
daily business operations of our company prior to his appointment. As a result
of these management changes and uncertainties pertaining to these changes,
management's attention could be diverted from our operations, employee retention
could be jeopardized and our business could be adversely affected. We are not
able to accurately predict what effect the changes in our management may have on
our company.

WE HAVE MATERIAL WEAKNESSES IN OUR INTERNAL CONTROL OVER FINANCIAL
REPORTING, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO REPORT OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ACCURATELY AND ON A
TIMELY BASIS.

In connection with management's assessment of our internal control
over financial reporting as of December 31, 2005, we have identified material
weaknesses in our internal control. For a discussion of our internal control
over financial reporting and a description of these material weaknesses, see
"Item 9A. Controls and Procedures--Management's Report on Internal Control Over
Financial Reporting."

Material weaknesses in our internal control over financial reporting
could adversely impact our ability to provide timely and accurate financial
information. As a result, we must continue to develop and implement our
remediation plan to address the material weaknesses and to obtain reasonable
assurance regarding the reliability of our financial statements. The recent A.M.
Best downgrade of our financial strength ratings, which is currently requiring
management to devote significant time and resources to analyzing our business
lines, our technology and system needs, our positioning in the market, our
internal operations and potential strategic alternatives, could adversely affect
our ability to retain, attract and integrate members of our management team and
other employees and remediate the material weaknesses we have identified. If we
are unsuccessful in implementing or following our remediation plan, or fail to
update our internal control as our business changes, we may not be able to
timely or accurately report our financial condition, results of operations or
cash flows or maintain effective disclosure controls and procedures. If we are
unable to report financial information timely and accurately or to maintain
effective disclosure controls and procedures, we could be subject to, among
other things, regulatory or enforcement actions by the SEC and Nasdaq, including
a delisting from Nasdaq, securities litigation or events of default under our
credit facilities, and a general loss of investor confidence, any one of which
could adversely affect our business prospects and the valuation of our
securities.

WE ARE EXPOSED TO RISKS RELATING TO EVALUATIONS OF CONTROLS REQUIRED
BY SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002.

We have evaluated our internal controls systems to allow management to
report on, and our independent registered public accounting firm to audit, our
internal controls over financial reporting. We have identified control
deficiencies of varying degrees of severity under applicable SEC and Public
Company Accounting Oversight Board rules and regulations that remain
unremediated. As a public company, we are required to report, among other
things, control deficiencies that constitute a "material weakness" or changes in
internal controls that, or are reasonably likely to, materially affect internal
controls over financial reporting. A "material weakness" is a significant
deficiency, or combination of significant deficiencies that results in more than
a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The report by us of a
material weakness, including the material weaknesses identified in this annual
report, may cause investors to lose confidence in our financial statements and
our stock price may be adversely affected. If we fail to remedy any material
weakness, our financial statements may be inaccurate, we may face restricted
access to the capital markets, and the share price of the common and preferred
shares may be adversely affected.

WE ARE REQUIRED TO POST ADDITIONAL SECURITY UNDER INSURANCE AND
REINSURANCE AGREEMENTS AS A RESULT OF THE RECENT DOWNGRADE OF OUR
FINANCIAL STRENGTH RATING, AND WE MAY REQUIRE ADDITIONAL CAPITAL IN
THE FUTURE, WHICH MAY NOT BE AVAILABLE ON FAVORABLE TERMS OR AT ALL.

the facility, which may be accomplished through the substitution or liquidation
of collateral. The lenders would also have the right, among other things, to
cancel outstanding letters of credit issued under the facility. Further, a
downgrade in our rating below "B++" (very good) will trigger termination
provisions or require the posting of additional security in certain of our other
insurance and reinsurance contracts. As a result, we may be required to post
additional security either through the issuance of letters of credit or the
placement of securities in trust under the terms of those insurance or
reinsurance contracts. Furthermore, many of our insurance contracts and certain
of our reinsurance contracts provide for cancellation at the option of the
policyholder regardless of our financial strength rating. Accordingly, we may
also elect to post security under these other contracts in order to maintain
that business. We currently have net cash and cash equivalent balances and other
investments of approximately $341.9 million that are available to post as
security or place in trust. We cannot assure you that we will be able to
increase the commitment under our existing bank credit facility or obtain
additional credit facilities at terms acceptable to us. We cannot draw letters
of credit or borrow under the credit agreement if we have incurred a material
adverse effect or if a default exists under the agreement. If we fail to
maintain or enter into adequate letter of credit facilities on a timely basis,
we would be required to place securities in trust or similar arrangements, which
would be more difficult and costly to establish and administer.

We may need to raise additional funds through financings in order to
carry out our business operations. We may also require additional capital
because some of the markets in which we place specialty insurance require higher
capital levels than the capital we currently have available. The amount and
timing of these capital requirements will depend on many factors, including our
ability to write new business successfully in accordance with our expectations
and to establish premium rates and reserves at levels sufficient to cover our
losses. At this time, we are not able to quantify the amount of additional
capital we may require in the future or predict the timing of our future capital
needs. Any equity or debt financing, if available at all, may be on terms that
are not favorable to us. If we are able to raise capital through equity
financings, your interest in our company would be diluted, and the securities we
issue may have rights, preferences and privileges that are senior to our current
outstanding securities. If we cannot obtain adequate capital, our business,
financial condition and results of operations will be adversely affected.

IF ACTUAL CLAIMS EXCEED OUR LOSS RESERVES, OUR FINANCIAL RESULTS COULD
BE SIGNIFICANTLY ADVERSELY AFFECTED.

Our success depends upon our ability to accurately assess the risks
associated with the businesses that we insure and reinsure. To the extent actual
claims exceed our expectations we will be required to immediately recognize the
less favorable experience as we become aware of it. This could cause a material
increase in our liabilities and reduction of capital. It is early in our history
and the number and size of reported claims may increase, and their size could
exceed our expectations.

A portion of our business has high attachment points of coverage.
Reserving for losses is inherently complicated in that losses in excess of the
attachment level of our policies are characterized by high severity and low
frequency, and other factors which could vary significantly as claims are
settled. This limits the volume of relevant industry claims experience available
from which to reliably predict ultimate losses following a loss event. In
addition, there always exists a reporting lag between a loss event taking place
and the reporting of the loss to us. These incurred but not reported losses are
inherently difficult to predict. Because of the variability and uncertainty
associated with loss estimation, it is possible that our individual case
reserves for each catastrophic event and other case reserves are incorrect,
possibly materially.

These factors require us to make significant assumptions when
establishing loss reserves. Since we have insufficient past loss experience, we
supplement this information with industry data. This industry data may not match
our risk profile, which introduces a further degree of uncertainty into the
process. Accordingly, actual claims and claim expenses paid may deviate, perhaps
substantially, from the reserve estimates reflected in our financial statements.

In our reinsurance business line, like other reinsurers, we do not
separately evaluate each of the individual risks assumed under reinsurance
treaties. Therefore, we are largely dependent on the original underwriting
decisions made by ceding companies. We are subject to the risk that the ceding
companies may not have adequately evaluated the risks to be reinsured and that
the premiums ceded may not adequately compensate us for the risks we assume.

If our loss reserves are determined to be inadequate, we will be
required to increase loss reserves at the time of such determination with a
corresponding reduction in our net income in the period in which the deficiency
is rectified. It is possible that claims in respect of events that have occurred
could exceed our loss reserves and have a material adverse effect on our results
of operations or our financial condition in general.

THE FAILURE OF ANY OF THE LOSS LIMITATION METHODS WE EMPLOY COULD HAVE
A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION OR OUR RESULTS OF
OPERATIONS.

We seek to limit our loss exposure by writing a number of our
reinsurance contracts on an excess of loss basis, adhering to maximum
limitations on reinsurance written in defined geographical zones, limiting
program size for each client and by prudent underwriting of each program
written. In the case of proportional treaties, we seek per occurrence
limitations or loss ratio caps to limit the impact of losses from any one event.
We cannot be sure that any of these loss limitation methods has been or will be
effective. We also seek to limit our loss exposure by geographic
diversification. Geographic zone limitations involve significant underwriting
judgments, including the determination of the area of the zones and the
inclusion of a particular policy within a particular zone's limits. We cannot
assure you that various provisions of our policies, such as limitations or
exclusions from coverage or choice of forum, will be enforceable in the manner
we intend. Disputes relating to coverage and choice of legal forum may also
arise. Underwriting is inherently a matter of judgment, involving important
assumptions about matters that are inherently unpredictable and beyond our
control, and for which historical experience and probability analysis may not
provide sufficient guidance. One or more catastrophic or other events, such as
the hurricanes in 2004 and 2005, could result in claims that substantially
exceed our expectations, which could have a material adverse effect on our
financial condition or our results of operations, possibly to the extent of
eliminating our shareholders' equity.

WE COMPETE WITH A LARGE NUMBER OF COMPANIES IN THE INSURANCE INDUSTRY
FOR UNDERWRITING REVENUES.

We compete with a large number of other companies in our current
selected lines of business. Our competitors offer the lines of insurance that we
offer or will offer, target the same markets as we do and utilize similar
business strategies. We face competition both from specialty insurance
companies, underwriting agencies and intermediaries, as well as diversified
financial services companies. In addition, newly formed and existing insurance
industry companies have recently raised capital to meet perceived demand in the
current environment and address underwriting capacity issues. Other newly formed
and existing insurance companies may also be preparing to enter the same market
segments in which we compete or raise new capital. Since we have a limited
operating history, many of our competitors have greater name and brand
recognition than we have. Many of them also have more (in many cases
substantially more) capital and greater marketing and management resources than
we have and may offer a broader range of products and more competitive pricing
than we expect to, or will be able to, offer. An increase in capital-raising by
companies in our current or future lines of business could result in stronger
competitors, new entrants to our markets and an excess of capital in the
industry, all of which may make it harder to generate sufficient business at
profitable rates. We cannot assure you that we will be able to timely or
effectively respond to our downgrade to our financial strength ratings by A.M.
Best and implement business strategies in a manner that will generate returns on
capital superior to those of our competitors.

In response to the recent downgrade of our financial strength ratings
by A.M. Best, we may enter new markets and will be subject to competitors in
these new markets who may sell a product at a price that does not cover its
actual costs. If we lower our prices to maintain market share and our premium
rates are not adequate, our profitability will decline, thereby resulting in a
lower return on equity for our shareholders. However, if we do not lower our
prices for similar products, we may not be able to successfully enter those
markets. There are no assurances that in the future we will be able to retain or
attract customers at prices which we consider to be adequate.

Our competitive position is based on many factors, including our
perceived financial strength, ratings assigned by independent rating agencies,
geographic scope of business, client relationships, premiums charged, contract
terms and conditions, products and services offered (including the ability to
design customized programs), speed of claims payment, reputation, experience and
qualifications of employees and local presence. Since we have recently commenced
operations, we may not be able to compete successfully on many of these bases.
If competition limits our ability to write new and renewal business at adequate
rates, our return on capital may be adversely affected.

A number of new, proposed or potential industry developments could
further increase competition in our industry. These developments include:

o programs in which government-sponsored entities provide property
insurance in catastrophe-prone areas or other "alternative
markets" types of coverage; and

o changing practices caused by the Internet, which may lead to
greater competition in the insurance business.

New competition from these developments could cause the supply and/or
demand for insurance or reinsurance to change, which could affect our ability to
price our products at attractive rates and adversely affect our underwriting
results.

WE MAY MISEVALUATE THE RISKS WE SEEK TO INSURE IN THE UNDERWRITING AND
PRICING OF OUR PRODUCTS. IF WE MISEVALUATE THESE RISKS, OUR ACTUAL
INSURED LOSSES MAY BE GREATER THAN OUR LOSS RESERVES, WHICH WOULD
NEGATIVELY IMPACT OUR BUSINESS, REPUTATION, FINANCIAL CONDITION AND
RESULTS OF OPERATION.

We are a Bermuda company formed to provide specialty lines insurance
and reinsurance products on a global basis through our operating subsidiaries.
The market for specialty lines insurance and reinsurance products differs
significantly from the standard market. In general, in the standard market,
insurance rates and forms are highly regulated, products and coverages are
largely uniform and have relatively predictable exposures and companies tend to
compete for customers on the basis of price and service. In contrast, the
specialty market, especially the structured insurance and reinsurance market,
provides coverage for risks that do not fit the underwriting criteria of the
standard carriers. We have formed teams of experienced underwriting officers and
underwriters with specialized knowledge of their respective market segments. Our
success will depend on the ability of these underwriters to accurately assess
the risks associated with the businesses that we insure. Underwriting for
specialty lines and structured insurance and reinsurance products requires us to
make assumptions about matters that are inherently unpredictable and beyond our
control and for which historical experience and probability analysis may not
provide sufficient guidance. Further, underwriting for specialty lines presents
particular difficulties because there is usually limited information available
on the client's loss history for the perils being insured and structured
insurance products frequently involve coverages for multiple years and multiple
business segments. If we fail to adequately evaluate the risks to be insured,
our business, financial condition and results of operations could be materially
and adversely affected.

Significant periods of time often elapse between the occurrence of an
insured loss, the reporting of the loss to an insurer and payment by the insurer
of that loss. As we recognize liabilities

for unpaid losses, we will continue to establish reserves. These reserves
represent estimates of amounts needed to pay reported losses and unreported
losses and the related loss adjustment expense. Loss reserves are only an
estimate of what an insurer anticipates the ultimate costs of claims to be and
do not represent an exact calculation of liability. Estimating loss reserves is
a difficult and complex process involving many variables and subjective
judgments, particularly for new companies, such as ours, that have limited loss
development experience. As part of our reserving process, we review historical
data as well as actuarial and statistical projections and consider the impact of
various factors such as:

o trends in claim frequency and severity;

o changes in operations;

o emerging economic and social trends;

o inflation; and

o changes in the regulatory and litigation environments.

This process assumes that past experience, adjusted for the effects of
current developments and anticipated trends, is an appropriate basis for
predicting future events. There is no precise method, however, for evaluating
the impact of any specific factor on the adequacy of reserves, and actual
results are likely to differ from original estimates. In addition, unforeseen
losses, the type or magnitude of which we cannot predict, may emerge in the
future. To the extent our loss reserves are insufficient to cover actual losses
or loss adjustment expenses, we will have to add to these loss reserves and
incur a charge to our earnings, which could have a material adverse effect on
our financial condition, results of underwriting and cash flows.

In addition, because we, like other reinsurers, do not separately
evaluate each of the individual risks assumed under reinsurance treaties, we are
largely dependent on the original underwriting decisions made by ceding
companies. We are subject to the risk that our ceding companies may not have
adequately evaluated the risks to be reinsured and that the premiums ceded to us
may not adequately compensate us for the risks we assume.

OUR UTILIZATION OF PROGRAM MANAGERS AND OTHER THIRD PARTIES TO SUPPORT
OUR BUSINESS EXPOSES US TO OPERATIONAL AND FINANCIAL RISKS.

In our program product line, we rely on program managers, and other
agents and brokers participating in our programs, to produce and service a
substantial portion of our business in this segment. In these arrangements, we
typically grant the program manager the right to bind us to newly issued
insurance policies, subject to underwriting guidelines we provide and other
contractual restrictions and obligations. Should our managers issue policies
that contravene these guidelines, restrictions or obligations, we could
nonetheless be deemed liable for these policies. We intend to resist claims that
exceed or expand on our underwriting intention, however, it is possible that we
would not prevail in such an action, or that our program managers would be
unable to substantially indemnify us for their contractual breach. We also rely
on our managers, or other third parties we retain, to collect premiums and to
pay valid claims. While we aim to mitigate these risks in the contracts we enter
into, we still have exposure to their credit and operational risk, without
necessarily relieving us of our obligations to potential insureds. We could also
be exposed to potential liabilities relating to the claims practices of the
third-party administrators we have retained to manage claims activity that we
expect to arise in our program operations. Although we have implemented auditing
and other oversight protocols for our program, we cannot assure you that these
measures will be sufficient to alleviate all of these exposures.

We are also subject to the risk that our successful program managers
will not renew their programs with us. Our contracts are generally for defined
terms of as little as one year, and either party can cancel the contract in a
relatively short period of time. We cannot assure you that we will retain the
programs that produce profitable business or that our insureds will renew with
us. Failure to retain or replace these producers would impair our ability to
execute our growth strategy, and our financial results could be adversely
affected. For further discussion of our HBW program, see "Item 1A. Risk
Factors--Risks Related to our Business--The downgrade of our ratings by A.M.
Best permits clients to terminate their contracts with us. Many other clients
may terminate their contracts with us regardless of our financial strength
rating, including the program managers under our programs. Based on our
discussions with the program manager of our residential builders' and
contractors' program, or HBW program, we expect that the program manager will
divert a substantial portion of its business to other carriers during 2006."

OUR BUSINESS IS DEPENDENT UPON INSURANCE AND REINSURANCE BROKERS WHO
USE RATINGS AS AN IMPORTANT FACTOR IN EVALUATING THE FINANCIAL
STRENGTH AND QUALITY OF INSURERS. AS A RESULT OF OUR RECENT FINANCIAL
STRENGTH RATINGS DOWNGRADE, SEVERAL OF OUR IMPORTANT BROKERS HAVE
REMOVED US FROM THEIR APPROVED LISTING. THE FAILURE TO DEVELOP OR
MAINTAIN IMPORTANT BROKER RELATIONSHIPS COULD MATERIALLY ADVERSELY
AFFECT OUR ABILITY TO MARKET OUR PRODUCTS AND SERVICES.

We market almost all of our insurance and reinsurance products (other
than our program business) through brokers, and we derive a significant portion
of our business from a limited number of brokers. Other than our programs, which
contributed 28.1% of our gross premiums written during the year ended December
31, 2005, 15.0% of our gross premiums written were generated by one broker. No
other broker accounted for more than 10% of gross premiums written for the year
ended December 31, 2005. Financial strength ratings are an important factor used
by brokers and other marketing sources in assessing the financial strength and
quality of insurers. As a result of the downgrade of our financial strength
rating by A.M. Best, we have been removed from the approved listing of several
of our important brokers, including two of our largest brokers, Aon Corporation
and Marsh Inc. The downgrade of our financial rating or the continued
qualification of our current rating could continue to cause concern about our
viability among brokers and other marketing sources, resulting in a movement of
business away from us to other stronger or more highly rated carriers.

We are also evaluating whether opportunities exist to expand our
business mix and build our product lines along a middle market strategy. We may
seek to work with existing and new brokers to reach additional customers we can
serve with our underwriting capabilities and our risk management capacity. Our
failure to maintain or develop relationships with brokers in response to the
March 2006 A.M. Best rating action and from whom we expect to receive our
business would have a material adverse effect on us.

OUR RELIANCE ON BROKERS SUBJECTS US TO THEIR CREDIT RISK.

In accordance with industry practice, we anticipate that we will
frequently pay amounts owed on claims under our insurance or reinsurance
contracts to brokers, and these brokers, in turn, will pay these amounts over to
the clients that have purchased insurance or reinsurance from us. If a broker
fails to make such a payment in a significant portion of business that we write,
it is highly likely that we will be liable to the client for the deficiency
under local laws or contractual obligations. Likewise, when the client pays
premiums for these policies to brokers for payment over to us, these premiums
are considered to have been paid and, in most cases, the client will no longer
be liable to us for those amounts, whether or not we actually receive the
premiums from the brokers. Consequently, we will assume a degree of credit risk
associated with brokers around the world with respect to most of our business.

THE IMPACT OF THE INVESTIGATIONS INTO ANTI-COMPETITIVE PRACTICES IN
THE INSURANCE INDUSTRY CANNOT BE PREDICTED AND MAY HAVE A MATERIAL
ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS

AND FINANCIAL CONDITION.

Since October 2004, the industry has seen a number of investigations
by the Office of the Attorney General of the State of New York and a number of
other government and self-regulatory agencies. A number of these investigations
have been settled. We received, and have complied with, requests for information
from the Departments of Insurance of North Carolina and Colorado and from
Lloyd's of London, or Lloyd's. We are unable to predict the impact, if any, that
these investigations and settlements, and any increased regulatory oversight
that might result therefrom, may have on our business and financial results.

CURRENT LEGAL AND REGULATORY ACTIVITIES RELATING TO CERTAIN FINITE
RISK INSURANCE PRODUCTS COULD AFFECT OUR BUSINESS, RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.

Finite risk reinsurance has become the focus of investigations by the
Securities and Exchange Commission and numerous state Attorneys General. Finite
risk reinsurance has been defined as a form of reinsurance in which, among other
things, the time value of money is considered in the product's design and
pricing, in addition to the expected amount of the loss payments.

At this time, other than requiring additional disclosures in the
statutory financial statements of some of our subsidiaries, we are unable to
predict the potential effects, if any, that these investigations may have upon
the insurance and reinsurance markets and industry business practices or what,
if any, changes may be made to laws and regulations regarding the industry and
financial reporting. Any of the foregoing could adversely affect our business,
results of operations and financial condition.

WE COULD FACE UNANTICIPATED LOSSES FROM WAR, TERRORISM AND POLITICAL
UNREST, AND THESE OR OTHER UNANTICIPATED LOSSES COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We may have exposure to unexpected losses resulting from future
man-made catastrophic events, such as acts of war, acts of terrorism and
political instability. Although we may attempt to exclude losses from terrorism
and certain other similar risks from some coverages we write, we may not be
successful in doing so. In addition, we have written, and will continue to write
policies explicitly limiting the exposure of our clients to the credit
worthiness of their commercial trade partners in some emerging markets or to
political uncertainty in those countries which could interfere with the
execution of commercial contracts they have entered into. These risks are
inherently unpredictable and may increase the frequency or severity of losses.
It is difficult to predict the timing of such events or to estimate the amount
of loss that any given occurrence will generate. To the extent that losses from
such risks occur, our financial condition and results of operation could be
materially adversely affected.

ASSESSMENTS AND OTHER SURCHARGES FOR GUARANTY FUNDS AND SIMILAR
ARRANGEMENTS MAY REDUCE OUR PROFITABILITY.

Virtually all states in the U.S. require insurers licensed to do
business therein to bear a portion of the unfunded obligations of impaired or
insolvent insurance companies. These obligations are funded by assessments,
which are levied by guaranty associations or similar entities within the state,
up to prescribed limits, on all member insurers in the state on the basis of the
proportionate share of the premiums written by member insurers in the lines of
business in which the impaired, insolvent or failed insurer was engaged.
Accordingly, the assessments levied on us by the states in which we are licensed
to write insurance may increase if we increase our premiums written in these
states. In addition, as a condition to the ability to conduct business in
certain states, insurance companies are required to participate in that state's
mandatory reinsurance fund. The effect of these assessments and arrangements, or
changes in them, could reduce our profitability in any given period or limit our
ability to maintain or grow our business. Additionally, Lloyd's requires members
to contribute to the

Lloyd's Central Fund. See " Item 1A. Risk Factors--Risks Related to our
Business--Continued or increased premium levies by Lloyd's for the Lloyd's
central fund and cash calls for trust fund deposits or a significant downgrade
of Lloyd's A.M. Best rating would materially and adversely affect us."

CONTINUED OR INCREASED PREMIUM LEVIES BY LLOYD'S FOR THE LLOYD'S
CENTRAL FUND AND CASH CALLS FOR TRUST FUND DEPOSITS OR A SIGNIFICANT
DOWNGRADE OF LLOYD'S A.M. BEST RATING WOULD MATERIALLY AND ADVERSELY
AFFECT US.

We participate in Lloyd's through Syndicate 4000, our Lloyd's segment.
Syndicate 4000 was created in December 2004 and currently writes traditional
specialty insurance products including professional liability (professional
indemnity and directors' and officers' coverage), fidelity and crime (financial
institutions) and specie and fine art. Whenever a member of Lloyd's is unable to
pay its debts to policyholders or to meet certain other obligations, these debts
or obligations may be payable by the Lloyd's Central Fund.

The Lloyd's Central Fund protects Lloyd's policyholders against the
failure of a member of Lloyd's to meet its obligations. The Central Fund is a
mechanism that, in effect, "mutualizes" unpaid liabilities among all members,
whether individual or corporate. The fund is available to back Lloyd's policies
issued after 1992. Lloyd's requires members to contribute to the Central Fund in
the form of an annual contribution and by making, through the syndicates on
which they participate, annual subordinated loans to Lloyd's whose proceeds are
held in the Central Fund. The Council of Lloyd's has discretion to require
members to make further Central Fund contributions of up to 3% of their
underwriting capacity in any one year. Policies issued before 1993 have been
reinsured by Equitas, an independent insurance company authorized by the
Financial Services Authority, or FSA. However, if Equitas were to fail or
otherwise be unable to meet all of its obligations, Lloyd's may take the view
that it is appropriate to apply the Central Fund to discharge those liabilities
Equitas failed to meet. In that case, the Council of Lloyd's may resolve to
impose a special or additional levy on the existing members, including corporate
members such as Quanta 4000 Limited, effectively requiring them to fund the
performance of those obligations.

Additionally, Lloyd's insurance and reinsurance business is subject to
local regulation. Regulators in the United States require Lloyd's to maintain
certain minimum deposits in trust funds as protection for policyholders in the
United States. These deposits may be used to cover liabilities in the event of a
major claim arising in the United States and Lloyd's may require Quanta 4000
Limited to satisfy cash calls to meet claims payment obligations and to maintain
minimum trust fund amounts.

Any premium levy or cash call would increase the expenses of Syndicate
4000 and Quanta 4000 Limited, its corporate member, without providing
compensating revenues and could have a material adverse effect on our results.
The Lloyd's market is currently rated "A" (excellent) by A.M. Best. In the event
that Lloyd's rating is downgraded below "A-" in the future, the downgrade could
have a material adverse effect on our ability to underwrite business through
Syndicate 4000 and on our financial condition or results of operations.

THE AVAILABILITY OF REINSURANCE AND RETROCESSIONAL COVERAGE THAT WE
USE TO LIMIT OUR EXPOSURE TO RISKS MAY BE LIMITED, AND COUNTERPARTY
CREDIT AND OTHER RISKS ASSOCIATED WITH OUR REINSURANCE ARRANGEMENTS
MAY RESULT IN LOSSES WHICH COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

To limit our risk of loss and to mitigate the volatility of losses
upon our financial results, we use reinsurance and retrocessional coverage,
which is reinsurance of a reinsurer's business. The availability and cost of
reinsurance and retrocessional protection is subject to market conditions, which
are beyond our control. Currently, there is a high level of demand for these
arrangements. The occurrence of additional large loss events could reduce the
reinsurance coverage that is available to us and could weaken the financial
condition of our reinsurers which could have a material adverse effect on our
results of operations. Further, this protection may be more costly or difficult
to obtain as a

result of our recent ratings downgrade by A.M. Best. We cannot assure you that
we will be able to renew adequate protection at cost-effective levels in the
future.

As a result of market conditions and other factors, we may not be able
to successfully alleviate risk through reinsurance and retrocessional
arrangements. Further, we will be subject to credit risk with respect to our
reinsurance and retrocessional arrangements because the ceding of risk to
reinsurers and retrocessionaires will not relieve us of our liability to the
clients or companies we insure or reinsure. Our failure to establish adequate
reinsurance or retrocessional arrangements or the failure of our reinsurance or
retrocessional arrangements to protect us from overly concentrated risk exposure
could adversely affect our business, financial condition and results of
operations and could influence A.M. Best's determination with respect to the
rating it assigns to us.

WE MUST CONTINUE TO DEVELOP, IMPLEMENT AND INTEGRATE NEW SOFTWARE AND
SYSTEMS.

Our software systems are not fully developed, implemented or
integrated. We continue to rely on many manual processes, which have an
increased risk of errors and require more controls than we expect to need once
our systems are fully developed, implemented and integrated. A defect or failure
in our controls could have a materially adverse effect on our business. While we
have acquired new software and systems responsible for accounting, claims
management, modeling and other tasks relating to our insurance and reinsurance
operations, we must continue to implement and integrate these software and
systems with each other and with those that we are developing ourselves. In
addition, we must acquire or obtain the right to use additional software and
systems and continue to develop those systems as well as any systems that we are
creating internally. Our failure to acquire, implement or integrate our systems
in a timely and effective manner could impede our ability to achieve our
business strategy, including our strategy to seek business from a broader range
of clients which would produce a larger number of policies resulting in an even
stronger demand on our systems. This failure could significantly and adversely
affect our business, financial condition and results of operations.

WE RELY ON OUR INFORMATION TECHNOLOGY AND TELECOMMUNICATION SYSTEMS,
AND THE FAILURE OF THESE SYSTEMS COULD MATERIALLY AND ADVERSELY AFFECT
OUR BUSINESS.

Our business is highly dependent upon the successful and uninterrupted
functioning of our information technology and telecommunications systems. We
rely on these systems to process new and renewal business, provide customer
service, make claims payments and facilitate collections and cancellations.
These systems also enable us to perform actuarial and other modeling functions
necessary for underwriting and rate development. We believe our technology and
telecommunications systems are critical to our business and our ability to
compete successfully. The failure of these systems, or the termination of a
third-party software license upon which any of these systems is based, could
interrupt our operations or materially impact our ability to evaluate and write
new business. Because our information technology and telecommunications systems
interface with and depend on third-party systems, we cannot be certain that we
will have continued access to these third-party systems and we could experience
service denials if demand for such services exceeds capacity or such third-party
systems fail or experience interruptions. In addition, we cannot make any
assurances that our systems will continue to operate as intended. If sustained
or repeated, a system failure or service denial could result in a deterioration
of our ability to write and process new and renewal business and provide
customer service or compromise our ability to pay claims in a timely manner.
This could result in a material adverse effect on our business.

OUR BUSINESS COULD BE ADVERSELY AFFECTED BY BERMUDA EMPLOYMENT
RESTRICTIONS.

We have hired and may continue to hire a number of non-Bermudians to
work for us in Bermuda. Under Bermuda law, non-Bermudians (other than spouses of
Bermudians) may not engage in any gainful occupation in Bermuda without an
appropriate governmental work permit. Work permits may be granted or extended by
the Bermuda government upon showing that, after proper public

advertisement in most cases, no Bermudian (or spouse of a Bermudian) or a holder
of a permanent resident's certificate or holder of a working resident's
certificate is available who meets the minimum standard requirements for the
advertised position. The Bermuda government recently announced a new policy
limiting the duration of work permits to six years, with certain exemptions for
key employees. While we have been able to obtain work permits that we have
needed for our employees to date, we can not assure you that we will not
encounter difficulties in the future. We may not be able to use the services of
one or more of our key employees if we are not able to obtain work permits for
them, which could have a material adverse effect on our business.

A SIGNIFICANT AMOUNT OF OUR INVESTED ASSETS IS SUBJECT TO MARKET
VOLATILITY.

We invest the premiums we receive from customers. Our investment
portfolio currently contains highly rated and liquid fixed income securities.
Our investment portfolio is invested by several professional investment advisory
management firms under the direction of our management team in accordance with
our investment guidelines and are subject to market-wide risks and fluctuations,
as well as to risks inherent in particular securities. The volatility of our
claims may force us to liquidate securities. The obligations under the credit
facility are currently fully secured by investments and cash. If a default
occurs under the credit agreement, our lenders may require us to cash
collateralize a portion or all of the outstanding letters of credit issued under
the facility, which may be accomplished through the substitution or liquidation
of collateral. These events may cause us to incur capital losses. Our investment
results and, therefore, our financial condition may also be impacted by changes
in the business, financial condition or results of operations of the entities in
which we invest, as well as changes in interest rates, government monetary
policies, general economic conditions and overall market conditions. Further, if
we do not structure our investment portfolio so that it is appropriately matched
with our insurance and reinsurance liabilities, we may be forced to liquidate
investments prior to maturity at a significant loss to cover such liabilities.
Investment losses could significantly decrease our asset base, which will affect
our ability to conduct business.

WE MAY BE ADVERSELY AFFECTED BY INTEREST RATE CHANGES.

Our investment portfolio contains interest rate-sensitive instruments,
such as bonds, which may be adversely affected by changes in interest rates.
Because of the unpredictable nature of losses that may arise under insurance and
reinsurance policies, we expect our liquidity needs will be substantial and may
arise at any time. Increases in interest rates during periods when we sell
investments to satisfy liquidity needs may result in losses. Changes in interest
rates could also have an adverse effect on our investment income and results of
operations. For example, if interest rates decline, reinvested funds will earn
less than expected.

In addition, our investment portfolio includes highly-rated
mortgage-backed securities. As with other fixed income investments, the fair
market value of these securities fluctuates depending on market and other
general economic conditions and the interest rate environment. Changes in
interest rates can expose us to prepayment risks on these investments. In
periods of declining interest rates, mortgage prepayments generally increase and
mortgage-backed securities are prepaid more quickly, requiring us to reinvest
the proceeds at the then current market rates. In periods of increasing interest
rates, these investments are exposed to extension risk, which occurs when the
holders of underlying mortgages reduce the frequency on which they prepay the
outstanding principal before the maturity date and delay any refinancing of the
outstanding principal.

Interest rates are highly sensitive to many factors, including
governmental monetary policies, domestic and international economic and
political conditions and other factors beyond our control. Although we attempt
to take measures to manage the risks of investing in a changing interest rate
environment, we may not be able to mitigate interest rate sensitivity
effectively. Our mitigation efforts include maintaining a high quality portfolio
with a relatively short duration to reduce the effect of interest rate changes
on book value. Despite our mitigation efforts, a significant increase in
interest rates could have a material adverse effect on our book value.

FLUCTUATIONS IN CURRENCY EXCHANGE RATES MAY CAUSE US TO EXPERIENCE
LOSSES.

Our functional currency is the U.S. dollar. Our operating currency
generally is also the U.S. dollar. However, we expect the premiums receivable
and losses payable in respect of a portion of our business will be denominated
in currencies of other countries. We will attempt to manage our foreign currency
risk by seeking to match our liabilities under insurance and reinsurance
policies that are payable in foreign currencies either with forward purchase
contracts or with investments that are denominated in these currencies.

To the extent we believe that it may be practical, we hedge our
foreign currency exposure with respect to potential losses by maintaining assets
denominated in the same currency or entering into forward purchase contracts for
specific currencies. We use forward purchase contracts when we are advised of
known or probable significant losses that will be paid in non-U.S. currencies in
order to manage currency fluctuation exposure. We also use forward purchase
contracts to hedge our non-U.S. dollar currency exposure with respect to
premiums receivable, which will be generally collected over the relevant
contract term to the extent practical and to the extent we do not expect we will
need these receipts to fund potential losses in such currencies. We also make
foreign currency-denominated investments, generally for the purpose of improving
overall portfolio yield. However, we may not be successful in reducing foreign
currency exchange risks. As a result, we may from time to time experience losses
resulting from fluctuations in values of foreign currencies, which could have a
material adverse effect on our results of operations.

OUR RETURNS MAY BE ADVERSELY IMPACTED BY INFLATION.

The effects of inflation could cause the severity of claims to rise in
the future. Our reserve for losses and loss expenses will include assumptions
about future payments for settlement of claims and claims handling expenses,
such as medical treatments and litigation costs. To the extent inflation causes
these costs to increase above reserves established for these costs, we would be
required to increase our loss reserves with a corresponding reduction in our net
income in the period in which the deficiency is identified.

WE HAVE MADE CERTAIN DECISIONS CONCERNING THE ALLOCATION OF OUR
CAPITAL BASE AMONG OUR SUBSIDIARIES. THOSE DECISIONS COULD HAVE A
MAJOR IMPACT ON OUR ABILITY TO MEET OUR BUSINESS OBJECTIVES.

We have established operating subsidiaries in Bermuda, Ireland and the
United States, a branch in the United Kingdom and a syndicate at Lloyd's of
London. We allocate capital among our subsidiaries, branch and syndicate in such
a way as we believe will maximize the composite return to shareholders stemming
from our overall capital base. These capital allocation decisions require us to
make various profitability, risk, operating, regulatory and tax assumptions. If
our assumptions are not correct, we may not allocate our capital optimally. In
light of the regulatory constraints on moving capital, this could adversely
affect our ability to meet our business objectives.

ESC'S RISK ASSESSMENT AND RISK CONSULTING PRODUCTS AND SERVICES COULD
ADVERSELY AFFECT OUR BUSINESS.

The assessment and analysis of environmental liabilities, and the
management, remediation, and engineering of environmental conditions constitute
a significant portion of our technical services business. These businesses
involve risks, including the possibility that we may be liable to clients, third
parties and governmental authorities for clean-up costs, property damage,
personal injuries, breach of contract or breach of warranty claims, fines and
penalties and regulatory action. As a result, we could be subject to substantial
liabilities or fines in the future that could adversely affect our business.

OUR LIABILITY TRANSFER PROGRAM MAY EXPOSE US TO LIABILITY.

From time to time, we have offered a liability assumption program
under which a special-purpose entity assumes specified liabilities associated
with environmental conditions for which we provide consulting services. Our
liability assumption program requires extensive technical skills and judgments
in order to evaluate the significant risks associated with the properties
subject to the program. We will be exposed to substantial liabilities related to
the environmental conditions associated with assuming liabilities with respect
to these properties that could materially adversely affect our financial
position.

ESC'S SERVICES MAY EXPOSE US TO PROFESSIONAL LIABILITY IN EXCESS OF
ITS CURRENT INSURANCE COVERAGE.

ESC may have liability to clients for errors or omissions in the
services it performs. These liabilities could exceed ESC's insurance coverage
and the fees ESC derives from those services. Prior to our acquisition of ESC,
ESC maintained general liability insurance and professional liability insurance.
The cost of obtaining these insurance policies is rising. We cannot assure you
that this insurance will be sufficient to cover any liabilities ESC incurs or
that we will be able to maintain ESC's insurance at reasonable rates or at all.
If we terminate ESC's policies and do not obtain retroactive coverage, we will
be uninsured for claims against ESC made after termination even if these claims
are based on events or acts that occurred during the term of the policy. In
addition, we cannot assure you that we will be able to obtain insurance coverage
for the new services or areas into which we expand ESC's services on favorable
terms or at all.

WE ARE SUBJECT TO EXTENSIVE REGULATION IN BERMUDA, THE UNITED STATES,
IRELAND AND LLOYD'S, WHICH MAY ADVERSELY AFFECT OUR ABILITY TO ACHIEVE
OUR BUSINESS OBJECTIVES. IF WE DO NOT COMPLY WITH THESE REGULATIONS,
WE MAY BE SUBJECT TO PENALTIES, INCLUDING FINES, SUSPENSIONS AND
WITHDRAWALS OF LICENSES, WHICH MAY ADVERSELY AFFECT OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

We are subject to extensive governmental regulation and supervision
and to the regulation and supervision of Lloyd's with respect to Syndicate 4000.
Most insurance regulations are designed to protect the interests of
policyholders rather than shareholders and other investors. These regulations,
generally administered by a department of insurance in each jurisdiction in
which we will do business, relate to, among other things:

o standards of solvency, including risk-based capital measurements;

o licensing of insurers and their agents;

o limits on the size and nature of risks assumed;

o restrictions on the nature, quality and concentration of
investments;

o restrictions on the ability of our insurance company subsidiaries
to pay dividends to us;

o restrictions on our ability to transfer shares in our insurance
company subsidiaries and our Lloyd's subsidiary;

o restrictions on transactions between insurance company
subsidiaries and their affiliates;

o restrictions on the size of risks insurable under a single
policy;

o requiring deposits for the benefit of policyholders;

o approval of policy forms and premium rates;

o requiring certain methods of accounting;

o periodic examinations of our operations and finances;

o prescribing the form and content of records of financial
condition required to be filed; and

o requiring reserves for unearned premium, losses and other
purposes.

Insurance departments also conduct periodic examinations of the
affairs of insurance companies and require the filing of annual and other
reports relating to financial condition, holding company issues and other
matters. These regulatory requirements and the periodic examinations which as a
newly formed group of companies we may be more frequently subject to than more
established companies, may adversely affect or inhibit our ability to achieve
some or all of our business objectives.

In addition, regulatory authorities have relatively broad discretion
to deny or revoke licenses for various reasons, including the violation of
regulations. We intend to base some of our practices on our interpretations of
regulations or practices that we believe are generally followed by the industry.
These practices may turn out to be different from the interpretations of
regulatory authorities. If we do not have the requisite licenses and approvals
or do not comply with applicable regulatory requirements, insurance regulatory
authorities could preclude or temporarily suspend us from carrying on some or
all of our activities or otherwise penalize us. This could adversely affect our
ability to operate our business. Further, changes in the level of regulation of
the insurance or reinsurance industry or changes in the laws or regulations
themselves or interpretations by regulatory authorities could adversely affect
our ability to operate our business.

REGULATION IN THE UNITED STATES. In recent years, the state insurance
regulatory framework in the United States has come under increased federal
scrutiny, and some state legislators have considered or enacted laws that may
alter or increase state authority to regulate insurance companies and insurance
holding companies. Moreover, the National Association of Insurance
Commissioners, which is an association of the insurance regulatory officials of
all 50 states and the District of Columbia, and state insurance regulators
regularly reexamine existing laws and regulations, interpretations of existing
laws and the development of new laws, which may be more restrictive or may
result in higher costs to us than current statutory requirements. In addition,
surplus lines association in various states are asserting themselves more
aggressively. Federal legislation is also being discussed that would require all
states to adopt uniform standards relating to the regulation of products,
licensing, rates and market conduct. We are unable to predict whether any of
these or other proposed laws and regulations will be adopted, the form in which
any such laws and regulations would be adopted, or the effect, if any, these
developments would have on our operations and financial condition.

The offshore insurance and reinsurance regulatory framework recently
has also become subject to increased scrutiny in many jurisdictions, including
in the United States and in various states within the United States. In the
past, there have been congressional and other proposals in the United States
regarding increased supervision and regulation of the insurance industry,
including proposals to supervise and regulate reinsurers domiciled outside the
United States. If Quanta Bermuda or Quanta U.S. Re were to become subject to any
insurance laws and regulations of the United States or any U.S. state, which are
generally more restrictive than those applicable to it in Bermuda, at any time
in the future, they might be required to post deposits or maintain minimum
surplus levels and might be prohibited from engaging in lines of business or
from writing specified types of policies or contracts. Complying with those laws
could have a material adverse effect on our ability to conduct business or on
our results of operations.

REGULATION IN BERMUDA. Quanta Bermuda and Quanta U.S. Re are
registered Bermuda

insurance companies and subject to regulation and supervision in Bermuda. The
applicable Bermuda statutes and regulations generally are designed to protect
insureds and ceding insurance companies, not our shareholders. Quanta Bermuda
and Quanta U.S. Re are not registered or licensed as insurance companies in any
jurisdiction outside Bermuda, conduct business through offices in Bermuda and do
not maintain an office in, and their personnel do not conduct any insurance
activities in, the United States or elsewhere. Inquiries or challenges to the
insurance activities of Quanta Bermuda or Quanta U.S. Re. may be raised in the
future.

REGULATION IN IRELAND. Quanta Europe is a non-life insurance company
incorporated under the laws of Ireland subject to the regulation and supervision
of the Irish Financial Services Regulatory Authority, or IFSRA, under the Irish
Insurance Acts, 1909 to 2000 and the regulations relating to insurance business
and directions made under those regulations, or together, the Insurance Acts and
Regulations. In addition, Quanta Europe is subject to certain additional
supervisory requirements of IFSRA for authorized non-life insurers that fall
outside the strict legislative framework, such as guidelines issued by IFSRA in
2001 requiring actuarial certification of certain reserves. Among other things,
without consent of IFSRA, Quanta Europe is not permitted to reduce the level of
its initial capital, or make any dividend payments or loans. Quanta Europe is
required to maintain a minimum solvency margin and reserves against underwriting
liabilities. Assets constituting these reserves must comply with asset
diversification, localization and currency matching rules. If Quanta Europe
writes credit insurance, it is required to maintain a further equalization
reserve. Additionally, Quanta Europe is required to adhere to IFSRA's policy
restricting the reinsurance business written by a direct insurer. Under this
policy, a direct insurer is prohibited from engaging in reinsurance except to an
extent that is not significant (to maximum 10% to 20% of overall business) and
subject to certain conditions. In practice IFSRA generally expects a direct
insurer to write reinsurance in very limited circumstances. An insurance company
supervised by IFSRA may have its authorization revoked or suspended by IFSRA
under various circumstances, including, among others, if IFSRA determines that
it has not used its authorization for the last 12 months, it has expressly
renounced its authorization, has ceased to carry on business covered by the
authorization for more than six months, no longer fulfills the conditions
required for granting authorization or fails seriously in its obligations under
the Insurance Acts and Regulations. The appointment of the directors and senior
managers of Quanta Europe is subject to prior approval from IFSRA. Changes to
any of the Insurance Acts and Regulations, or to the interpretation of these or
to the additional supervisory requirements of IFSRA referred to above could have
a material adverse effect on our business, financial condition and results of
operations.

REGULATION IN LLOYD'S. The business of Syndicate 4000 is subject to
regulation by the Financial Services Authority, as established by the Financial
Services and Markets Act 2000, through its regulation of the managing agent of
the syndicate and its regulation of the Society of Lloyd's itself. Under this
Act, the Financial Services Authority has broad powers of intervention. The
Financial Services Authority requires that the managing agent of the syndicate
carry out a capital assessment of the syndicate in order to determine whether
any additional capital should be held by the syndicate on account of any
particular risks arising from its business or operational infrastructure. This
assessment (known as an "individual capital assessment") is reviewed and may be
challenged by Lloyd's. Syndicate 4000's individual capital assessment for the
year ending December 31, 2006 has been reviewed and approved by Lloyd's.
However, as a result of our recent ratings downgrade by A.M. Best, Lloyd's has
informed us that in order for Syndicate 4000 to continue underwriting in the
Lloyd's of London market during the 2007 underwriting year, Syndicate 4000 must
diversify its capital base with the addition of one or more third-party capital
sources. This capital, including the third-party source, must be in place by
November 30, 2006. Based on the amount of capital provided by any third-party
source, we believe we will be able to remove some of the funds we have deposited
to support our underwriting capacity of our Lloyd's Syndicate. However, we can
make no assurances that we will be successful in obtaining any third-party
source of capital to support our Lloyd's syndicate. If we fail to meet Lloyd's
capital diversification requirements by November 30, 2006, we will no longer be
able to participate in the Lloyd's of London market in future underwriting
years, which will have a material adverse effect on our business.

The business of Syndicate 4000 is also subject to regulation by the
Council of Lloyd's, and its sole member, our subsidiary Quanta 4000 Limited, is
subject to the rules imposed under regulations and byelaws made, and amended
from time to time, by the Council of Lloyd's under powers conferred on it by
Lloyd's Act 1982. Under these rules, Lloyd's prescribes, in respect of its
managing agents and corporate members, certain minimum standards relating to
their management and control, solvency and various other requirements. The
Financial Services Authority monitors the Lloyd's market to ensure that managing
agents' compliance with the systems and controls prescribed by Lloyd's enables
those managing agents to comply with its relevant requirements. If it appears to
the Financial Services Authority that either Lloyd's is not fulfilling its
regulatory responsibilities, or that managing agents are not complying with the
applicable regulatory sections or market requirements prescribed by Lloyd's, the
Financial Services Authority may exercise broad powers of intervention.

WE MAY BE SUBJECT TO U.S. TAX THAT MAY HAVE A MATERIAL ADVERSE EFFECT
ON OUR RESULTS OF OPERATIONS AND YOUR INVESTMENT.

Quanta Holdings and Quanta Bermuda are Bermuda companies and Quanta
Europe is an Irish company. We believe we are managing our business so that each
of these companies is not treated as engaged in a trade or business within the
United States and, as a result, will not be subject to U.S. tax (other than U.S.
excise tax on insurance and reinsurance premium income attributable to insuring
or reinsuring U.S. risks and U.S. withholding tax on certain U.S. source
investment income). However, because there is considerable uncertainty as to
what activities constitute being engaged in a trade or business within the
United States, we cannot be certain that the U.S. Internal Revenue Service will
not be able to successfully contend that any of Quanta Holdings or its foreign
subsidiaries are engaged in a trade or business in the United States. If Quanta
Holdings or any of its foreign subsidiaries were considered to be engaged in a
business in the United States, we could be subject to U.S. corporate income and
branch profits taxes on the portion of our earnings effectively connected to
such U.S. business, in which case our results of operations and your investment
could be materially adversely affected. See "Item 1. Business--Material Tax
Considerations--Certain U.S. Federal Income Tax Considerations--U.S. Taxation of
Quanta Holdings, Quanta Bermuda, Quanta Europe, Quanta U.S. Holdings, Quanta
Specialty Lines, Quanta U.S. Re and Quanta Indemnity."

Quanta Holdings' U.S. subsidiaries might be subject to additional U.S.
tax on a portion of their income if a subsidiary is considered a personal
holding company, or PHC, for U.S. federal income tax purposes. This status will
depend on whether more than 50% of our shares by value could be deemed to be
owned (under some constructive ownership rules) by five or fewer individuals and
whether 60% or more of the income of any of its U.S. subsidiaries, as determined
for U.S. federal income tax purposes, consists of "personal holding company
income," which is, in general, certain forms of passive and investment income.
We believe based upon information made available to us regarding our shareholder
base that none of Quanta Holdings' subsidiaries should be considered a PHC.
Additionally, we believe we are managing our business to minimize the
possibility that we will meet the 60% income threshold. However, because of the
lack of complete information regarding our ultimate share ownership (i.e., as
determined by the constructive ownership rules for PHCs), we cannot assure you
that none of Quanta Holdings' subsidiaries will be considered PHC or that the
amount of U.S. tax that would be imposed if it were not the case would be
immaterial. See "Item 1. Business--Material Tax Considerations--Certain U.S.
Federal Income Tax Considerations--U.S. Taxation of Quanta Holdings, Quanta
Bermuda, Quanta Europe, Quanta U.S. Holdings, Quanta Specialty Lines, Quanta
U.S. Re and Quanta Indemnity--Personal Holding Companies."

WE MAY BE SUBJECT TO ADDITIONAL IRISH TAX OR U.K. TAX.

If any of our non-Irish companies were considered to be resident in
Ireland, or to be doing business in Ireland, or, in the case of our U.S.
subsidiaries which qualify for the benefits of an existing tax treaty with
Ireland, to be doing business through a permanent establishment in Ireland,
those companies would be subject to Irish tax. If we or any of our subsidiaries
were considered to be resident in the United Kingdom, or to be carrying on a
trade in the United Kingdom through a

permanent establishment in the United Kingdom, those companies would be subject
to United Kingdom tax. If any of our U.S. subsidiaries were subject to Irish tax
or U.K. tax, that tax would generally be creditable against their U.S. tax
liability, subject to limitations. If we or any of our Bermuda subsidiaries were
subject to Irish tax or U.K. tax, that could have a material adverse impact on
our results of operation and on the value of our shares.

THE IMPACT OF BERMUDA'S LETTER OF COMMITMENT TO THE ORGANIZATION FOR
ECONOMIC COOPERATION AND DEVELOPMENT TO ELIMINATE HARMFUL TAX
PRACTICES IS UNCERTAIN AND COULD ADVERSELY AFFECT OUR TAX STATUS IN
BERMUDA.

A number of multinational organizations, including the European Union,
the Financial Action Task Force, the Financial Stability Forum, and the
Organization for Economic Cooperation and Development, which is commonly
referred to as the OECD, have published reports and launched a global dialogue
among member and non-member countries on measures to limit harmful tax
competition. These measures are largely directed at counteracting the effects of
tax havens and preferential tax regimes in countries around the world. Tax haven
jurisdictions that do not cooperate with the OECD could face sanctions imposed
by OECD member countries. In the OECD's report dated June 26, 2000, Bermuda was
not listed as a tax haven jurisdiction because it had previously signed a letter
committing itself to eliminate harmful tax practices by the end of 2005 and to
embrace international tax standards for transparency, exchange of information
and the elimination of any aspects of the regimes for financial and other
services that attract business with no substantial domestic activity. We are not
able to predict what changes will arise from the commitment or whether these
changes will subject us to additional taxes. In addition, we cannot assure you
that the OECD will not adopt measures that will have a negative impact on
Bermuda companies.

WE MAY BECOME SUBJECT TO TAXES IN BERMUDA AFTER MARCH 28, 2016, WHICH
MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND
YOUR INVESTMENT.

The Bermuda Minister of Finance, under the Exempted Undertakings Tax
Protection Act 1966, as amended, of Bermuda, has given each of Quanta Holdings,
Quanta Bermuda and Quanta U.S. Re, an assurance that if any legislation is
enacted in Bermuda that would impose tax computed on profits or income, or
computed on any capital asset, gain or appreciation, or any tax in the nature of
estate duty or inheritance tax, then the imposition of any such tax will not be
applicable to Quanta Holdings, Quanta Bermuda and Quanta U.S. Re or any of their
operations, shares, debentures or other obligations until March 28, 2016. See
"Item 1. Business--Material Tax Considerations--Certain Bermuda Tax
Considerations." Given the limited duration of the Minister of Finance's
assurance, we cannot be certain that we will not be subject to any Bermuda tax
after March 28, 2016.

RISKS RELATED TO THE INDUSTRY

THE INSURANCE AND REINSURANCE BUSINESS IS HISTORICALLY CYCLICAL, AND
WE EXPECT TO EXPERIENCE PERIODS WITH EXCESS UNDERWRITING CAPACITY AND
UNFAVORABLE PREMIUM RATES.

Historically, insurers and reinsurers have experienced significant
fluctuations in operating results due to competition, frequency of occurrence or
severity of catastrophic and other loss events, levels of capacity, general
economic and social conditions and other factors. The supply of insurance and
reinsurance is related to prevailing prices, the level of insured losses and the
level of industry surplus which, in turn, may fluctuate in response to changes
in rates of return on investments being earned in the insurance and reinsurance
industry. As a result, the insurance and reinsurance business historically has
been a cyclical industry characterized by periods of intense price competition
due to excessive underwriting capacity as well as periods when shortages of
capacity permitted favorable premium levels. The supply of insurance and
reinsurance may increase, either due to capital provided by new entrants or by
the commitment of additional capital by existing insurers or reinsurers, which
may cause prices to decrease. Any of these factors could lead to a significant
reduction in premium rates, less favorable policy terms and fewer submissions
for our underwriting services. In addition to

these considerations, changes in the frequency and severity of losses suffered
by insureds and insurers may affect the cycles of the insurance and reinsurance
business significantly. We expect that our returns will be impacted by the
cyclical nature of the insurance and reinsurance industry. The existence of
negative market conditions may affect our ability to write insurance and
reinsurance at rates that we consider appropriate relative to the risk assumed.
If we cannot write our specialty lines of insurance and reinsurance at
appropriate rates, our ability to transact our business would be significantly
and adversely affected.

THE EFFECTS OF EMERGING CLAIM AND COVERAGE ISSUES ON OUR BUSINESS ARE
UNCERTAIN.

As industry practices and legal, judicial, social and other
environmental conditions change, unexpected issues related to claims and
coverage may emerge. These issues may adversely affect our business by either
extending coverage beyond our underwriting intent or by increasing the number or
size of claims. In some instances, these changes may not become apparent until
some time after we have issued insurance or reinsurance contracts that are
affected by the changes. As a result, the full extent of liability under our
insurance or reinsurance contracts may not be known for many years after a
contract is issued.

Recent examples of emerging claims and coverage issues include:

o larger settlements and jury awards against professionals and
corporate directors and officers covered by professional
liability and directors' and officers' liability insurance; and

o a growing trend of plaintiffs targeting property and casualty
insurers in purported class action litigation relating to
claims-handling, insurance sales practices and other practices
related to the conduct of business in our industry.

The effects of these and other unforeseen emerging claim and coverage
issues are extremely hard to predict and could harm our business, financial
condition and results of operations.

RECENT FEDERAL LEGISLATION MAY NEGATIVELY AFFECT OUR RESULTS OF
OPERATION AND OUR BUSINESS.

RISKS RELATED TO OUR SECURITIES

OUR SERIES A PREFERRED SHARES HAVE RIGHTS, PREFERENCES AND PRIVILEGES
SENIOR TO THOSE OF HOLDERS OF OUR COMMON SHARES.

Our series A preferred shares rank senior to our common shares with
respect to the payment of dividends and distributions upon our liquidation,
dissolution or winding-up. So long as any series A preferred shares remain
outstanding, if full dividends for all outstanding series A preferred shares
have not been declared and paid or declared and a sum sufficient for the payment
thereof has not been set aside, then no dividend may be paid or declared on our
common shares and our common shares may not be purchased or redeemed.
Additionally, our series A preferred shares require us to redeem our series A
preferred shares after the occurrence of certain change of control events, which
may have the effect of discouraging or preventing a change of control of us. The
holders of our series A preferred shares will also have voting rights to elect
two directors to our board of directors if dividends on our series A preferred
shares have not been declared by the board of directors and paid for an
aggregate of six full dividend periods (whether or not consecutive).

OUR SERIES A PREFERRED SHARES ARE EQUITY AND ARE SUBORDINATE TO OUR
EXISTING AND FUTURE INDEBTEDNESS.

Our series A preferred shares are equity interests and do not
constitute indebtedness. Consequently, our series A preferred shares rank junior
to all of our indebtedness, such as our junior subordinated debentures and our
secured letter of credit and revolving credit facility, and other non-equity
claims on us with respect to assets available to satisfy our claims, including
in the event of our liquidation, dissolution or winding-up. Our existing and
future indebtedness may restrict payments of dividends on our series A preferred
shares. We may issue additional indebtedness from time to time. Additionally,
unlike indebtedness, where principal and interest would customarily be payable
on specified due dates, in the case of our series A preferred shares (1)
dividends are payable only if declared by our board of directors and (2) as a
corporation, we are subject to restrictions on payments of dividends and
redemption price out of lawfully available funds.

DIVIDENDS ON OUR SERIES A PREFERRED SHARES ARE NON-CUMULATIVE.

Dividends on our series A preferred shares are non-cumulative.
Consequently, if our board of directors (or a committee of the board) does not
authorize and declare a dividend for any dividend period, holders of our series
A preferred shares would not be entitled to receive any such dividend, and such
unpaid dividend will not accrue and will not be payable. We will have no
obligation to pay dividends for a dividend period on or after the dividend
payment date for such period if our board of directors (or a committee of the
board) has not declared such dividend before the related dividend payment date,
whether or not dividends are declared for any subsequent dividend period with
respect to our series A preferred shares.

OUR HOLDING COMPANY STRUCTURE AND CERTAIN REGULATORY AND OTHER
CONSTRAINTS, INCLUDING OUR CREDIT FACILITY, AFFECT OUR ABILITY TO PAY
DIVIDENDS ON OUR SHARES, MAKE PAYMENTS ON OUR INDEBTEDNESS AND OTHER
LIABILITIES AND OUR ABILITY TO REDEEM OUR SERIES A PREFERRED SHARES.

Quanta Holdings is a holding company. As a result, we do not, and will
not, have any significant operations or assets other than our ownership of the
shares of our subsidiaries. Dividends and other permitted distributions from our
operating subsidiaries will be our sole source of funds to pay dividends, if
any, to shareholders, redeem our series A preferred shares and to meet ongoing
cash requirements, including debt service payments and other expenses. Because
we are a holding company, our ability to pay dividends on our shares and to
redeem our series A preferred shares for cash may be limited by restrictions on
our ability to obtain funds through dividends from our subsidiaries. The ability
of our operating subsidiaries to make these payments is limited by the
applicable laws and regulations of the domiciles in which the subsidiaries
operate. These laws and regulations subject our subsidiaries to significant
restrictions and require, among other things, that some of our subsidiaries
maintain minimum solvency requirements and limit the amount of dividends that
these subsidiaries can pay to us. The inability of our operating subsidiaries to
pay dividends in an amount sufficient to enable us to meet our cash requirements
at the holding company level could have a material adverse effect on our
operations and on our ability to pay dividends, redeem our series A

preferred shares and make payments on our indebtedness.

We are subject to Bermuda regulatory constraints that affect our
ability to pay dividends on our shares, redeem our series A preferred shares and
make other payments. Under the Companies Act 1981 of Bermuda, as amended, or the
Companies Act, even though we are solvent and able to pay our liabilities as
they become due, we may not declare or pay a dividend or make a distribution if
we have reasonable grounds for believing that we are, or will after the payment
be, unable to pay our liabilities as they become due or if the realizable value
of our assets will thereby be less than the aggregate of our liabilities and our
issued share capital and share premium accounts.

We have obtained a consent under our current letter of credit and
revolving credit facility for the payment of dividends on our series A preferred
shares. However, the facility prohibits us from paying dividends on our series A
preferred shares so long as there is a default under that agreement. Future
credit agreements or other agreements relating to our indebtedness may also
contain provisions prohibiting or limiting the payment of dividends on our
shares under certain circumstances.

WITHOUT THE APPROVAL BY OUR COMMON SHAREHOLDERS OF A PROPOSAL TO
REDUCE OUR SHARE PREMIUM ACCOUNT AND REALLOCATE CERTAIN CAPITAL TO OUR
CONTRIBUTED SURPLUS ACCOUNT, WE EXPECT TO BE RESTRICTED BY LAW FROM
DECLARING OR PAYING DIVIDENDS TO OUR SHAREHOLDERS, INCLUDING OUR
HOLDERS OF SERIES A PREFERRED SHARES, IN THE FUTURE.

As a result of our losses, for Bermuda company law purposes, we expect
that the realizable value of our assets will no longer exceed the aggregate of
our liabilities and our issued share capital and share premium accounts. So long
as this deficiency continues, we are prohibited by Bermuda company law from
paying dividends or making distributions to our shareholders, including our
holders of series A preferred shares. For further discussion of our share
capital and share premium accounts, see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Financial Condition
and Liquidity--Liquidity--Dividends and Redemptions."

In order for Quanta Holdings to have the flexibility to pay dividends
to shareholders, we are evaluating a proposal to reduce the share premium
account and allocate sums to our contributed surplus account. This reduction of
our share premium account and reallocation to the contributed surplus account
would require the approval of our common shareholders to be effective. If our
common shareholders do not approve any such proposal, we may be restricted by
Bermuda company law from declaring or paying dividends to our holders of series
A preferred shares and other shareholders. We cannot make any assurances that we
will have the ability to declare and pay dividends under Bermuda law to our
shareholders in the future. In addition, even if we submit, and our common
shareholders approve, any proposal and we are permitted by law to declare and
pay dividends, we cannot assure you that future losses or other events could not
impair our ability to pay dividends to our shareholders.

UNDER CERTAIN LIMITED CIRCUMSTANCES, WE ARE OBLIGATED TO REDEEM OR
PURCHASE OUR SERIES A PREFERRED SHARES. PRIOR TO DECEMBER 15, 2010, WE
MAY REDEEM SOME OR ALL OF OUR SERIES A PREFERRED SHARES ONLY UNDER
CERTAIN LIMITED CIRCUMSTANCES. ON AND AFTER DECEMBER 15, 2010, AT OUR
OPTION, WE MAY REDEEM SOME OR ALL OF OUR SERIES A PREFERRED SHARES.

Our series A preferred shares have no maturity date or redemption
date. We may be required to offer to redeem the series A preferred shares at a
price of $25.25 per share, plus declared but unpaid dividends and additional
amounts, if any, to the date of redemption upon the occurrence of specified
change of control events. Holders of our series A preferred shares may not
otherwise require us to redeem or repurchase our series A preferred shares under
any circumstances. We may redeem the series A preferred shares before December
15, 2010 for certain tax events. We may also, at our option, on and after
December 15, 2010, redeem some or all of our series A preferred shares at any
time at the redemption price set forth in the Certificate of Designation for our
series A preferred shares. We do not need the consent of the series A preferred
shareholders in order to redeem our

series A preferred shares and may do so at any time after December 15, 2010 that
is advantageous to us. If we redeem our series A preferred shares, holders of
the series A preferred shares may not be able to reinvest the proceeds in
alternative investments that will compensate them in a manner commensurate with
our series A preferred shares.

OUR RESULTS OF OPERATIONS AND REVENUES MAY FLUCTUATE AS A RESULT OF
MANY FACTORS, INCLUDING CYCLICAL CHANGES IN THE INSURANCE AND
REINSURANCE INDUSTRY, WHICH MAY CAUSE THE PRICE OF OUR SHARES TO
DECLINE.

The results of operations of companies in the insurance and
reinsurance industry historically have been subject to significant fluctuations
and uncertainties. Our profitability can be affected significantly by:

o the differences between actual and expected losses that we cannot
reasonably anticipate using historical loss data and other
identifiable factors at the time we price our products;

o volatile and unpredictable developments, including man-made,
weather-related and other natural catastrophes or terrorist
attacks, or court grants of large awards for particular damages;

o cyclicality relating to the demand and supply of insurance and
reinsurance products;

o changes in the level of reinsurance capacity;

o changes in the amount of loss reserves resulting from new types
of claims and new or changing judicial interpretations relating
to the scope of insurers' liabilities; and

o fluctuations in equity markets, interest rates, credit risk and
foreign currency exposure, inflationary pressures and other
changes in the investment environment, which affect returns on
invested assets and may impact the ultimate payout of losses.

In addition, the demand for the types of insurance we will offer can
vary significantly, rising as the overall level of economic activity increases
and falling as that activity decreases, causing our revenues to fluctuate. These
fluctuations in results of operations and revenues may cause the price of our
securities to be volatile.

PROVISIONS IN OUR CHARTER DOCUMENTS MAY REDUCE OR INCREASE THE VOTING
POWER ASSOCIATED WITH OUR SHARES.

Our bye-laws generally provide that common shareholders have one vote
for each common share held by them and are entitled to vote, on a non-cumulative
basis, at all meetings of shareholders. Our Certificate of Designation generally
provides that the holders of our series A preferred shares do not have any
voting rights unless dividends on the series A preferred shares have not been
declared by the board of directors and paid for an aggregate of six full
dividend periods (whether or not consecutive).

Pursuant to a mechanism specified in our bye-laws and Certificate of
Designation, the voting rights exercisable by a shareholder may be limited so
that certain persons or groups are not deemed to hold more than 9.5% of the
voting power conferred by our shares. In addition, our board of directors
retains certain discretion to make adjustments to the aggregate number of votes
attaching to the shares of any shareholder that they consider fair and
reasonable in all the circumstances to ensure that no person will hold more than
9.5% of the voting power represented by our then outstanding shares.

Under these provisions, some shareholders may have the right to
exercise their voting rights limited to less than one vote per share. Moreover,
these provisions could have the effect of reducing

the voting power of certain shareholders who would not otherwise be subject to
the limitation by virtue of their direct share ownership. As a result of any
reduction in the votes of other shareholders, your voting power might increase
above 5% of the aggregate voting power of the outstanding shares, which may
result in your becoming a reporting person subject to Schedule 13D or 13G filing
requirements under the Securities Exchange Act of 1934, as amended, or the
Exchange Act.

We also have the authority under our bye-laws to request information
from any shareholder for the purpose of determining whether a shareholder's
voting rights are to be reduced pursuant to the bye-laws. If a shareholder fails
to respond to our request for information or submits incomplete or inaccurate
information in response to our request, we may, in our sole discretion,
determine that the votes of that shareholder shall be disregarded until the
shareholder provides the requested information.

FUTURE SALES OF COMMON SHARES MAY ADVERSELY AFFECT THEIR PRICE.

Future sales of common shares by our shareholders or us, or the
perception that such sales may occur, could adversely affect the market price of
our common shares. Currently, 69,946,861 common shares are outstanding. As of
March 30, 2006, we have also granted options, performance shares, restricted
shares, and founder warrants for up to 5,740,978 of our common shares. All of
our outstanding common shares, other than 291,262 common shares sold to one of
our directors, Nigel W. Morris, in a private placement and the common shares
subject to awards granted under our 2003 Long Term Incentive Plan, have been
registered pursuant to registration statements. Additionally, 2,542,813 common
shares underlying founder warrants issued in connection with our formation and
capitalization have been registered for resale pursuant to a registration
statement and when and if they are issued, will be freely tradable without
restriction under the Securities Act, assuming they are not held by our
affiliates. The 291,262 shares sold to Mr. Morris have not been registered
pursuant to a registration statement, but we have entered into a registration
rights agreement with Mr. Morris covering these shares.

IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.

Provisions of our organizational documents and in our Certificate of
Designation for our series A preferred shares may discourage, delay or prevent a
merger, tender offer or other change of control that holders of our shares may
consider favorable. These provisions impose various procedural and other
requirements that could make it more difficult for shareholders to effect
various corporate actions. These provisions could:

o have the effect of delaying, deferring or preventing a change in
control of us;

o discourage bids for our securities at a premium over the price;

o adversely affect the price of, and the voting and other rights of
the holders of, our securities; or

o impede the ability of the holders of our securities to change our
management.

U.S. PERSONS WHO OWN OUR SHARES MAY HAVE MORE DIFFICULTY IN PROTECTING
THEIR INTERESTS THAN U.S. PERSONS WHO ARE SHAREHOLDERS OF A U.S.
CORPORATION.

The Companies Act, which applies to us, differs in certain material
respects from laws generally applicable to U.S. corporations and their
shareholders including:

o Interested director transactions. Under Bermuda law and our
bye-laws, any transaction entered into by us in which a director
has an interest is not voidable by us nor can such director be
accountable to us for any benefit realized under that transaction
provided the

nature of the interest is disclosed at the first opportunity at a
meeting of directors, or in writing to the directors. In
addition, our bye-laws allow a director to be taken into account
in determining whether a quorum is present and to vote on a
transaction in which he has an interest following a declaration
of the interest pursuant to the Companies Act unless the chairman
of the meeting determines otherwise. U.S. companies are generally
required to obtain the approval of a majority of disinterested
directors or the approval of shareholders before entering into
any transaction or arrangement in which any of their directors
have an interest, unless the transaction or arrangement is fair
to the company at the time it is authorized by the company's
board or shareholders.

o Certain transactions with significant shareholders. As a Bermuda
company, we may enter into certain business transactions with our
significant shareholders, including asset sales, in which a
significant shareholder receives, or could receive, a financial
benefit that is greater than that received, or to be received, by
other shareholders. Such transactions may be entered into with
prior approval from our board of directors but without obtaining
prior approval from our shareholders. U.S. companies in general
may not enter into business combinations with interested
shareholders, namely certain large shareholders and affiliates,
unless the business combination had been approved by the board in
advance or by a supermajority of shareholders or the business
combination meets specified conditions.

o Shareholders' suits. The rights of shareholders under Bermuda law
are not as extensive as the rights of shareholders under
legislation or judicial precedent in many U.S. jurisdictions.
Class actions and derivative actions are generally not available
to shareholders under the laws of Bermuda. In general, under
Bermuda law, derivative actions are permitted only when the act
complained of is alleged to be beyond the corporate power of the
company, is illegal or would result in the violation of the
company's memorandum of association or bye-laws. In addition,
Bermuda courts would consider permitting a derivative action for
acts that are alleged to constitute a fraud against the minority
shareholders or, for instance, acts that require the approval of
a greater percentage of the company's shareholders than those who
actually approved them.

o Indemnification of directors and officers. Under Bermuda law and
our bye-laws, we may indemnify our directors, officers or any
other person appointed to a committee of the board of directors
(and their respective heirs, executors or administrators) to the
full extent permitted by law against all actions, costs, charges,
liabilities, loss, damage or expense incurred or suffered by such
person by reason of any act done, concurred in or omitted in the
conduct of our business or in the discharge of his/her duties;
provided that such indemnification shall not extend to any matter
involving any fraud or dishonesty (as determined in a final
judgment or decree not subject to appeal) on the part of such
director, officer or other person. Under our bye-laws, each of
our shareholders agrees to waive any claim or right of action,
other than those involving fraud or dishonesty, against us or any
of our officers or directors. In general, U.S. companies may
limit the personal liability of their directors as long as they
acted in good faith and without knowing violation of law.

As a result of these differences, U.S. persons who own our shares may
have more difficulty protecting their interests than U.S. persons who own shares
of a U.S. corporation.

WE ARE A BERMUDA COMPANY AND IT MAY BE DIFFICULT FOR YOU TO ENFORCE
JUDGMENTS AGAINST US OR OUR DIRECTORS AND EXECUTIVE OFFICERS.

We are incorporated under the laws of Bermuda and our business is
based in Bermuda. In addition, some of our officers reside outside the United
States, and all or a substantial portion of our assets and the assets of these
persons are, and will continue to be, located in jurisdictions outside the
United States. As such, it may be difficult or impossible to effect service of
process within the United

States upon us or those persons or to recover against us or them on judgments of
U.S. courts, including judgments predicated upon civil liability provisions of
the U.S. federal securities laws. Further, no claim may be brought in Bermuda
against us or our directors and officers in the first instance for violation of
U.S. federal securities laws because these laws have no extraterritorial
jurisdiction under Bermuda law and do not have force of law in Bermuda. A
Bermuda court may, however, impose civil liability, including the possibility of
monetary damages, on us or our directors and officers if the facts alleged in a
complaint constitute or give rise to a cause of action under Bermuda law.

We have been advised that there is doubt as to whether the courts of
Bermuda would enforce judgments of U.S. courts obtained in actions against us or
our directors and officers predicated upon the civil liability provisions of the
U.S. federal securities laws or original actions brought in Bermuda against us
or these persons predicated solely upon U.S. federal securities laws. Further,
we have been advised that there is no treaty in effect between the United States
and Bermuda providing for the enforcement of judgments of U.S. courts, and there
are grounds upon which Bermuda courts may not enforce judgments of U.S. courts.
Some remedies available under the laws of U.S. jurisdictions, including some
remedies available under the U.S. federal securities laws, may not be allowed in
Bermuda courts as contrary to that jurisdiction's public policy. Because
judgments of U.S. courts are not automatically enforceable in Bermuda, it may be
difficult for you to recover against us based upon such judgments.

HOLDERS OF OUR SHARES WHO OWN 10% OR MORE OF OUR VOTING POWER MAY BE
SUBJECT TO TAXATION UNDER THE "CONTROLLED FOREIGN CORPORATION," OR
CFC, RULES.

Each "10% U.S. Shareholder" of a foreign corporation that is a CFC for
an uninterrupted period of 30 days or more during a taxable year, and that owns
shares in the CFC directly or indirectly through foreign entities on the last
day of the CFC's taxable year, must include in its gross income for U.S. federal
income tax purposes its pro rata share of the CFC's "subpart F income," even if
the subpart income is not distributed. A foreign corporation is considered a CFC
if "10% U.S. Shareholders" own more than 50% of the total combined voting power
of all classes of voting stock of the foreign corporation, or the total value of
all stock of the corporation. A 10% U.S. Shareholder is a U.S. person, as
defined in the Internal Revenue Code, that owns at least 10% of the total
combined voting power of all classes of stock entitled to vote of the foreign
corporation. A CFC also includes a foreign corporation in which more than 25% of
the total combined voting power of all classes of stock (or more than 25% of the
total value of the stock) is owned by 10% U.S. Shareholders, on any day during
the taxable year of such corporation, if the gross amount of premiums or other
consideration for the reinsurance or the issuing of insurance or annuity
contracts generating subpart F income exceeds specified limits. For purposes of
determining whether a corporation is a CFC, and therefore whether the
more-than-50% (or more-than-25%, in the case of insurance income) and 10%
ownership tests have been satisfied, shares owned includes shares owned directly
or indirectly through foreign entities or shares considered owned under
constructive ownership rules. The attribution rules are complicated and depend
on the particular facts relating to each investor.

Furthermore, whenever dividends on our series A preferred shares and
the parity stock then outstanding have not been declared by the board of
directors and paid for an aggregate of at least six dividend periods, whether or
not consecutive, holders would be entitled to certain voting rights. It is
possible that the Internal Revenue Service, or the IRS, could assert that
accrual of these voting rights on default of the series A preferred shares cause
certain U.S. holders of series A preferred shares to be 10% U.S. Shareholders
and us, or any of our foreign subsidiaries, to be a CFC.

Due to the anticipated dispersion of our share ownership and certain
bye-law provisions that impose limitations on the concentration of voting power
of its shares and that authorize the board to purchase its shares under
specified circumstances, we do not believe that we have any 10% U.S.
shareholders. It is possible, however that the IRS could challenge the
effectiveness of these provisions and that a court could sustain such a
challenge.

IF WE DETERMINE THAT YOUR OWNERSHIP OF OUR SHARES MAY RESULT IN
ADVERSE CONSEQUENCES, WE MAY REQUIRE YOU TO SELL YOUR SHARES TO US.

Our bye-laws provide that we have the option, but not the obligation,
to require a shareholder to sell its shares at a purchase price equal to their
fair market value to us, to other shareholders or to third parties if our board
of directors in its absolute discretion determines that the share ownership of
that shareholder may result in adverse tax consequences to us, any of our
subsidiaries or any other shareholder. To the extent possible under the
circumstances, the board of directors will use its best efforts to exercise this
option equally among similarly situated shareholders. Our right to require a
shareholder to sell its shares to us will be limited to the purchase of a number
of shares that we determine is necessary to avoid or cure those adverse tax
consequences.

U.S. PERSONS WHO HOLD SHARES COULD BE SUBJECT TO ADVERSE TAX
CONSEQUENCES IF WE ARE CONSIDERED A "PASSIVE FOREIGN INVESTMENT
COMPANY" FOR U.S. FEDERAL INCOME TAX PURPOSES.

We do not intend to conduct our activities in a manner that would
cause us to become a passive foreign investment company. However, it is possible
that we could be deemed a passive foreign investment company by the IRS for
2003, 2004, 2005 or any future year. If we were considered a passive foreign
investment company it could have material adverse tax consequences for an
investor that is subject to U.S. federal income taxation, including subjecting
the investor to a greater tax liability than might otherwise apply or subjecting
the investor to tax on amounts in advance of when tax would otherwise be
imposed. There are currently no regulations regarding the application of the
passive foreign investment company provisions to an insurance company. New
regulations or pronouncements interpreting or clarifying these rules may be
issued in the future. We cannot predict what impact, if any, this guidance would
have on a shareholder that is subject to U.S. federal income taxation. We have
not sought and do not intend to seek an opinion of legal counsel as to whether
or not we were a passive foreign investment company for the period ended
December 31, 2003 or for the years ended December 31, 2004 or 2005.

U.S. PERSONS WHO HOLD SHARES MAY BE SUBJECT TO U.S. INCOME TAXATION ON
THEIR PRO RATA SHARE OF OUR "RELATED PARTY INSURANCE INCOME."

If:

o Quanta Europe's or Quanta Bermuda's related party insurance
income equals or exceeds 20% of that company's gross insurance
income in any taxable year,

o direct or indirect insureds (and persons related to such
insureds) own (or are treated as owning directly or indirectly)
20% or more of the voting power or value of the shares of Quanta
Europe or Quanta Bermuda, and

o U.S. persons are considered to own in the aggregate 25% or more
of the stock of either corporation by vote or value,

then a U.S. person who owns shares of Quanta Holdings directly or indirectly
through foreign entities on the last day of the taxable year would be required
to include in its income for U.S. federal income tax purposes the shareholder's
pro rata share of Quanta Europe's or Quanta Bermuda's related party insurance
income for the U.S. person's taxable year that includes the end of the
corporation's taxable year determined as if such related party insurance income
were distributed proportionately to such U.S. shareholders at that date
regardless of whether such income is distributed. In addition any related party
insurance income that is includible in the income of a U.S. tax-exempt
organization will be treated as unrelated business taxable income. The amount of
related party insurance income earned by Quanta Europe or Quanta Bermuda
(generally, premium and related investment income from the direct or indirect
insurance or reinsurance of any direct or indirect U.S. shareholder of Quanta
Europe or Quanta Bermuda or any person related to such shareholder) will depend
on a number of

factors, including the geographic distribution of Quanta Europe's or Quanta
Bermuda's business and the identity of persons directly or indirectly insured or
reinsured by Quanta Europe or Quanta Bermuda. Although we do not expect our
related party insurance income to exceed 20% of our gross insurance income in
the foreseeable future, some of the factors which determine the extent of
related party insurance income in any period may be beyond Quanta Europe's or
Quanta Bermuda's control. Consequently, Quanta Europe's or Quanta Bermuda's
related party insurance income could equal or exceed 20% of its gross insurance
income in any taxable year and ownership of its shares by direct or indirect
insureds and related persons could equal or exceed the 20% threshold described
above.

The related party insurance income rules provide that if a shareholder
that is a U.S. person disposes of shares in a foreign insurance corporation that
has related party insurance income (even if the amount of related party
insurance income is less than 20% of the corporation's gross insurance income or
the ownership of its shares by direct or indirect insureds and related persons
is less than the 20% threshold) and in which U.S. persons own 25% or more of the
shares, any gain from the disposition will generally be treated as ordinary
income to the extent of the shareholder's share of the corporation's
undistributed earnings and profits that were accumulated during the period that
the shareholder owned the shares (whether or not such earnings and profits are
attributable to related party insurance income). In addition, such a shareholder
will be required to comply with reporting requirements, regardless of the amount
of shares owned by the shareholder. These rules should not apply to dispositions
of our shares because Quanta Holdings will not itself be directly engaged in the
insurance business and because proposed U.S. Treasury regulations appear to
apply only in the case of shares of corporations that are directly engaged in
the insurance business. However, the IRS might interpret the proposed
regulations in a different manner and the applicable proposed regulations may be
promulgated in final form in a manner that would cause these rules to apply to
dispositions of our shares.

CHANGES IN U.S. FEDERAL INCOME TAX LAW COULD MATERIALLY ADVERSELY
AFFECT AN INVESTMENT IN OUR SHARES.

The U.S. federal income tax laws and interpretations regarding whether
a company is engaged in a trade or business within the United States, or is a
passive foreign investment company or whether U.S. persons would be required to
include in their gross income the subpart F income or the related party
insurance income of a CFC are subject to change, possibly on a retroactive
basis. There are currently no regulations regarding the application of the
passive foreign investment company rules to insurance companies and the
regulations regarding related party insurance income are still in proposed form.
New regulations or pronouncements interpreting or clarifying such rules may be
issued in the future. We cannot be certain if, when or in what form such
regulations or pronouncements may be provided and whether such regulations or
guidance will have a retroactive effect.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements included in this annual report, including those
using words such as "believes," "expects," "intends," "estimates," "projects,"
"predicts," "assumes," "anticipates," "plans," and "seeks" and comparable terms,
are forward-looking statements. The Private Securities Litigation Reform Act of
1995 provides a "safe harbor" for forward-looking statements. Forward-looking
statements are not statements of historical fact and reflect our views and
assumptions as of the date of this annual report regarding future events and
operating performance. Because of our recent ratings downgrade by A.M. Best and
our limited operating history, many statements relating to us and our business,
including statements relating to our position, operations and business
strategies, are forward-looking statements.

All forward-looking statements address matters that involve risks and
uncertainties. There are important factors that could cause our actual results
to differ materially from those indicated in these statements. We believe that
these factors include but are not limited to the following:

o A.M. Best has recently downgraded our financial strength rating
to "B++" (very good) and placed our rating under review with
negative implications. We are experiencing a significant loss of
business and business opportunities from the recent downgrade and
qualification of our financial strength rating. Our current
financial strength rating of "B++" (very good), under review with
negative implications has had, and will continue to have, a
significant adverse effect on our ability to conduct our business
in our current product lines. In addition, certain of our
insurance and many of our reinsurance contracts contain
termination rights, which have been triggered by the A.M. Best
rating downgrade. Some of the insurance and reinsurance contracts
also require us to post additional security as a result of the
downgrade. Furthermore, many of our other insurance contracts and
certain of our reinsurance contracts provide for cancellation at
the option of the policyholder regardless of our financial
strength rating. A downgrade in our rating below "B++" (very
good) will cause a default in our credit facility and trigger
termination provisions or require the posting of additional
security in many of our other insurance and reinsurance
contracts. The obligations under the credit facility are
currently fully secured by investments and cash. If a default
occurs under the credit agreement, our lenders may require us to
cash collateralize a portion or all of the outstanding letters of
credit issued under the facility, which may be accomplished
through the substitution or liquidation of collateral. The
lenders would also have the right, among other things, to cancel
outstanding letters of credit issued under the facility;

o we believe that A.M. Best continues to reevaluate its capital
adequacy models and other factors it uses in its evaluation of
our business. As a result of the deterioration in our business
due to the recent downgrade of our financial strength ratings,
A.M. Best may further downgrade our ratings. Accordingly, there
can be no assurance as to what additional rating actions A.M.
Best may take in the future or whether A.M. Best will further
downgrade our ratings or will remove any qualification of our
ratings;

o based on our discussions with the program manager of our
residential builders' and contractors' program, or HBW program,
we expect that the program manager will divert a substantial
portion of its business to other carriers during 2006;

o as a result of the recent downgrade of our financial strength
ratings by A.M. Best, we are closely analyzing our business
lines, positioning in the market and internal operations and
identifying steps we should take to preserve shareholder value
and improve our position, including the exploration of strategic
alternatives. The implementation of any changes based on such
analysis or of any strategic alternatives involves substantial
uncertainties and risks that may result in restructuring charges
and unforeseen expenses and costs. There can be no assurance that
any of these initiatives will not negatively impact our

results of operations or will be successful in improving our
position and preserving shareholder value;

o our business is dependent upon insurance and reinsurance brokers
who use ratings as an important factor in evaluating the
financial strength and quality of insurers. As a result of our
recent financial strength ratings downgrade, several of our
important brokers have removed us from their approved listing;

o our ability to continue to operate our business and identify,
evaluate and complete any strategic transaction is dependent on
our ability to retain our executives and key employees, including
our teams of underwriters. Our inability to retain, attract and
integrate members of our management team, key employees,
including our underwriting teams, and other personnel could
significantly and negatively affect our business;

o our ability to pay dividends may be restricted;

o certain lines of business that we have underwritten, including
marine, technical risk and aviation reinsurance and environmental
insurance, have large aggregate exposures to natural and man-made
disasters such as hurricane, typhoon, windstorm, flood,
earthquake, acts of war, acts of terrorism and political
instability and our results may continue to be volatile as a
result;

o our preliminary estimates of our exposure to ultimate claim costs
associated with Hurricanes Katrina, Rita and Wilma are based on
available information, claims notifications received to date,
industry loss estimates, output from industry models, a review of
affected contracts and discussions with brokers and clients. The
actual amount of losses from Hurricanes Katrina, Rita and Wilma
may vary significantly from our estimates based on such data,
which could have a material adverse effect on our financial
condition or our results of operations;

o the ineffectiveness or obsolescence of our planned business
strategy due to the recent downgrade of our financial strength
ratings or changes in current or future market conditions;

o if actual claims exceed our loss reserves, our financial results
could be significantly adversely affected;

o the failure of any of the loss limitation methods we employ could
have a material adverse effect on our financial condition or our
results of operations;

o the failure to successfully broaden the number of brokers we do
business with in order to expand our customer base in response to
our ratings downgrade;

o actual results, changes in market conditions, the occurrence of
catastrophic losses and other factors outside our control that
may require us to alter our anticipated methods of conducting our
business, such as the nature, amount and types of risk we assume
and the terms and limits of the products we write or intend to
write;

o based on our current estimate of losses related to Hurricanes
Katrina and Rita, we have exhausted our reinsurance and
retrocessional protection with respect to Hurricane Katrina and
our marine reinsurance with respect to Hurricane Rita. If our
Hurricane Katrina losses prove to be greater than currently
anticipated, we have no further reinsurance and retrocessional
coverage available for that windstorm. If our marine reinsurance
losses for Hurricane Rita prove greater than currently
anticipated, we will have no further retrocessional coverage
available for marine reinsurance losses for that windstorm. In

addition, if there are further catastrophic events relating to
our underwriting exposures, our retrocessional coverage for these
events may be limited or we may have no coverage at all;

o the failure to remedy any weakness found in our evaluations of
controls required by Section 404 of the Sarbanes-Oxley Act of
2002, including the material weaknesses identified in this annual
report, may result in our financial statements being materially
inaccurate, may restrict our access to the capital markets and
may cause the share price of our common and preferred shares to
be adversely affected;

o changes in the availability, cost or quality of reinsurance;

o our limited operating history;

o our insurance and reinsurance business is not widely diversified
among classes of risk or sources of origination. The exit from
our property reinsurance and technical risk property insurance
line and the casualty reinsurance commutations and recent rating
action by A.M. Best, have further reduced our diversification in
our product lines and will cause the concentrations across
certain of our risk classes to increase;

o changes in regulation or tax laws applicable to us, our brokers
or our customers;

o risks relating to our reliance on program managers, third-party
administrators and other supporting vendors;

o other risks of doing business with program managers, including
the risk we might be bound to policyholder obligations beyond our
underwriting intent, and the risk that our program managers or
agents may elect not to continue or renew their programs with us;

o we may require additional capital, which may not be available on
favorable terms or at all;

o changes in accounting policies or practices; and

o changes in general economic conditions, including inflation,
foreign currency exchange rates, interest rates and other
factors.

If one or more of these or other risks or uncertainties materialize,
or if our underlying assumptions prove to be incorrect, actual results may vary
materially from our projections. Additionally, the list of factors above is not
exhaustive and should be read with the other cautionary statements that are
included in this annual report under "Item 1A. Risk Factors" and that are
otherwise described from time to time in our U.S. Securities and Exchange
Commission reports filed after this annual report. Any forward-looking
statements you read in this annual report reflect our current views with respect
to future events and are subject to these and other risks, uncertainties and
assumptions relating to, among other things, our operations, results of
operations, growth strategy and liquidity. All subsequent written and oral
forward-looking statements attributable to us or individuals acting on our
behalf are expressly qualified in their entirety by this paragraph. You should
specifically consider the factors identified in this annual report that could
cause actual results to differ from those discussed in the forward-looking
statements before making an investment decision. We undertake no obligation to
publicly update or review any forward-looking statement, whether as a result of
new information, future events or otherwise.

Market data and forecasts used in this annual report have been
obtained from independent industry sources as well as from research reports
prepared for other purposes. We have not independently verified the data
obtained from these sources and we cannot assure you of the accuracy or
completeness of the data. Forecasts and other forward-looking information
obtained from these

sources are subject to the same qualifications and uncertainties applicable to
the other forward-looking statements in this annual report.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We have executed a lease for office space in Bermuda that contains
approximately 4,000 square feet. The lease expires on August 31, 2008. The
annual lease payment for this office is approximately $191,161. Effective as of
April 1, 2006, we will assign this lease to a third party. In addition, we have
entered into a lease for additional office space in Bermuda that contains 8,445
square feet. The lease expires September 30, 2007. The annual lease payment for
this office space is approximately $435,000.

We have entered into a lease for office space in London that contains
approximately 5,850 square feet. The initial term of the lease expires in June
2006. The annual lease payments for this office is approximately $185,000. We
have entered into a lease for office space in Dublin that contains approximately
4,000 square feet. The initial term of the lease expires in April 2030 and may
not be terminated prior to April 15, 2015. The annual lease payments for this
office is approximately $190,000.

The headquarters of Quanta U.S. Holdings and our other U.S.
subsidiaries is located in New York, New York and contains approximately 58,000
square feet. The initial term of the lease for these premises expires in October
2013 with an option to extend the lease term by an additional 15 years. The
annual lease payment for this office is approximately $2,300,720.

Our other offices in the U.S. are located in Reston, Virginia;
Chicago, Illinois; Pittsburgh, Pennsylvania; Denver, Colorado; San Jose,
California; San Francisco, California; Hartford, Connecticut; Dallas, Texas;
Minneapolis, Minnesota; Alpharetta, Georgia, Cazenovia, New York; Boxborough,
Massachusetts; Somerset, New Jersey, Apex, North Carolina, Orchard Park, New
York and Irvine, California. These offices are leased for a total of
approximately $1.6 million per year for all these offices.

We believe that these facilities are sufficient for our current
purposes. If we expand our operations in the future, we may require additional
office space, which we believe will be available on commercially reasonable
terms.

ITEM 3. LEGAL PROCEEDINGS

We are not a party to any pending or threatened material litigation
and are not currently aware of any pending or threatened material litigation
other than routine legal proceedings that we believe are, in the aggregate, not
material to our financial condition and results of operations. In the normal
course of business, we are involved in various claims and legal proceedings,
including litigation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of shareholders during the fourth
quarter of the fiscal year ended December 31, 2005.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION

Our common shares have been traded on the National Market of The
Nasdaq Stock Market, Inc. ("Nasdaq") under the symbol "QNTA" since May 14, 2004.
The following table contains, for the periods indicated, the high and low sales
prices per common share.

COMMON SHARES
--------------
HIGH LOW
------ -----
2004
Second Quarter (from May 14, 2004)... $11.00 $9.50
Third Quarter........................ $10.75 $8.03
Fourth Quarter....................... $ 9.50 $7.87

2005
First Quarter........................ $10.25 $7.60
Second Quarter....................... $ 8.50 $5.86
Third Quarter........................ $ 7.45 $5.40
Fourth Quarter....................... $ 6.02 $3.55

HOLDERS

As of February 28, 2006, we had 69,946,861 common shares issued and
outstanding, which were held by 11 holders of record. The 11 holders of record
include Cede & Co., which holds shares on behalf of The Depository Trust
Company, which itself holds shares on behalf of in excess of 800 beneficial
owners of our common shares.

DIVIDENDS

As a holding company, we depend on future dividends and other
permitted payments from our subsidiaries to pay dividends to our common and
preferred shareholders. Our subsidiaries' ability to pay dividends, as well as
our ability to pay dividends, is subject to regulatory, contractual, rating
agency and other constraints. Furthermore, the terms of our letter of credit and
revolving credit facility prohibit us from repurchasing shares and paying
dividends on our shares without the consent of our lenders. We have obtained a
consent under our current letter of credit and revolving credit facility for the
payment of dividends on our series A preferred shares. However, the facility
prohibits us from paying dividends on our series A preferred shares so long as
there is a default under that agreement. Future credit agreements or other
agreements relating to our indebtedness may also contain provisions prohibiting
or limiting the payment of dividends on our shares under certain circumstances.

We are subject to Bermuda regulatory constraints that affect our
ability to pay dividends on our shares, redeem our series A preferred shares and
make other payments. Under the Companies Act 1981 of Bermuda, as amended, or the
Companies Act, we may not declare or pay a dividend or make a distribution if we
have reasonable grounds for believing that we are, or will after the payment be,
unable to pay our liabilities as they become due or if the realizable value of
our assets will thereby be less than the aggregate of our liabilities and our
issued share capital and share premium accounts. As a result of our losses, for
Bermuda company law purposes, we expect that the realizable value of our assets
will no longer exceed the aggregate of our liabilities and our issued share
capital and share premium accounts. So long as this deficiency continues, we are
prohibited by Bermuda company law from paying dividends or making distributions
to our shareholders, including our holders of series A

preferred shares. In order for Quanta Holdings to have the flexibility to pay
dividends to shareholders, we are evaluating a proposal to reduce the share
premium account and allocate sums to our contributed surplus account. This
reduction of our share premium account and reallocation to the contributed
surplus account would require the approval of our common shareholders to be
effective. If our common shareholders do not approve any such proposal, we may
be restricted by Bermuda company law from declaring or paying dividends to our
holders of series A preferred shares and other shareholders. We cannot make any
assurances that we will have the ability to declare and pay dividends under
Bermuda law to our shareholders in the future. In addition, even if we submit,
and our shareholders approve, any proposal and we are permitted by law to
declare and pay dividends, we cannot assure you that future losses or other
events could not impair our ability to pay dividends to our shareholders.

For further discussion of our share capital and share premium
accounts, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition and
Liquidity--Liquidity--Dividends and Redemptions." For additional discussion
concerning risks relating to our dividend policy and our holding company
structure and its effect on our ability to receive and pay dividends, see "Item
1A.--Risk Factors--Risks Related to our Securities--Our holding company
structure and certain regulatory and other constraints, including our credit
facility, affect our ability to pay dividends on our shares, make payments on
our indebtedness and other liabilities and our ability to redeem our series A
preferred shares." For a discussion of certain additional limitations on our
ability to pay dividends on our common shares relating to certain preferential
rights associated with the Company's series A preferred shares, see "Item
1A.--Risk Factors--Risks Related to our Securities--Our series A preferred
shares have rights, preferences and privileges senior to those of holders of our
common shares."

Subject to the above limitations, our board of directors is free to
change our dividend practices from time to time and to decrease or increase the
dividend paid, or to not pay a dividend, on our common shares based on factors
such as the results of operations, financial condition, cash requirements and
future prospects and other factors deemed relevant by our board of directors. To
date, we have not paid any dividends on our common shares.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

We did not repurchase any of our equity securities in 2005 and have
not adopted a stock repurchase program.

ITEM 6. SELECTED FINANCIAL DATA

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

PREDECESSOR QUANTA CAPITAL HOLDINGS LTD. (3)
------------------------------------ ------------------------------------------
FOR THE FOR THE
FOR THE YEAR ENDED PERIOD PERIOD FROM FOR THE YEAR FOR THE YEAR
DECEMBER 31, ENDED MAY 23, 2003 ENDED ENDED
----------------------- SEPTEMBER TO DECEMBER DECEMBER 31, DECEMBER 31,
2001 2002 3, 2003 31, 2003 2004 2005
---------- ---------- ---------- ------------ ------------ ------------

Selected Income Statement Data
REVENUES:
Net premiums earned $ -- $ -- $ -- $ 1,940 $ 237,140 $ 364,075
Technical services revenues 28,448 28,628 20,350 11,680 32,485 47,265
Net investment income 33 23 13 2,290 14,307 27,181
Net realized gains (losses) -- -- -- 109 228 (13,020)
Other income -- -- -- 126 2,995 5,610
Total revenues 28,481 28,651 20,363 16,145 287,155 431,111
EXPENSES:
Net losses and loss expenses -- -- -- 1,191 198,916 324,084
Acquisition expenses -- -- -- 164 53,995 69,624
Direct technical services costs 17,576 17,193 12,992 8,637 23,182 37,027
Interest expense -- -- -- -- 71 4,165
General and administrative expenses and
depreciation 8,793 8,765 5,971 44,630 65,572 101,919
Total expenses 26,369 25,958 18,963 54,658 341,736 536,819
Net income $ 2,112 $ 2,693 $ 1,400
Net loss before taxes (38,477) (54,581) (105,708)
Provision for income taxes -- -- 244
Net loss after taxes $ (38,477) $ (54,581) $ (105,952)
Weighted average common shares and
common share equivalents outstanding
basic 1,093,250 1,093,250 1,093,250 31,369,001 56,798,218 57,205,342
Weighted average common shares and
common share equivalents outstanding
diluted 1,093,250 1,093,250 1,093,250 31,369,001 56,798,218 57,205,342
Net income (loss) per share basic and
diluted (2) $ 1.93 $ 2.46 $ 1.28 $ (1.23) $ (0.96) $ (1.85)
PREDECESSOR PRO FORMA DATA (UNAUDITED):
Net income as shown above $ 2,112 $ 2,693 $ 1,400
Pro forma provision for income taxes
(1) 822 1,048 545
Net income adjusted for pro forma
income taxes $ 1,290 $ 1,645 $ 855
Pro forma net income per share basic
and diluted (2) $ 1.18 $ 1.51 $ 0.78

PREDECESSOR QUANTA CAPITAL HOLDINGS LTD. (3)
------------------------------ --------------------------------
AS OF DECEMBER 31, AS OF AS OF AS OF AS OF
------------------ SEPTEMBER DECEMBER DECEMBER DECEMBER
2001 2002 3, 2003 31, 2003 31, 2004 31, 2005
------- -------- --------- -------- -------- ----------

SUMMARY BALANCE SHEET DATA
Cash and cash equivalents $ 74 $ 73 $ 413 $ 47,251 $ 75,257 $ 260,978
Available-for-sale Investments at fair
value -- -- -- 467,036 559,430 699,121
Trading Investments at fair value
related to deposit liabilities -- -- -- -- 40,492 38,316
Premiums receivable -- -- -- 10,961 146,784 146,837
Losses and loss adjustment expenses
recoverable -- -- -- 3,263 13,519 190,353
Deferred acquisition costs -- -- -- 6,616 41,496 33,117
Deferred reinsurance premiums -- -- -- 1,925 47,416 112,096
Goodwill and other intangibles assets -- -- -- 21,351 20,617 24,877
Total assets 10,160 10,131 11,249 573,761 980,733 1,552,091
Reserves for losses and loss expenses -- -- -- 4,454 159,794 533,983

Unearned premiums -- -- -- 20,044 247,936 336,550
Environmental liabilities assumed -- -- -- 7,018 6,518 5,911
Deposit liabilities -- -- -- -- 43,365 51,509
Junior subordinated debentures -- -- -- -- 41,238 61,857
Total liabilities 4,003 3,681 5,199 86,278 549,824 1,096,089
Redeemable preferred shares -- -- -- -- -- 71,838
Total shareholders' equity $ 6,157 $ 6,450 $ 6,051 $487,483 $430,909 $ 384,164

(1) As an S corporation, ESC, our predecessor, was not subject to
U.S. federal income taxes. At the time of its acquisition, ESC
became subject to U.S. income tax. Accordingly, the predecessor
historical operating earnings have been adjusted, on a pro forma
basis, to reflect taxes at a 38.9% rate including a 35% statutory
rate for U.S. federal income taxes and a 3.9% rate, based on a 6%
statutory rate for Virginia state income taxes less the related
federal tax benefit.

(2) Basic earnings per share is computed using the weighted average
number of common shares outstanding during the period. All
potentially dilutive securities including stock options and
warrants are excluded from the basic earnings per share
computation. In calculating diluted earnings per share, the
weighted average number of shares outstanding for the period is
increased to include all potentially dilutive securities using
the treasury stock method. Any common stock equivalent shares are
excluded from the computation if their effect is antidilutive.
Basic and diluted earnings per share are calculated by dividing
income available to ordinary shareholders by the applicable
weighted average number of shares outstanding during the year.

(3) Includes the operations of ESC from September 3, 2003, the date
of acquisition. We accounted for the acquisition of ESC as a
purchase. See Note 4 to our consolidated financial statements.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The following discussion and analysis of our results of operations,
financial condition and liquidity and capital resources should be read in
conjunction with our audited consolidated financial statements and related notes
for the year ended December 31, 2005 contained in this annual report on pages
F-1 to F-53 and with the risk factors appearing under "Item 1A. Risk Factors"
in this annual report.

OVERVIEW

GENERAL

Quanta Holdings was incorporated on May 23, 2003 as a Bermuda holding
company formed to provide specialty lines insurance, reinsurance, risk
assessment and risk technical services on a global basis through its affiliated
companies. We commenced substantive operations on September 3, 2003 when we
obtained our initial capital and purchased ESC, our predecessor for accounting
purposes. During the remainder of 2003, we wrote a small number of insurance and
reinsurance contracts. During the years ended December 31, 2005 and 2004, we
continued to grow our specialty lines of business significantly increasing the
number of insurance and reinsurance contracts underwritten.

Through our operating subsidiaries in Bermuda, the U.S. and Europe, we
focus on writing coverage for specialized classes of risks through teams of
experienced and technically qualified underwriters. Specialty lines of business
are often unusual or difficult to place and do not fit the underwriting criteria
of standard commercial product providers. We have used our Bermuda operations
primarily to insure U.S. risks from Bermuda on a non-admitted basis and also,
from time to time, to underwrite some European risks. We also write specialty
products in the United States on an admitted basis through our subsidiary,
Quanta Indemnity, which is a U.S. licensed insurer with licenses in 44 states
and is an accredited reinsurer in Washington, D.C. Further, during 2005 we wrote
specialty insurance from the United States on an excess and surplus lines basis
and U.S. reinsurance on a non-admitted basis through our subsidiary, Quanta
Specialty Lines. Since the fourth quarter of 2004, we are underwriting European
Union sourced specialty business through Quanta Europe, our Irish subsidiary
located in Dublin, Ireland, which is the headquarters of our European business.
We are also underwriting through our wholly-owned Lloyd's syndicate, which we
call Syndicate 4000. Since February 2005, we are serving our London-based
clients for European insurance and reinsurance business through our Quanta
Europe branch in London.

We acquired Environmental Strategies Corporation, known as ESC, on
September 3, 2003. ESC is our predecessor company for accounting and financial
reporting purposes. ESC provides diversified environmental risk management
services to assist customers in environmental remediation, regulatory analyses,
technical support for environmental claims, merger and acquisition due
diligence, environmental audits and risk assessments, and engineering and
information management services. ESC also provides risk assessment and technical
services support to our environmental underwriters. We expect ESC's operations
will be adversely affected to the extent our environmental insurance product
line and our other insurance and reinsurance product lines that have used ESC's
consulting services are no longer able to continue to write coverage or lose
business opportunities due to the recent A.M. Best downgrade of our financial
strength ratings. In addition to these consulting services, we provide liability
assumption programs through Quanta Technical Services and its subsidiaries under
which these subsidiaries assume specified liabilities associated with
environmental conditions, which may be insured or guaranteed by us or an
insurance subsidiary. Under these programs, our technical services team provides
consulting and performs the required remediation services through
subcontractors. Our liability assumption programs during the year ended December
31, 2005 included our Buffalo, New York and Axis, Alabama programs. The
estimated remaining liabilities for these programs are approximately $5.9
million, as of December 31, 2005. We are currently evaluating whether, or to
what extent, we will continue to offer this liability assumption program
following our March 2006 ratings downgrade.

Presently, we anticipate that it will be difficult to continue to provide these
programs under an A.M. Best rating of "B++."

2005 HURRICANE LOSSES, PROPERTY AND REINSURANCE TRANSACTIONS AND 2005
OFFERINGS

We have incurred estimated net losses of approximately $87.4 million
relating to Hurricanes Katrina, Rita and Wilma during the year ended December
31, 2005. These losses include net reinstatement premium expense of
approximately $4.1 million. Of these losses, $33.6 million (including
reinstatement premium expense of approximately $1.8 million) occurred in our
property reinsurance line, $39.9 million (including reinstatement premium income
of approximately $0.2 million) occurred in our marine reinsurance lines, $13.7
million (including reinstatement premium expense of approximately $2.5 million)
occurred in our technical risk property insurance line and $0.2 million occurred
in our fidelity insurance product line. We believe that we will not know our
exact losses for some time given the uncertainty around the industry loss
estimates, the size and complexity of Hurricanes Katrina, Rita and Wilma,
limited claims data and potential legal and regulatory developments related to
potential losses. As a result, our losses may continue to develop during the
next year and our ultimate losses may vary significantly from our recorded
estimates. Below is a summary of the estimated losses and loss expenses incurred
for the 2005 hurricanes.

FOR THE YEAR ENDED DECEMBER 31, 2005
--------------------------------------------
GROSS LOSSES CEDED LOSSES
AND LOSS AND LOSS NET LOSSES AND
EXPENSES EXPENSES LOSS EXPENSES
------------ ------------ --------------
($ in thousands)

SPECIALTY INSURANCE:

Technical risk property $ 52,245 $ (41,029) $11,216
Fidelity and crime 450 (225) 225
-------- --------- -------
52,695 (41,254) 11,441
-------- --------- -------
SPECIALTY REINSURANCE:

Marine, technical risk and aviation 68,986 (28,861) 40,125
Property 77,426 (45,653) 31,773
-------- --------- -------
146,412 (74,514) 71,898
-------- --------- -------
TOTAL LOSSES AND LOSS EXPENSES INCURRED $199,107 $(115,768) $83,339
======== ========= =======

LOSSES AND LOSS EXPENSES BY EVENT
Katrina and Rita $169,803 $ (97,668) $72,135
Wilma 29,304 (18,100) 11,204
-------- --------- -------
199,107 (115,768) 83,339
-------- --------- -------
Reinstatement premiums
Katrina and Rita (8,833) 13,367 4,534
Wilma (979) 502 (477)
-------- --------- -------
(9,812) 13,869 4,057
-------- --------- -------

-------- --------- -------
NET COST OF 2005 HURRICANES $189,295 $(101,899) $87,396
======== ========= =======

The above table includes losses incurred from Hurricanes Katrina, Rita
and Wilma in 2005 and does not include development on losses incurred from the
2004 hurricanes.

We have recorded estimated gross losses of approximately $189.3
million relating to Hurricanes Katrina, Rita and Wilma during the year ended
December 31, 2005. These losses include, and are net of, gross reinstatement
premium income of approximately $9.8 million. The difference between our
estimated gross and estimated net losses, of $101.9 million, represents the
amount of reinsurance or retrocessional insurance recoveries, including ceded
reinstatement premium expense of $13.9 million. We obtained this reinsurance and
retrocessional insurance as part of our risk management practices to help limit
our net loss exposures and control our aggregate exposures to particular classes
of risk

including those related to natural catastrophe events. We expect that the
companies to which insurance has been ceded or reinsurance has been retroceded
will be recoverable. The average credit rating of these entities is rated "A"
(excellent) by A.M. Best.

Shortly after Hurricane Rita, we discontinued writing new and most
renewal business in our technical risk property and property reinsurance lines
of business. We did not discontinue or make changes in our program businesses,
including our residential builders' and contractors' program, which we refer to
as the HBW program. In addition, we retroceded substantially all the in-force
business, as of October 1, 2005, in these lines (other than our program
business) by a portfolio transfer to a third-party reinsurer, which we refer to
as the Property Transaction. The Property Transaction limits our property
reinsurance and technical risk property losses occurring after October 1, 2005
to those relating to Hurricane Wilma and those we have incurred through
September 30, 2005 (including incurred but not reported losses), which includes
losses relating to Hurricanes Katrina and Rita. Under the Property Transaction,
we also transferred all future premiums earned for that business and loss and
acquisition expenses incurred from and after October 1, 2005 to the third-party
reinsurer. Effective October 1, 2005, we also commuted two of our casualty
reinsurance treaties back to the insurance company which had reinsured it with
us, which we refer to as the Casualty Reinsurance Transaction. We refer to the
Property Transaction and the Casualty Reinsurance Transaction collectively as
the Transactions.

The property reinsurance and technical risk property product lines
subject to the Property Transaction accounted for gross premiums written and net
premiums written of approximately $108.0 million and $107.0 million for the year
ended December 31, 2004 and approximately $97.1 million and $19.1 million for
the year ended December 31, 2005. The net premiums written of $19.1 million for
the year ended December 31, 2005 reflect $57.3 million of ceded premiums written
during the fourth quarter related to the Property Transaction. Our net
underwriting losses for the product lines subject to the Property Transaction
were approximately $47.4 million for the year ended December 31, 2004 and
approximately $51.6 million for the year ended December 31, 2005.

The two casualty reinsurance treaties subject to the Casualty
Reinsurance Transaction accounted for gross premiums written and net premiums
written of approximately $36.7 million for the year ended December 31, 2004 and
approximately $5.7 million for the year ended December 31, 2005, which is net of
$17.0 million of net unearned premium returned to the insurance company under
the terms of the Casualty Reinsurance Transaction. Our net underwriting income
relating to those two casualty reinsurance treaties was approximately $1.6
million for the year ended December 31, 2004 and approximately $2.1 million for
the year ended December 31, 2005, which includes the net expense of the Casualty
Reinsurance Transaction of approximately $1.2 million. The impact of the
transactions is disclosed in Note 22 to the consolidated financial statements
for the year ended December 31, 2005.

On December 14, 2005, we issued 13,136,841 common shares at $4.75 per
share and 3,000,000 shares of our series A preferred shares at $25.00 per share
with a liquidation preference of $25.00 per share. The gross proceeds to the
Company were $137.4 million before the payment of underwriting fees, of which
$62.4 million was from the sale of common shares and $75.0 million was from the
sale of preferred shares. In addition, on December 29, 2005, the underwriters
exercised a portion of their over-allotment option to acquire additional series
A preferred shares at the offering price of $25.00. This resulted in the sale,
on January 11, 2006 of 130,525 shares of our series A preferred shares for gross
proceeds of $3.3 million.

A.M. BEST RATING ACTIONS, STRATEGIC ALTERNATIVES AND EVALUATION

property and property reinsurance lines of business (other than our program
business) by a portfolio transfer to a third-party reinsurer, the commutation of
two of our casualty reinsurance treaties back to the insurance company which had
reinsured it with us and the completion of the offerings of our common shares
and series A preferred shares in the fourth quarter of 2005. On December 21,
2005, A.M. Best affirmed the financial strength rating of "A-" (excellent) of
Quanta Bermuda and its subsidiaries, and ascribed a negative outlook to the
rating. A.M. Best defines a negative outlook as indicating that a company is
experiencing unfavorable financial/market trends, relative to its current rating
level and, if continued, the company has a good possibility of having its rating
downgraded. In connection with A.M. Best's December 2005 affirmation of our
ratings and continued review with negative outlook, A.M. Best cited significant
challenges and uncertainties associated with the successful execution of
management's revised business plans, management's ability to diversify and grow
our business profitably, and the risk for upward development of Hurricanes
Katrina, Rita and Wilma losses.

Certain of our insurance and many of our reinsurance contracts contain
termination rights triggered by the A.M. Best rating downgrade. Many of our
other insurance contracts and certain of our reinsurance contracts provide for
cancellation at the option of the policyholder regardless of our financial
strength rating. A cancellation typically results in the termination of the
policy and our ongoing obligations and the return of premiums to our client that
usually approximates our unearned premium reserve as of the date of the
cancellation. Whether a client would exercise such rights would depend, among
other things, on the reasons for the downgrade, the extent of the downgrade, the
prevailing market conditions, whether we have posted security in respect of our
obligations and the pricing and availability of replacement coverage. We cannot
predict in advance how many of our

clients will actually exercise such rights or the effect such cancellations will
have on our financial condition or future prospects. However, depending on the
number of contracts involved, such an effect could be materially adverse. As of
March 29, 2006, we had received notice of cancellation on approximately 2.3% of
our in-force policies, calculated using original contract gross premiums written
related to those cancelled policies as a percentage of total gross premiums
written during 2005. Gross unearned premiums relating to these cancellations
that we have returned or expect to return to our clients total approximately
$5.0 million. We expect that we will receive additional cancellations.

Many of our other insurance contracts and certain of our reinsurance
contracts provide for cancellation at the option of the policyholder regardless
of our financial strength rating, including those placed by the program manager
of our HBW program. HBW gross premiums written during the year ended December
31, 2005 totaled approximately $165.9 million, of which approximately $140.3
million was casualty premium, $15.0 million was warranty premium and $10.6
million was property premium, by class of risk. HBW net premiums written during
the year ended December 31, 2005 totaled approximately $108.9 million, of which
approximately $84.7 million was casualty premium, $15.0 million was warranty
premium and $9.2 million was property premium, by class of risk. Based on our
discussions with the program manager, we understand that it will divert a
substantial portion of the HBW program business to other carriers. However, we
expect to continue to write a small portion of the casualty business through our
Lloyd's syndicate. We understand that the new carriers can begin writing
casualty business in some states beginning in March 2006, but will need time to
file and obtain approval of rate and policy forms with regulatory authorities in
other states in which the program manager is writing. Until the new carriers are
able to obtain these approvals, we will continue to write casualty business for
the program manager. Other than the business that we intend to write through our
Lloyd's syndicate, we expect that substantially all of the HBW program business
will be diverted to other carriers by December 31, 2006. Consequently, we
estimate that the gross and net premiums written under the HBW program during
2006 will be less than 25% of the gross and net premiums written during 2005.
While we expect to be able to continue to write business through our Lloyd's
syndicate, we expect that the premiums written under our HBW program during 2007
will be significantly less than 2006 as the HBW program manager is able to move
that business to new carriers.

with existing broker relationships to reach additional customers that we can
serve.

We generated approximately $390.0 million, $419.5 million and $20.1
million of net premiums written after premiums ceded on purchased reinsurance
protection, which include the ceded premiums of $57.3 million related to the
Property Transaction referred to above, and $364.1 million, $237.1 million and
$1.9 million of net premiums earned during the years ended December 31, 2005,
2004 and 2003. During the year ended December 31, 2005, we also purchased
additional retrocessional protection in our specialty reinsurance segment which
is intended to help limit our net loss exposures to catastrophe windstorm
events. This purchase resulted in approximately $15.3 million of premium ceded
during the year ended December 31, 2005. However, based on our current estimate
of losses related to Hurricane Katrina, we have exhausted our reinsurance and
retrocessional protection with respect to that hurricane. If our Hurricane
Katrina losses prove to be greater than currently anticipated, we will have no
further reinsurance and retrocessional coverage available for that windstorm.

The primary drivers of growth in 2005 in our insurance lines of
business and net premiums written were the development of our relationships with
insurance and reinsurance brokers and the development of our specialty insurance
lines of business, including Syndicate 4000. Traditionally, many reinsurance
contracts are entered into at the beginning of a calendar year and that period
is often referred to as the January renewal season. As we have exited most of
our reinsurance business, we believe that the 2006 renewal season will be much
less significant for our 2006 results. Our specialty insurance segment
demonstrated premium growth during the year ended December 31, 2005 as compared
to the year ended December 31, 2004, especially through Lloyd's, following
receipt of regulatory approvals during the fourth quarter of 2004. Our specialty
insurance segment became a more significant contributor to our overall business
and represented approximately 65.8% of our total net premiums written in the
year ended December 31, 2005, compared to 40.6% in the year ended December 31,
2004.

We believe that our portfolio is not diversified either among classes
of risks or source of origination. For example, during the year ended December
31, 2005, our HBW program accounted for approximately 42.3% of our specialty
insurance segment gross premiums written. In addition, the HBW program and the
other insurance programs we write, accounted for 44.9% of our specialty
insurance segment gross premiums written in the year ended December 31, 2005. As
described below, our specialty reinsurance segment showed significant
concentrations across certain risk classes. In addition, our specialty
reinsurance segment generated approximately 42.0%, 25.5% and 10.6% of its gross
premiums written through three brokers. The exit from our property reinsurance
and technical risk property insurance line and the casualty reinsurance
commutations, have further reduced our diversification in our product lines and
will cause the concentrations across certain of our risk classes to increase.
Further, as a result of the recent rating action by A.M. Best, we expect that
concentrations in

certain risk classes will increase as we evaluate and position our business.

We have determined that $607.2 million of investment securities, with
unrealized losses of approximately $10.2 million were other-than-temporarily
impaired as of December 31, 2005. The realization of these losses represents the
maximum amount of potential losses in our investment securities if we would have
sold all of these securities at December 31, 2005. As a result of our decision,
the affected investments were reduced to their estimated fair value, which
becomes their new cost basis. The recognition of the losses has no affect on our
shareholders' equity, the market value of our investments, our cash flows or our
liquidity. The evaluation for other-than-temporary impairments requires the
application of significant judgment, including our intent and ability to hold
the investment for a period of time sufficient to allow for possible recovery.
We believe we have sufficient assets to pay our currently foreseen liabilities
as they become due and we have no immediate intent to liquidate the investments
securities affected by our decision. However, due to the general uncertainties
surrounding our business resulting from A.M. Best's March 2006 downgrade of our
financial strength ratings and our decision to explore strategic alternatives,
we concluded that there are no absolute assurances that we will have the ability
to hold the affected investments for a sufficient period of time. It is possible
that the investment securities' fair values could change in subsequent periods,
resulting in further material impairment charges.

SEGMENT INFORMATION

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

o Specialty insurance. Our specialty insurance segment
includes our traditional, structured and program specialty
insurance products. Our traditional specialty insurance
products included in our specialty insurance segment results
include technical risk property, professional liability,
environmental liability, fidelity and crime, surety, trade
credit and political risk and marine and aviation. During
2005, our specialty insurance segment wrote business both on
a direct basis with insured clients or by reinsuring
policies that are issued on our behalf by third-party
insurers and reinsurers, and includes our Lloyd's syndicate,
which was created in December 2004. During the year ended
December 31, 2005, we changed the composition of our
reportable segments by aggregating the Lloyd's operating
segment with the specialty insurance reportable segment. Our
Lloyd's syndicate writes traditional specialty insurance
products including professional liability (professional
indemnity and directors' and officers' coverage), fidelity
and crime (financial institutions) and specie and fine art.
Our specialty insurance programs include the HBW program.
After the end of the third quarter of 2005, we discontinued
the writing of new and most renewal business in our
technical risk property line of business. Currently, we are
not writing new business in our professional liability,
environmental, and marine and aviation specialty insurance
product lines and our structured products line and we are
running off our surety line.

o Specialty reinsurance. Our specialty reinsurance segment
includes our traditional, structured and program specialty
reinsurance products. Our specialty reinsurance products
included in our specialty reinsurance segment results
include property, casualty and marine and aviation products.
We currently do not write reinsurance on a program basis.
After the end of the third quarter of 2005, we discontinued
the writing

of new and most renewal business in our property reinsurance
of business and commuted a large portion of our casualty
reinsurance portfolio. Currently, we are not writing new
business in our remaining specialty reinsurance product
lines.

o Technical services. Our technical services segment provides
diversified environmental investigation, remediation and
engineering services, assessment services, other technical
and information management services primarily in the
environmental area in the U.S. Our technical services
segment also provides technical and information management
services to our specialty insurance and reinsurance
segments.

The determination of these reportable segments reflects how we manage
and monitor the performance of our insurance and reinsurance operations and may
change from time to time. We refer to the specialty insurance and specialty
reinsurance segments as our underwriting segments. We refer to our risk
consulting and management operations as our technical services segment. We
evaluate each segment based on its underwriting or technical services results,
as applicable, including items of revenue and expense that are associated with,
and directly related to, each segment.

We allocate corporate general and administrative expenses to each
segment based upon each product line's allocated capital for the current
reporting period. We allocate capital to each of our product lines through the
estimated value-at-risk method, which uses statistical analyses of historical
market trends and volatility to estimate the probable amounts of capital at risk
for each reporting period. We do not manage our assets by segment and, as a
result, net investment income, and depreciation and amortization are not
evaluated at the segment level.

MAIN DRIVERS OF OUR RESULTS

REVENUES

We derive the majority of our revenues from three principal sources:
premiums from policies written by our underwriting segments, technical services
revenues and investment income from our investment portfolios.

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

We also have revenues generated by our technical services segment,
which operates primarily in the environmental area, from technical and risk
management services provided under various short-term service contracts and for
services performed by subcontractors engaged on behalf of clients. We also
generate revenues from the remediation of environmental obligations that we have
assumed. The amount of technical services and remediation fees and subcontractor
revenues is a function of political and economic conditions and the impact these
conditions have on clients' discretionary spending on environmental projects.

Our investment income depends on the average invested assets in our
investment portfolios and the yield that we earn on those invested assets. Our
investment yield is a function of market interest rates and the credit quality
and maturity period of our invested assets. Our investment portfolio consists
principally of fixed income securities, short-term liquidity funds, cash, and
cash equivalents. In addition, we realize capital gains or losses on sales of
investments as a result of changing market conditions, including changes in
market interest rates and changes in the credit quality of our invested

assets. We also recognize capital losses on investments as a result of other
than temporary impairment charges. Under U.S. GAAP, our available-for-sale
investments are carried at fair market value with unrealized gains and losses on
the investments included on our balance sheet in accumulated other comprehensive
income (loss) net of income taxes as a separate component of shareholders'
equity. Our trading investments that relate to deposits associated with non-risk
bearing contracts are recorded at estimated fair value with the change in fair
value included in net realized gains and losses on investments in the
consolidated statement of operations and comprehensive loss. The objective of
our current investment strategy is to preserve investment principal, maintain
liquidity and to manage duration risk between investment assets and insurance
liabilities, while maximizing investment returns through a diversified
portfolio. Our investment returns are benchmarked against certain specified
indices. However, the volatility in claim payments and the interest rate
environment can significantly affect the returns we generate on our investment
portfolios.

EXPENSES

Our expenses primarily consist of net loss and loss expenses, general
and administrative expenses, acquisition expenses and direct technical services
costs.

Net loss and loss expenses, which are net of loss and loss expenses
recovered under our ceded reinsurance contracts, depend on the number and type
of insurance and reinsurance contracts we write and reflect our best estimate of
ultimate losses and loss expenses we expect to incur on each contract written
using various actuarial analyses. Actual losses and loss expenses will depend on
actual costs to settle insurance and reinsurance claims. Our ability to
accurately estimate expected ultimate loss and loss expense at the time of
pricing each insurance and reinsurance contract and the occurrence of unexpected
high loss severity catastrophe events are critical factors in determining our
profitability.

General and administrative expenses consist primarily of personnel
related expenses, information technology, other operating overheads and
professional fees. From time to time we engage administrative service providers
and legal, accounting, tax and financial advisors. General and administrative
expenses are a function of the development of our business and infrastructure,
including the growth in personnel and the volume of insurance and reinsurance
contracts written. These general and administrative expenses may be incurred
directly by a segment or indirectly at the corporate level.

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

We also incur expenses directly related to and arising from our
technical services and environmental remediation activities. These direct costs
primarily include expenses associated with direct technical labor,
subcontractors we engage on behalf of our technical services clients, and other
technical services or remediation contract related expenses. These costs are a
function of, and are proportional to, the level of technical services and
remediation revenues earned from the provision of technical services and
completion of remediation activities.

FINANCIAL RATIOS

The financial ratios we use include the net loss and loss expense
ratio, the acquisition expense ratio and the general and administrative expense
ratio. Our net loss and loss expense ratio is calculated as net losses and loss
expenses incurred divided by net premiums earned. Because our underwriting
portfolios continue to change significantly, we expect that our net loss ratios
may continue to be volatile. Our acquisition expense ratio is calculated by
dividing acquisition expenses by net premiums earned. Our net loss and loss
expense ratio and acquisition expense ratio provide a measure of the current
profitability of the earned portions of our written insurance and reinsurance
contracts. Our

general and administrative expense ratio is calculated by dividing underwriting
related general and administrative expenses by net premiums earned and indicates
the level of indirect costs that we incur in acquiring and writing insurance and
reinsurance business. During 2005, we have changed the denominator to be used in
the calculation of our general and administrative expense ratio to net premiums
earned, instead of net premiums written. Our combined ratio is the aggregate of
our loss and loss expense, acquisition expense and general and administrative
expense ratios. We believe that these financial ratios appropriately reflect the
profitability of our underwriting segments. A combined ratio of less than 100%
indicates an underwriting profit and over 100%, an underwriting loss. Because we
have a limited operating history, our combined ratio may be subject to
significant volatility and may not be indicative of future profitability.

RESULTS OF OPERATIONS

The following is a discussion of Quanta Holdings' consolidated results
of operations for the years ended December 31, 2005 and 2004. Comparisons
between the year ended December 31, 2004 and the period from May 23, 2003 (date
of incorporation) to December 31, 2003 are not meaningful because we commenced
substantive operations on September 3, 2003 and during the period from May 23,
2003 (date of incorporation) to December 31, 2003, we wrote only a small number
of insurance and reinsurance contracts. We separately provide a discussion for
the period from May 23, 2003 (date of incorporation) to December 31, 2003. The
discussion and analysis of Quanta Holdings' results include the results of ESC,
our predecessor, from September 3, 2003, the date Quanta Holdings acquired ESC,
through December 31, 2004.

ESC is our predecessor for accounting purposes and its business is
wholly attributable to the technical services segment. Accordingly, we compare
the results of operations of ESC for the year ended December 31, 2005 to the
year ended December 31, 2004, and the year ended December 31, 2004 to the pro
forma financial information for the year ended December 31, 2003 within the
discussion of our technical services segment under "Results by Segments."

YEARS ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004

Results of operations for the years ended December 31, 2005 and 2004
were as follows:

2005 2004
--------- ---------
($ in thousands)
---------------------

REVENUES
Gross premiums written....................... $ 608,935 $ 494,412
========= =========
Net premiums written......................... $ 390,041 $ 419,541
========= =========
Net premiums earned.......................... $ 364,075 $ 237,140
Technical services revenues.................. 47,265 32,485
Net investment income........................ 27,181 14,307
Net realized (losses) gains on investments... (13,020) 228
Net foreign exchange gains................... 331 978
Other income................................. 5,279 2,017
--------- ---------
Total revenues............................ 431,111 287,155
--------- ---------
EXPENSES
Net losses and loss expenses................. (324,084) (198,916)
Acquisition expenses......................... (69,624) (53,995)
Direct technical services costs.............. (37,027) (23,182)
General and administrative expenses.......... (97,930) (63,392)
Interest expense ............................ (4,165) (71)
Depreciation and amortization of intangible
assets.................................... (3,989) (2,180)
--------- ---------
Total expenses............................ (536,819) (341,736)
--------- ---------
Income taxes................................. 244 --
--------- ---------
Net loss .................................... $(105,952) $ (54,581)
========= =========

REVENUES.

Substantially all of our revenues were generated by our underwriting
subsidiaries in the U.S., Bermuda and Europe. Technical services revenues were
derived from the operations of ESC, QLT Buffalo LLC and QLT of Alabama, LLC.

Premiums. Gross premiums written were $608.9 million for the year
ended December 31, 2005, an increase of $114.5 million, or 23.2%, compared to
$494.4 million for the year ended December 31, 2004. The increase in our gross
premiums written was largely due to the contribution of $80.7 million, or 13.3%,
of our gross premiums written, from our Lloyd's syndicate, which commenced in
December 2004. The increase also reflected continued growth in all of our
specialty insurance segment product lines and our marine, technical risk and
aviation product line in our specialty reinsurance segment. Shortly after
Hurricane Rita, we discontinued writing new and most renewal business in our
technical risk property and property reinsurance lines of business (other than
our program business), which accounted for approximately $97.1 million, or
15.9%, of our gross premium written during the year ended December 31, 2005.

Premiums ceded were $218.9 million for the year ended December 31,
2005 an increase of $144.0 million compared to $74.9 million for the year ended
December 31, 2004. The increase in premiums ceded primarily reflects the growth
in gross premiums written, approximately $57.3 million of premiums ceded
resulting from the Property Transaction and approximately $20.8 million in
purchased reinsurance and retrocessional protection (including reinstatement
premiums) to help limit our net loss exposures to natural catastrophe events.
The increase of premiums ceded is attributable to a lesser extent to the
development of the reinsurance program for our specialty insurance segment
product lines, which was restructured during the year ended December 31, 2005.
The restructure involved the commutation of our 2004 reinsurance treaty
protection in our professional liability and

fidelity product lines, which was ceded on an excess of loss basis. The
unexpired portions of this business were then transferred, effective April 1,
2005, into our 2005 reinsurance treaty, which is ceded on a proportional quota
share basis.

Net premiums earned were $364.1 million for the year ended December
31, 2005, an increase of $127.0 million, or 53.5%, compared to $237.1 million
for the year ended December 31, 2004, reflecting the growth in premiums written
and the earning and amortization of premiums written and ceded during the years
ended December 31, 2004 and 2005. Our net premiums written are typically earned
over the risk periods of the underlying insurance policies which are generally
twelve months. Net premiums written that are not yet earned and are deferred as
unearned premium reserves, net of deferred reinsurance premiums, totaled $224.5
million at December 31, 2005 and will be earned and recognized in our results of
operations in future periods. Because we only began to write insurance and
reinsurance business during the fourth quarter of 2003 and because our Lloyd's
syndicate commenced operations in December 2004, we believe that our net
premiums earned are not representative of a fully developed and diversified
portfolio of insurance and reinsurance contracts.

Technical services revenues. Technical services revenues were $47.3
million for the year ended December 31, 2005 an increase of $14.8 million, or
45.5%, compared to $32.5 million for the year ended December 31, 2004. This
increase in technical services revenues is primarily attributable to increased
remediation revenues associated with our liability assumption program in
Buffalo, New York.

Net investment income and net realized (losses) gains. Net investment
income and net realized (losses) gains totaled $14.2 million for the year ended
December 31, 2005, a decrease of $0.3 million, or 2.6%, compared to $14.5
million for the year ended December 31, 2004. The decrease is primarily due to
an increase in net investment income of $12.9 million because of our larger
amount of invested assets and rises in market interest rates, which is offset by
an increase in net realized losses of $13.2 million, of which $10.2 million is
attributable to other than temporary impairment losses recognized during the
year ended December 31, 2005.

Net investment income was $27.2 million for the year ended December
31, 2005 and was derived primarily from interest earned on fixed maturity and
short term investments, partially offset by investment management fees and
amortization of discounts on fixed maturity investments. Our average annualized
effective yield (calculated by dividing net investment income by the average
amortized cost of invested assets, net of amounts payable or receivable for
investments purchased or sold) was approximately 3.5% for the year ended
December 31, 2005 compared to 2.7% for the year ended December 31, 2004,
reflecting rises in market interest rates. Net realized losses of $13.0 million
were generated primarily from our other than temporary impairment charge of
$10.2 million and also as we sought to manage our total investment returns and
the duration of our investment portfolios.

As of December 31, 2005, the average duration of our investment
portfolio was approximately 2.6 years with an average credit rating of
approximately "AA+".

EXPENSES.

Net losses and loss expenses. Net losses and loss expenses were $324.1
million for the year ended December 31, 2005 an increase of $125.2 million, or
62.9%, compared to $198.9 million for the year ended December 31, 2004. Net
losses and loss expenses are a function of our net premiums earned and our
expected ultimate losses and loss expenses for reported and unreported claims on
contracts of insurance and reinsurance underwritten. The increase in net losses
and loss expenses is due to:

o the number of insurance and reinsurance contracts we entered into
and the associated net premiums earned as our insurance and
reinsurance portfolios continue to mature;

o the increase in loss occurrences, particularly those related to
the 2005 hurricanes and the first quarter 2005 rupture of an oil
pipeline in California during a mudslide; and

o general reserve strengthening relating primarily to our HBW
program, Lloyd's, professional and environmental lines.

Included in our expected ultimate losses during the year ended
December 31, 2005 are specific loss estimates on contracts of reinsurance and
insurance insuring claims arising from Hurricanes Katrina, Rita and Wilma. Our
preliminary loss estimates for the 2005 hurricanes based on currently available
information totals $87.4 million (including reinstatement premiums), of which
$83.3 million is included in net losses and loss expenses for the year ended
December 31, 2005 compared to $61.3 million included in net losses and loss
expenses for the year ended December 31, 2004 from Hurricanes Charley, Frances,
Ivan and Jeanne. Our estimate of our exposure to ultimate claim costs associated
with these hurricanes is primarily based on currently available information,
claims notifications received to date, industry loss estimates, output from
industry models, a review of affected contracts and discussion with cedents and
brokers. The actual amount of losses from the hurricanes may vary significantly
from the estimate.

Our expected ultimate losses during the year ended December 31, 2005
also include estimated gross and net loss estimates of $21.6 million and $13.0
million related to damage caused by an oil pipeline in California which ruptured
during a mudslide in the first quarter of 2005, for which the damage is covered
by an insurance contract issued by our environmental liability product line.
There remains the possibility of further negative development on this loss in
the future, particularly if the timing of the completion of the remediation plan
for the spill is further delayed. In addition to the hurricanes and the oil
pipeline loss, as of December 31, 2005, we have received a limited amount of
significant reported losses. However, we participate in lines of business where
claims may not be reported for some period of time after those claims are
incurred.

We have used the Bornhuetter-Ferguson reserving method as our primary
loss reserving methodology as of December 31, 2005 to estimate the ultimate cost
of losses for our specialty reinsurance lines and our fidelity and technical
risk property specialty insurance lines. The Bornhuetter-Ferguson reserving
method uses an initial expected loss and loss expense ratio supplemented by our
actual loss and loss expense experience to date. We have used an expected loss
ratio method as our primary reserving methodology as of December 31, 2005 to
estimate the ultimate cost of losses for our other specialty insurance business
lines, whereby earned premiums are multiplied by an expected loss ratio to
derive ultimate losses and deducts any paid losses and loss expenses to arrive
at estimated losses and loss expense reserves. With respect to the year ended
December 31, 2005, in establishing our reserves for losses and loss expenses, we
reviewed reserve estimates of an actuary employed with our company and of an
external actuary specialist. We recorded these reserves as of the year ended
December 31, 2005 based on the highest aggregate reserve amount of the estimates
we reviewed. As part of our year-end closing process, we strengthened our loss
reserves for 2005 by approximately $7.9 million. Given the immaturity of our
business and very limited claims history, we have relied on pricing, loss and
expense data accumulated by our consulting actuary, historical industry results,
and to a limited extent, our own reported claims history in establishing loss
ratios for each line of business. Although we have not experienced significant
reported claims in our casualty insurance line, we have worked closely with our
independent loss specialist and concluded to generally strengthen our loss
ratios in our HBW program, Lloyd's and environmental lines with respect to the
year ended December 31, 2005.

Our total net loss ratio (calculated by dividing net losses and loss
expenses by net premiums earned) was 89.0% for the year ended December 31, 2005,
an increase of 5.1% compared to a total net loss ratio of 83.9% for the year
ended December 31, 2004. The increase in the total net loss ratio is due both to
the greater magnitude of the hurricanes that occurred in the second half of 2005
as compared to those that occurred in the third quarter of 2004 and to the oil
pipeline loss. However, the extent of

the impact of the actual catastrophes in 2005 was mitigated by our purchased
reinsurance and retrocessional protection and increased net premiums earned
compared to the year ended December 31, 2004.

We received a claim under our PWIB program relating to tornados
occurring in March 2006. Due to the fact that we very recently received this
claim, we are still in the process of estimating the amount of losses relating
to this claim that we will need to recognize in our financial statement for the
first quarter of 2006.

Acquisition expenses. Acquisition expenses were $69.6 million for the
year ended December 31, 2005, an increase of $15.6 million, or 28.9%, compared
to $54.0 million for the year ended December 31, 2004. The increase in
acquisition expenses is due to the increase in the number of insurance and
reinsurance contracts we entered into and the associated net premiums earned.

Our acquisition expense ratio for the year ended December 31, 2005 was
19.1%, a decrease of 3.7% compared to our acquisition expense ratio of 22.8% for
the year ended December 31, 2004. The decrease is due to four factors. First,
during 2005, our earned premium was more heavily weighted towards specialty
insurance, which carries lower acquisition costs than specialty reinsurance.
Second, we are paying less fronting costs on our specialty insurance lines
because we are licensed in more states and no longer need to utilize fronting
companies to the same extent in order to write our business. Third, our ceding
commission income that we are recovering on our specialty insurance segment's
reinsurance treaties increased during 2005 as a result of the restructuring of
those treaties during the second quarter of 2005. Finally, we paid less
commission in our HBW program during 2005 because the contracts contain sliding
scale commission provisions that vary with changes in the selected loss ratio.
Deferred acquisition costs include, as of December 31, 2005, $33.1 million of
acquisition expenses on written contracts of insurance and reinsurance that will
be amortized in future periods as the premiums written to which they relate are
earned.

Direct technical services costs. Direct technical services costs were
$37.0 million for the year ended December 31, 2005, an increase of $13.8
million, or 59.7% compared to $23.2 million for the year ended December 31,
2004, and were comprised of subcontractor and direct labor expenses. Direct
technical services costs, as a percentage of technical services revenues were
approximately 78.3% for the year ended December 31, 2005 compared to 71.4% for
the year ended December 31, 2004. The increase in direct technical services
costs as a percentage of revenues was attributable to a significant increase in
the use of subcontractors for environmental projects in 2005 as compared to
2004, which resulted primarily from the Buffalo, New York remediation project.

General and administrative expenses. General and administrative
expenses were $97.9 million for the year ended December 31, 2005, an increase of
$34.5 million, or 54.5%, compared to $63.4 million for the year ended December
31, 2004. General and administrative expenses were comprised of $58.6 million of
personnel related expenses (including $6.4 million of severance costs) and $39.3
million of other general and administrative expenses during the year ended
December 31, 2005 compared to $40.7 million of personnel related expenses and
$22.7 million of other expenses during the year ended December 31, 2004. The
increase in general and administrative expenses is due primarily to an increase
in the number of employees as we grew our lines of business, especially in
Europe and our severance costs. To a lesser extent, the increase is attributed
to increases in auditing fees, fees associated with ongoing efforts relating to
Sarbanes-Oxley Section 404 compliance and costs relating to information
technology development. General and administrative expenses related to our
underwriting segment was $90.3 million for the year ended, which included $3.1
million of expenses charged by our technical services segment for technical and
information management services, and $10.7 million of expenses related to our
technical services segment.

Our general and administrative expense ratio was 24.8% for the year
ended December 31, 2005 compared to 23.4% for the year ended December 31, 2004.
The increase was due to the additional number of employees hired and development
of our infrastructure as we grew our lines of business during 2005 and also due
to the impact of the transactions that lowered net earned premiums. In 2005, we
have changed the denominator in the calculation of our general and
administrative expense ratio to net premiums earned, instead of net premiums
written.

Interest expense. Interest expense was $4.2 million for the year ended
December 31, 2005, an increase of $4.1 million compared to $0.1 million for the
year ended December 31, 2004 and relates to the interest expense on our junior
subordinated debentures.

Depreciation and amortization of intangible assets. Depreciation and
amortization of intangible assets was $4.0 million for the year ended December
31, 2005, an increase of $1.8 million compared to $2.2 million for the year
ended December 31, 2004 and consisted of amortization of intangible assets
related to the acquisition of ESC and depreciation of fixed assets. The increase
in depreciation and amortization is due to the purchase of additional fixed
assets throughout 2004 and 2005 as we grew our lines of business.

We have not recorded any net deferred income tax benefits or assets
relating to tax operating losses generated by our subsidiaries since our results
of operations include a 100% valuation allowance against net deferred tax
assets. For the year ended December 31, 2005, the net valuation allowance
increased by approximately $11.5 million, to $24.8 million.

PERIOD FROM MAY 23, 2003 (DATE OF INCORPORATION) TO DECEMBER 31, 2003

Comparisons between the year ended December 31, 2004 and the period
from May 23, 2003 (date of incorporation) to December 31, 2003 are not
meaningful because we commenced substantive operations on September 3, 2003 and
during the period from May 23, 2003 (date of incorporation) to December 31,
2003, we wrote only a small number of insurance and reinsurance contracts.

Results of operations for the period from May 23, 2003 (date of
incorporation) to December 31, 2003 were as follows:

($ in thousands)
----------------
REVENUES
Gross premiums written ...................................... $ 20,465
========
Net premiums written ........................................ $ 20,060
========
Net premiums earned ......................................... $ 1,940
Technical services revenues ................................. 11,680
Net investment income ....................................... 2,290
Net realized gains on investments ........................... 109
Net foreign exchange losses ................................. --
Other income ................................................ 126
--------
Total revenues ........................................... 16,145

EXPENSES
Net losses and loss expenses ................................ (1,191)
Acquisition expenses ........................................ (164)
Direct technical services costs ............................. (8,637)
General and administrative expenses ......................... (44,196)
Depreciation and amortization of intangible
assets ................................................... (434)
Total expenses ........................................... (54,622)
--------
Income taxes ................................................ --
--------
Net loss .................................................... $(38,477)
========

REVENUES. Total revenues of $16.1 million were comprised of net
premiums earned of $1.9 million, technical services revenues of $11.7 million
and investment income of $2.4 million, including

net realized gains on sale of investments of $0.1 million. Technical services
revenues were derived from the operations of ESC, which were included in our
consolidated results of operations from the date of acquisition, September 3,
2003.

Premiums. We commenced writing insurance and reinsurance business
during the fourth quarter of 2003 and wrote $20.5 million of gross premiums
written for the period ended December 31, 2003. Of this premium, 63.5%, or $13.0
million, was written by our specialty reinsurance segment and 36.5%, or $7.5
million, was written by our specialty insurance segment. We ceded a small amount
of our insurance risk, amounting to $0.4 million in premiums ceded. Net premiums
earned in the period were $1.9 million reflecting the short duration of the
period between the inception date of the contracts and December 31, 2003.

Technical services revenues. Technical services revenues comprised
$4.4 million and $7.3 million generated from direct labor and subcontractor
related activities, respectively.

Net investment income and net realized gains. Net investment income
and net realized gains totaled $2.4 million for the period. Net investment
income was $2.3 million and was derived primarily from interest earned on fixed
maturity investments, and short term investments. Subsequent to the private
offering of our shares on September 3, 2003 and our acquisition of ESC, our
investments in cash assets increased by over $487 million representing cash
proceeds from the private offering, net of placement fees and associated costs,
of approximately $505.6 million less $18.5 million used to purchase ESC. Our
average annualized effective yield (calculated by dividing net investment income
by the time weighted average amortized cost of invested assets) for the period
from September 3, 2003 (private offering) to December 31, 2003 was approximately
1.4%. Initially our invested assets were held entirely in cash, liquidity funds
and overnight cash deposits. In October 2003, we and our asset managers
established an investment program to invest in a broader array of assets such as
fixed income securities, in accordance with our investment guidelines as
approved by our board of directors. As a result, our annualized effective yields
have increased through 2004 as we moved the majority of our invested assets into
longer term fixed income securities and similar instruments.

As of December 31, 2003, the average maturity duration of our
investment portfolio was approximately 2.5 years with an average credit rating
of approximately "AA."

EXPENSES. Total expenses were $54.6 million for the period and were
comprised of net losses and loss expenses incurred of $1.2 million, net
acquisition expenses of $0.2 million, direct technical services costs of $8.6
million, general and administrative expenses of $44.2 million and depreciation
and amortization of $0.4 million.

Losses and loss expenses. Net losses and loss expenses for the period
ended December 31, 2003 were $1.2 million and were a function of our net
premiums earned and expected ultimate losses and loss expenses.

Acquisition expenses. Net acquisition expenses for the period ended
December 31, 2003 were $0.2 million and were a function of the number of
insurance and reinsurance contracts we entered into and the associated net
premiums earned.

Direct technical services costs. Direct technical services costs
totaled $8.6 million and were comprised of subcontractor and direct labor
expenses at ESC. Direct technical services costs, as a percentage of technical
services revenues were 70.4% for the period and was consistent with direct
technical services costs as a percentage of technical services revenues realized
by ESC in prior periods.

General and administrative expenses. General and administrative
expenses were $44.2 million for the period and were comprised of $35.6 million
of personnel related expenses and $8.6 million of other overhead and start-up
related expenses. Included in general and administrative expenses were $41.5
million related to our underwriting segment and $2.7 million of expenses related

to our technical services segment. Personnel expenses, representing salaries and
other benefits grew steadily during the period reflecting the ramp-up in our
operations, including the growth in the number of our employees. Personnel
expenses also included $16.7 million of non-recurring, non-cash stock
compensation expense which related to common shares issued to our founding
shareholders in connection with our initial capitalization on May 23, 2003 and
also to certain of our directors and officers in connection with the private
offering of our shares on September 3, 2003. These shares were issued at prices
that were below the private offering price and, in accordance with Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees,"
("APB 25") we are required to expense the difference between the issue price per
share and the fair market value price per share, with a corresponding credit to
additional paid-in capital. The private offering price was considered to be an
approximation of the fair market price of the shares at the time of their
issuance. General and administrative expenses also included approximately $0.6
million of non-recurring start-up related expenses, which were primarily related
to legal and other professional costs.

Depreciation and amortization. Depreciation and amortization for the
period comprised depreciation of fixed assets and the amortization of our
customer relationships and non-compete arrangements intangible assets related to
the acquisition of ESC.

We did not record any net deferred income tax benefits or assets
relating to tax operating losses generated by our subsidiaries since our results
of operations included a 100% valuation allowance against net deferred tax
assets. For the period ended December 31, 2003, the net valuation allowance was
approximately $6.1 million.

RESULTS BY SEGMENTS

UNDERWRITING

We principally provide insurance and reinsurance protection for risks
that are often unusual or difficult to place, that do not fit the underwriting
criteria of standard commercial product carriers and that require extensive
technical underwriting and assessment resources in order to be profitably
underwritten. In measuring the performance of our specialty insurance and
specialty reinsurance segments, we consider each segment's net underwriting
income and a number of financial ratios. Net underwriting income is the sum of
net premiums earned less net losses and loss expenses, acquisition expenses and
direct and allocated general and administrative expenses.

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

During the year ended December 31, 2005, we changed the composition of
our reportable segments to aggregate the Lloyd's operating segment with our
specialty insurance reportable segment. We aggregated these segments to reflect
that we operate these insurance businesses as one and that the Lloyd's business
is very similar to the insurance business we write in the United States. Our
Lloyd's operations were previously reported as a separate segment.

The following is a discussion of our net underwriting results and
profitability measures by segment for the years ended December 31, 2005 and
2004, and separately for the period from May 23, 2003 (date of incorporation) to
December 31, 2003. Since we commenced substantive operations on September 3,
2003 and only wrote a small number of insurance and reinsurance contracts during
the period from May 23, 2003 (date of incorporation) to December 31, 2003,
comparisons between the year ended December 31, 2004 and the period from May 23,
2003 (date of incorporation) to December 31, 2003 are not meaningful.

YEARS ENDED DECEMBER 31, 2005 AND 2004

100

The following table summarizes our net underwriting results and
profitability measures for our segments for the years ended December 31, 2005
and 2004.

SPECIALTY INSURANCE

2005 2004 CHANGE
--------- --------- ---------
($ in thousands)
Gross premiums written ............ $ 392,023 $ 242,580 $ 149,443
Premiums ceded .................... (135,460) (72,259) (63,201)
--------- --------- ---------
Net premiums written .............. $ 256,563 $ 170,321 $ 86,242
========= ========= =========

Net premiums earned ............... $ 197,131 $ 75,167 $ 121,964
Other income ...................... 1,200 -- 1,200
Net losses and loss
expenses ....................... (145,362) (49,805) (95,557)
Acquisition expenses .............. (26,910) (14,287) (12,623)
General and administrative
expenses(1) ................... (65,181) (34,303) (30,878)
--------- --------- ---------
Net underwriting loss ............. $ (39,122) $ (23,228) $ (15,894)
========= ========= =========
RATIOS:

Loss and loss expense ratio ....... 73.7% 66.3% (7.4)%
Acquisition expense ratio ......... 13.7% 19.0% 5.3%
General and administrative
expense ratio .................. 33.1% 45.6% 12.5%
--------- --------- ---------
Combined ratio .................... 120.5% 130.9% 10.6%
========= ========= =========

----------
(1) Includes $2.4 million and $2.3 million of expenses charged by our technical
services segment for technical and information management services for the
years ended December 31, 2005 and 2004.

Premiums. Gross and net premiums written were $392.0 million and
$256.6 million for the year ended December 31, 2005 compared to $242.6 million
and $170.3 million for the year ended December 31, 2004. The increase in our
specialty insurance segment's gross and net premiums written was largely due to
the contribution of $80.7 million, or 20.6%, of the specialty insurance
segment's gross premiums written, from our Lloyd's syndicate, which commenced in
December 2004. The increase also reflected continued growth in all of our
specialty insurance segment product lines. However, shortly after Hurricane
Rita, we discontinued writing new and most renewal business in our technical
risk property line of business (other than our program business), which
accounted for approximately $13.4 million, or 3.4%, of our specialty insurance
segment's gross premiums written during the year ended December 31, 2005. We
also retroceded substantially all the in-force business, as of October 1, 2005,
in this line (other than our program business) by a portfolio transfer to a
third-party reinsurer.

The table below shows gross and net premiums written by product line
for the years ended December 31, 2005 and 2004 whether written on a traditional
insurance, programs or structured basis.

101

2005 2004
------------------- -------------------
($ in thousands)
Gross Net Gross Net
premiums premiums premiums premiums
written written written written
-------- -------- -------- --------
Technical risk property(1)......... $187,474 $114,377 $142,838 $101,650
Professional liability(2).......... 129,238 94,334 47,286 36,467
Environmental liability............ 40,009 23,464 35,914 20,906
Fidelity and crime................. 13,197 6,654 9,040 4,243
Surety............................. 12,041 9,370 5,627 5,301
Trade credit and political risk.... 7,574 6,022 1,875 1,754
Structured insurance............... 1,289 1,289 -- --
Other.............................. 1,201 1,053 -- --
-------- -------- -------- ---------
Total.............................. $392,023 $256,563 $242,580 $170,321
======== ======== ======== ========

----------
(1) The gross and net premiums written generated by our HBW program is written
in our technical risk property product line, as described below.

(2) The gross and net premiums written generated by our Lloyd's syndicate is
included in the professional liability product line, and was $79.5 million
and $60.6 million and $3.2 million and $2.6 million.

During the year ended December 31, 2005, we continued to write, in our
technical risk property product line, the HBW program, which accounted for
approximately $165.9 million, or 88.5%, of the technical risk property line of
business and 42.3% of total specialty insurance segment gross premiums written
in the year ended December 31, 2005. The HBW program accounted for $108.9
million, or 95.2%, of the technical risk property product line and 42.5% of the
total specialty insurance segment net premiums written for the year ended
December 31, 2005. We are no longer writing business in our technical risk
property line other than the programs that are part of that line. The policies
in the program are underwritten by a third-party agent which follows our
underwriting guidelines. We believe that this agent is an established specialist
in this technical field. Our HBW gross premiums written during the year ended
December 31, 2005 are summarized in the table below by specialty risk class.

($ in millions)
---------------
Casualty........................... $140.3
Warranty*.......................... 15.0
Property........................... 10.6
------
Total.............................. $165.9
======
----------
* Warranty is written as reinsurance.

Approximately 44.9% of our specialty insurance segment gross premiums
written of $392.0 million were generated through our program business, of which
42.3% was through our HBW program. The remaining 57.7% of our specialty
insurance segment gross premiums written were generated through a number of
brokers, only one of which accounted for more than 10% of our total specialty
insurance segment gross premiums written.

Premiums ceded were $135.5 million during the year ended December 31,
2005, an increase of $63.2 million compared to $72.3 million for the year ended
December 31, 2004. The increase in premiums ceded reflects the increase in our
gross premiums written, approximately $10.6 million of premiums ceded resulting
from the Property Transaction and approximately $5.5 million from reinsurance
treaties that we have entered into for our specialty insurance product lines to
help limit our net loss exposures to natural catastrophe events. The increase of
premiums ceded is attributable

102

to a lesser extent to the development of the reinsurance program for our
specialty insurance segment product lines, which was restructured during the
year ended December 31, 2005, as described above.

Net premiums earned during the year ended December 31, 2005 were
$197.1 million, an increase of $121.9 million, compared to $75.2 million for the
year ended December 31, 2004 representing growth of premiums written and the
earning and amortization of premiums written and ceded during the years ended
December 31, 2004 and 2005. Gross premiums written and ceded premiums are earned
over the period of each insured risk. The terms of our insurance contracts range
from between one and ten years with the majority of our contracts being for a
one year period.

Other income. Other income was $1.2 million for the year ended
December 31, 2005 and related to income, including fees, recognized on
non-traditional insurance contracts. A more detailed description of these
non-traditional contracts is provided under "- Non-Traditional Contracts" below.

Net losses and loss expenses. Net losses and loss expenses were $145.4
million for the year ended December 31, 2005, an increase of $95.6 million
compared to $49.8 million for the year ended December 31, 2004. Net losses and
loss expenses are a function of our net premiums earned and our expected
ultimate losses and loss expenses for reported and unreported claims on
contracts of insurance and reinsurance underwritten. The increase in net losses
and loss expenses is due to:

o the increase in loss occurrences, particularly those related to
the 2005 hurricanes and the first quarter 2005 rupture of an oil
pipeline in California during a mudslide;

o the growth in the number of insurance contracts we entered into
and the associated net premiums earned; and

o general reserve strengthening relating primarily to our HBW
program, Lloyd's, professional and environmental lines.

Included in our expected ultimate losses in our specialty insurance
segment during the year ended December 31, 2005 are specific loss estimates on
contracts of insurance insuring claims arising from Hurricanes Katrina, Rita and
Wilma. Our estimate of our specialty insurance segment's exposure to ultimate
claim costs associated with these hurricanes based on currently available
information is $13.9 million (including reinstatement premiums), of which $11.4
million is included in net losses and loss expenses for the year ended December
31, 2005, compared to $0.6 million included in net losses and loss expenses for
the year ended December 31, 2004 from Hurricanes Charley, Frances, Ivan and
Jeanne. Our preliminary estimate of our exposure to ultimate claim costs
associated with these hurricanes is based on currently available information,
claims notifications received to date, industry loss estimates, output from
industry models, a review of affected contracts and discussion and brokers. The
actual amount of losses from the hurricanes may vary significantly from the
estimate.

As part of our year-end closing process, we strengthened our loss
reserves for 2005 by approximately $13.2 million. Given the immaturity of our
business and very limited claims history, we have relied on pricing, loss and
expense data accumulated by our consulting actuary, historical industry results,
and to a limited extent, our own reported claims history in establishing loss
ratios for each line of business. Although we have not experienced significant
reported claims in our specialty insurance lines, other than those related to
the 2005 hurricanes and the oil pipeline, we have worked closely with our
independent loss specialist and concluded to generally strengthen our loss
ratios in our HBW program, Lloyd's and environmental lines with respect to the
year ended December 31, 2005.

103

timing of the completion of the remediation plan for the spill is further
delayed. In addition to the hurricanes and the oil pipeline loss, as of December
31, 2005, we have received a limited amount of significant reported losses.
However, we participate in lines of business where claims may not be reported
for some period of time after those claims are incurred.

Our specialty insurance segment net loss ratio was 73.7% for the year
ended December 31, 2005 an increase of 7.4% compared to a net loss ratio of
66.3% for the year ended December 31, 2004. The increase in the specialty
insurance segment net loss ratio is due to the loss estimates arising from
Hurricanes Katrina, Rita and Wilma as well as to the loss estimates arising from
the ruptured oil pipeline loss. However, the extent of the impact of the actual
catastrophes in 2005 was mitigated by our purchased reinsurance protection in
our specialty insurance segment and increased net premiums earned in our
specialty insurance segment compared to the year ended December 31, 2004. The
2005 hurricanes contributed 6.6% loss ratio percentage points to the specialty
insurance segment net loss ratio.

Acquisition expenses. Acquisition expenses were $26.9 million for the
year ended December 31, 2005 an increase of $12.6 million, or 88.4%, compared to
$14.3 million for the year ended December 31, 2004. The increase in acquisition
expenses was due to the increase in the number of insurance contracts we entered
into and the associated net premiums earned. These acquisition expenses
primarily represented brokerage fees, commission fees and premium tax expenses
and were net of ceding commissions earned on purchased reinsurance treaties.

Our acquisition expense ratio was 13.7% for the year ended December
31, 2005 a decrease of 5.3% compared to 19.0% for the year ended December 31,
2004. The reduction in our acquisition expense ratio in the specialty insurance
segment is primarily due to three factors. First, we are paying less fronting
costs because we are licensed in more states and no longer need to utilize
fronting companies to the same extent in order to write our insurance business.
Second, our ceding commission income that we are recovering on our specialty
insurance segment's reinsurance treaties increased during 2005 as a result of
the restructuring of those treaties during the second quarter of 2005. Third, we
paid less commission in our HBW program during the year ended December 31, 2005
as a result of the contracts containing sliding scale commission provisions that
vary with changes in the selected loss ratio. The selected loss ratio under the
HBW contracts increased from 56.8% in 2004 to 64.8% in 2005. Deferred
acquisition costs include, as of December 31, 2005, $17.5 million of acquisition
expenses on written contracts of insurance that will be amortized in future
periods as the premiums written to which they relate are earned.

General and administrative expenses. Direct and allocated indirect
general and administrative expenses totaled $65.2 million for the year ended
December 31, 2005 an increase of $30.9 million, or 90.0%, compared to $34.3
million for the year ended December 31, 2004. The increase in our general and
administrative expense was due to the additional number of employees hired
throughout 2004 and 2005, especially in Europe. The increase is also attributed
to severance costs, increases in auditing fees, fees associated with ongoing
efforts relating to Sarbanes-Oxley Section 404 compliance and costs relating to
information technology development, which were allocated to our specialty
insurance segment. Our general and administrative expense ratio decreased to
33.1% for the year ended December 31, 2005, compared to 45.6% for the year ended
December 31, 2004 due primarily to the increase in our specialty insurance
segment's net premiums earned.

104

SPECIALTY REINSURANCE

2005 2004 CHANGE
--------- --------- ---------
($ in thousands)
Gross premiums written......... $ 216,912 $ 251,832 $ (34,920)
Premiums ceded................. (83,434) (2,612) (80,822)
--------- --------- ---------
Net premiums written........... $ 133,478 $ 249,220 $(115,742)
========= ========= =========
Net premiums earned............ $ 166,944 $ 161,973 $ 4,971
Other income................... 1,974 1,571 403
Net losses and loss expenses... (178,887) (149,111) (29,776)
Acquisition expenses........... (42,714) (39,708) (3,006)
General and administrative
expenses(1)................. (25,154) (21,301) (3,853)
--------- --------- ---------
Net underwriting loss.......... $ (77,837) $ (46,576) $ (31,261)
========= ========= =========
RATIOS:
Loss and loss expense ratio.... 107.2% 92.1% (15.1)%
Acquisition expense ratio...... 25.6% 24.5% (1.1)%
General and administrative
expense ratio............... 15.1% 13.2% (1.9)%
--------- --------- ---------
Combined ratio................. 147.9% 129.8% (18.1)%
========= ========= =========

----------
(1) Includes $0.7 million and zero of expenses charged by our technical
services segment for information management services for the years ended
December 31, 2005 and 2004.

Premiums. Gross and net premiums written were $216.9 million and
$133.5 million for the year ended December 31, 2005 compared to $251.8 million
and $249.2 million of gross and net premiums for the year ended December 31,
2004. The decrease in our specialty reinsurance segment's net premiums written
reflects the decrease in our property and casualty reinsurance business lines as
a result of our decision to discontinue the writing of new and renewal business
in our property reinsurance business line and the commutation of two treaties in
our casualty reinsurance business line, as described above. The decline was
partially offset by growth in our marine reinsurance business line during 2005.

The table below shows gross and net premiums written by product line
whether written on a traditional reinsurance, programs or structured basis:

2005 2004
-------------------- -------------------
($ in thousands)
Gross Net Gross Net
premiums premiums premiums written
written written written premium
--------- -------- -------- --------
Property.................. 83,505 21,661 103,311 103,052
Casualty.................. $ 79,376 $ 79,376 $105,405 $105,405
Marine, technical risk and 54,031 32,441 42,660 40,307
aviation...............
Structured reinsurance.... -- -- 456 456
--------- -------- -------- --------
Total..................... $ 216,912 $133,478 $251,832 $249,220
========= ======== ======== ========

Our property reinsurance gross premiums written during the year ended
December 31, 2005 are summarized in the table below by risk class.

105

Homeowners and commercial property... 87.5%
Crop hail............................ 12.5%
-----
Total................................ 100.0%
=====

Our property reinsurance premiums written include contracts written on
excess of loss and quota share bases. Of our total property reinsurance gross
premiums written of $83.5 million for the year ended December 31, 2005, 27.2%
represents excess of loss contracts that we believe are exposed to losses from
natural catastrophe events worldwide. The majority of our property quota share
contracts are exposed to natural perils, including natural catastrophes.

Our casualty reinsurance gross premiums written during the year ended
December 31, 2005 are summarized in the table below by risk class.

Workers' compensation... 29.7%
Other................... 70.3%
-----
Total................... 100.0%
=====

Our casualty reinsurance gross premiums written included in our other
casualty category, were spread across 23 different risk classes, none of which
accounted for more than 10% of our casualty reinsurance premiums written for the
year ended December 31, 2005.

Our marine, technical risk and aviation reinsurance gross premiums
written during the year ended December 31, 2005 are summarized in the table
below by risk class.

Ocean marine... 91.6%
Aviation....... 8.4%
-----
Total.......... 100.0%
=====

Approximately 42.0%, 25.5% and 10.6% of our specialty reinsurance
segment gross premiums written of $216.9 million were generated through Guy
Carpenter & Company, Inc., Benfield Group and Willis Group.

Ceded premiums were $83.4 million during the year ended December 31,
2005 compared to $2.6 million for the year ended December 31, 2004. The increase
in our ceded premiums written reflects approximately $34.1 million of purchased
retrocession protection, including reinstatement premiums, in our specialty
reinsurance property and marine, technical risk and aviation product lines. We
obtained the retrocession protection to help limit our net loss exposures to
natural catastrophe events. We also purchased additional retrocessional coverage
for our marine, technical risk and aviation reinsurance product line to limit
our future probable maximum losses during the fourth quarter of 2005. These
retrocession treaties provide us with protection on an excess of loss, quota
share treaty and facultative basis for policies written in our reinsurance
product lines of business. Ceded premiums also includes $46.7 million of premium
ceded to the third-party reinsurer under the Property Transaction. Ceded
premiums are earned over the period of each insured risk.

Net premiums earned of $166.9 million for the year ended December 31,
2005 have increased by $5.0 million compared to the year ended December 31,
2004. The increase reflects the earning of premiums on contracts written during
the years ended December 31, 2005 and 2004 and is offset by the impact of the
decision to discontinue the writing of new and renewal business in our property
reinsurance line of business, the Property Transaction, the Casualty Reinsurance
Transaction and the purchase of additional retrocessional protection. Gross
premiums written in our specialty reinsurance

106

segment are being earned over the periods of reinsured or underlying insured
risks which are typically one year.

Other income. Other income was $2.0 million for the year ended
December 31, 2005 compared to $1.6 million for the year ended December 31, 2004,
and related to income, including fees, recognized on non-traditional reinsurance
contracts. A more detailed description of these non-traditional contracts is
provided under "- Non-Traditional Contracts" below.

Net losses and loss expenses. Net losses and loss expenses were $178.9
million for the year ended December 31, 2005 an increase of $29.8 million, or
20.0%, compared to $149.1 million for the year ended December 31, 2004. The
increase in net losses and loss expenses incurred was due to increased loss
occurrences, particularly those related to the 2005 hurricanes, as well as the
increase in the number of reinsurance contracts we entered into and the
associated net premiums earned. Net losses and loss expenses were a function of
our net premiums earned and our expected ultimate losses and loss expenses for
reported and unreported claims on contracts of reinsurance underwritten.

Included in our expected ultimate losses during the year ended
December 31, 2005 are specific loss estimates on contracts of reinsurance
insuring claims arising from Hurricanes Katrina, Rita and Wilma. Our estimate of
our specialty reinsurance segment's exposure to ultimate claim costs associated
with these hurricanes based on currently available information is $73.5 million
(including reinstatement premiums), of which $71.9 million is included in net
losses and loss expenses for the year ended December 31, 2005 compared to $60.7
million included in net losses and loss expenses for the year ended December 31,
2004 from Hurricanes Charley, Frances, Ivan and Jeanne. Our preliminary estimate
of ultimate losses from these events is primarily based on currently available
information, claims notifications received to date, industry loss estimates,
output from industry models, a review of affected contracts and discussion with
cedents and brokers. The actual amount of losses from the hurricanes may vary
significantly from the estimate. Other than the hurricane losses, as of December
31, 2005, we have received a limited amount of significant reported losses in
our specialty reinsurance segment. However, we participate in lines of business
where claims may not be reported for some period of time after those claims are
incurred.

Our specialty reinsurance segment net loss ratio was 107.2% for the
year ended December 31, 2005 compared to 92.1% for the year ended December 31,
2004. The increase in the specialty reinsurance segment net loss ratio is due to
the magnitude of the loss estimates arising from Hurricanes Katrina, Rita and
Wilma described above. However, the extent of the impact of the actual
catastrophes in 2005 was mitigated by our purchased retrocessional protection
during the year ended December 31, 2005. The 2005 hurricanes contributed 43.7%
loss ratio percentage points to the segment loss ratio.

Acquisition expenses. Acquisition expenses were $42.7 million for the
year ended December 31, 2005 an increase of $3.0 million, or 7.6%, compared to
$39.7 million for the year ended December 31, 2004. The increase in acquisition
expenses was due to the increase in the number of reinsurance contracts we
entered into and the associated net premiums earned. These acquisition expenses
primarily represented brokerage and ceding commissions.

Our acquisition expense ratio was 25.6% for the year ended December
31, 2005, compared to 24.5% for the year ended December 31, 2004. The increase
reflects certain contracts with higher commission rates that were written during
the second and third quarters of 2005 in our property, casualty and marine,
technical risk and aviation reinsurance product lines and the impact of ceded
premiums and ceded reinstatement premiums reducing our specialty reinsurance
segment's net earned premium.

General and administrative expenses. Direct and allocated indirect
general and administrative expenses totaled $25.2 million for the year ended
December 31, 2005 an increase of $3.9 million, or 18.1% compared to $21.3
million for the year ended December 31, 2004, reflecting the

107

additional number of employees hired throughout 2004 and 2005. The increase is
also attributed to severance costs, increases in auditing fees, fees associated
with ongoing efforts relating to Sarbanes-Oxley Section 404 compliance and costs
relating to information technology development, which were allocated to our
specialty reinsurance segment. Our general and administrative expense ratio was
15.1% for the year ended December 31, 2005 compared to 13.2% for the year ended
December 31, 2004.

PERIOD FROM MAY 23, 2003 (DATE OF INCORPORATION) TO DECEMBER 31, 2003

The following table summarizes our net underwriting results and
profitability measures for our specialty insurance and reinsurance segments for
the period from May 23, 2003 (date of incorporation) to December 31, 2003. Our
Lloyd's segment was not established until the fourth quarter of 2004:

SPECIALTY SPECIALTY TOTAL
INSURANCE REINSURANCE UNDERWRITING
--------- ----------- ------------
($ in thousands)
Direct insurance...................... $7,469 $ -- $ 7,469
Reinsurance assumed................... -- 12,996 12,996
------ ------- --------
Total gross premiums written.......... 7,469 12,996 20,465
Premiums ceded........................ (405) -- (405)
------ ------- --------
Net premiums written.................. $7,064 $12,996 $ 20,060
====== ======= ========
Net premiums earned................... $ 339 $ 1,601 $ 1,940
Net losses and loss expenses.......... (183) (1,008) (1,191)
Acquisition expenses.................. (24) (140) (164)
General and administrative expenses... -- -- (24,814)
------ ------- --------
Net underwriting income (loss)........ $ 132 $ 453 $(24,229)
====== ======= ========

During the period from May 23, 2003 (date of incorporation) to
December 31, 2003, we did not allocate general and administrative expenses to
our underwriting segments.

SPECIALTY INSURANCE

Premiums. Gross and net written insurance premiums were $7.5 million
and $7.1 million for the period ended December 31, 2003. The table below shows
gross and net premiums written by line of business:

Gross Net
premiums premiums
written written
-------- --------
($ in thousands)
Environmental liability $3,816 $3,816
Professional liability 2,729 2,324
Fidelity and crime 924 924
------ ------
Total $7,469 $7,064
====== ======

108

For the period ended December 31, 2003 we did not write any other
lines of business in our specialty insurance segment. Premiums ceded of $0.4
million relate to proportional facultative reinsurance purchased for certain
professional liability insurance policies written. Gross premiums written and
ceded premiums are earned over the period of insured risk. Consequently, only
$0.3 million of net premiums written were earned during the period reflecting
the short period of time between policy inception and our year end.

Net losses and loss expenses. Net losses and loss expenses incurred of
$0.2 million reflect a loss and loss expense ratio (calculated as losses and
loss expenses incurred divided by net premium earned) of 54.0%. For the period
ended December 31, 2003 we adopted an expected loss ratio methodology to
estimate our ultimate cost of losses; this method multiplied premiums earned by
an expected loss ratio that was derived, for each line of business, from pricing
data, industry data and from information provided by brokers and insureds. As of
December 31, 2003, we had not received any notifications of reported losses.

Acquisition costs. Acquisition costs for the period were negligible,
and primarily represented brokerage expenses.

SPECIALTY REINSURANCE

Premiums. Gross and net written reinsurance premiums were $13.0
million for the period ended December 31, 2003. The table below shows gross and
net premiums written by line of business:

Gross Net
premiums premiums
written written
-------- --------
($ in thousands)
Casualty $ 7,463 $ 7,463
Property 5,533 5,533
-------- --------
Total $12,996 $12,996
======= =======

Gross reinsurance premiums written primarily reflected a limited
number of reinsurance contracts that were written during the month of December
2003, and are being earned over the period of reinsured risks. Consequently,
only $1.6 million of reinsurance premiums written were earned during the period
reflecting the short time period between contract inception and our year end.
For the period ended December 31, 2003 we did not write any other reinsurance
business.

Net losses and loss expenses. Net losses and loss expenses incurred of
$1.0 million reflect a loss and loss expense ratio of 63.0%. For the period
ended December 31, 2003, we adopted an expected loss ratio methodology to
estimate our ultimate cost of reinsurance losses. As of December 31, 2003, we
had not received any notifications of reported losses on our specialty
reinsurance lines of business.

Acquisition costs. Acquisition costs for the period were not
significant, and primarily represented brokerage and reinsurance commission
expenses that were in line with market rates.

TECHNICAL SERVICES

YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004

The following table summarizes and compares our technical services
segment results for the years ended December 31, 2005 and 2004.

109

2005 2004
-------- --------
($ in thousands)
Technical services revenues $ 50,499 $ 34,752
Other income 1,718 586
Direct technical services costs (37,027) (23,182)
General and administrative expenses (10,664) (10,055)
-------- --------
Net technical services income $ 4,526 $ 2,101
======== ========

Technical services revenues. Technical services revenues were $50.5
million for the year ended December 31, 2005, an increase of $15.7 million, or
45.3%, compared to $34.8 million for the year ended December 31, 2004. The
increase in technical services revenues is primarily attributable to increased
remediation revenues associated with liability transfer project in Buffalo, New
York. During the year ended December 31, 2005, our liability assumption program
in Buffalo generated revenues of $14.8 million and other income of $1.4 million.

Other income. Other income totaled $1.7 million for the year ended
December 31, 2005, an increase of $1.1 million, compared to $0.6 million for the
year ended December 31, 2004. The increase was primarily generated from our
liability assumption program in Buffalo, New York. This income primarily
represents the amount of consideration received for the assumption of
remediation liabilities in excess of the expected environmental remediation
liability which is initially deferred in the consolidated balance sheet and
subsequently recognized in earnings over the remediation period using the cost
recovery or percentage of completion method.

Direct technical services costs. Direct technical services costs were
$37.0 million for the year ended December 31, 2005, an increase of $13.8
million, or 59.7%, compared to $23.2 million for the year ended December 31,
2004. The increase in direct technical services costs was primarily attributable
to increased direct subcontractor expenses which resulted from the Buffalo, New
York remediation project undertaken during the year ended December 31, 2005
compared to the year ended December 31, 2004. Direct technical services costs,
as a percentage of revenue was 73.3% for the year ended December 31, 2005
compared to 66.7% for the year ended December 31, 2004, reflecting the increased
usage of subcontractors for environmental projects in 2005 as compared to 2004.

General and administrative expenses. Direct and indirect allocated
general and administrative expenses were $10.7 million for the year ended
December 31, 2005, an increase of $0.6 million, or 6.1% compared to $10.1
million for the year ended December 31, 2004. The increase is attributable to
increased staffing levels, higher overhead allocation arising from the
development of our infrastructure and Sarbanes-Oxley Section 404 compliance
efforts, and professional fees associated with the environmental liability
assumption program in Buffalo, New York.

YEAR ENDED DECEMBER 31, 2004 COMPARED TO PERIOD FROM SEPTEMBER 3, 2003
TO DECEMBER 31, 2003 AND PERIOD FROM JANUARY 1, 2003 TO SEPTEMBER 3, 2003

The following table summarizes and compares our technical services
segment results for the year ended December 31, 2004 and, on a pro forma basis,
the year ended December 31, 2003. Substantially all of these results were
generated by the operations of our predecessor, ESC. The pro forma technical
services segment results for the year ended December 31, 2003 are derived from
the aggregation of segment results for the period from September 3, 2003 to
December 31, 2003 and the segment results of ESC for the period January 1, 2003
to September 3, 2003 (the date of our acquisition of ESC). We believe that our
comparative discussion on this pro forma basis provides a more meaningful
analysis of the results of the technical services segment.

110

PRO FORMA
YEAR ENDED PERIOD FROM YEAR ENDED
------------ --------------------------------- ------------
SEPTEMBER 3,
2003 TO JANUARY 1, 2003 TO
DECEMBER 31, DECEMBER 31, SEPTEMBER 3, 2003 DECEMBER 31,
2004 2003 (PREDECESSOR) 2003
------------ ------------ ------------------ ------------
($ in thousands)

Technical services revenues ....... $ 34,752 $12,261 $ 20,350 $ 32,611
Other income ...................... 586 100 14 114
Direct technical services costs ... (23,182) (8,637) (12,992) (21,629)
General and administrative
expenses ....................... (10,055) (2,657) (5,820) (8,477)
-------- ------- -------- --------
Net technical services income ..... $ 2,101 $ 1,067 $ 1,552 $ 2,619
======== ======= ======== ========

Technical services revenues. Technical services revenues were $34.8
million for the year ended December 31, 2004, an increase of $2.2 million, or
6.6%, compared to $32.6 million for the pro forma year ended December 31, 2003.
The increase of $2.2 million in technical services revenues consists of a $0.8
million increase in subcontractor revenue and a $1.4 million increase in direct
labor revenue. The increase in subcontractor revenue during the year ended
December 31, 2004 was the result of an increase in subcontractor remediation
activity. The increase in direct labor revenue is a result of an increase in
client spending on environmental projects.

Other income. Other income totaled $0.6 million for the year ended
December 31, 2004, an increase of $0.5 million, compared to $0.1 million for the
pro forma year ended December 31, 2003. The increase was primarily generated
from our liability assumption program under which we assume specified
environmental liabilities. This income represents fees earned relating to the
remediation services performed. ESC did not engage in environmental liability
assumption program activity during the period from January 1, 2003 to September
3, 2003.

Direct technical services costs. Direct technical services costs were
$23.2 million for the year ended December 31, 2004, an increase of $1.6 million,
or 7.2%, compared to $21.6 million for the pro forma year ended December 31,
2003. The increase in direct technical services costs was primarily attributable
to increased subcontractor expenses which resulted from an increase in the
number, and change in the nature of, remediation projects undertaken during the
year ended December 31, 2004 compared to the pro forma year ended December 31,
2003. Direct technical services costs, as a percentage of revenue was 66.7% for
the year ended December 31, 2004 compared to 66.3% for the pro forma year ended
December 31, 2003.

General and administrative expenses. Direct and indirect allocated
general and administrative expenses were $10.1 million for the year ended
December 31, 2004, an increase of $1.6 million, or 18.6% compared to $8.5
million for the pro forma year ended December 31, 2003. The increase is
primarily attributable to a general increase in underlying general and
administrative expenses and increased salary and benefit expense related to
hiring additional staff during the year ended December 31, 2004 compared to the
pro forma year ended December 31, 2003.

FINANCIAL CONDITION AND LIQUIDITY

Quanta Holdings is organized as a Bermuda holding company, and as
such, has no direct operations of its own. Our assets consist of investments in
our subsidiaries through which we conduct substantially all of our insurance,
reinsurance and technical services operations. As of December 31, 2005, we had
operations in the U.S., Bermuda, Ireland and the U.K., including Syndicate 4000.

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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, dividends on our preferred shares, taxes, and the payment of
other obligations. Funds to meet these obligations will come primarily from
dividends, interest and other statutorily permissible payments from our
operating subsidiaries. The ability of our operating subsidiaries to make
payments to Quanta Holdings is limited by the applicable laws and regulations of
the domiciles in which the subsidiaries operate. These laws and regulations
subject our subsidiaries to significant restrictions and require, among other
things, that some of our subsidiaries maintain minimum solvency requirements and
limit the amount of dividends that these subsidiaries can pay to us. Rating
agency considerations also limit our ability to transfer capital allocated among
our insurance operating subsidiaries. Additionally, there are significant
restrictions regarding our ability to remove the funds deposited to support our
underwriting capacity of our Lloyd's syndicate. For further information
regarding these restrictions, see "Item 1. Business--Regulation" and notes 21
and 23 to our consolidated financial statements. As a result, there are
restrictions on our ability to transfer substantially all of the investment
balances of our insurance subsidiaries to Quanta Holdings.

We are also subject to constraints under the Companies Act that affect
our ability to pay dividends on our shares. We may not declare or pay a dividend
or make a distribution if we have reasonable grounds for believing that we are,
or will after the payment be, unable to pay our liabilities as they become due
or if the realizable value of our assets will thereby be less than the aggregate
of our liabilities and our issued share capital and share premium accounts. As a
result of our losses, for Bermuda company law purposes, we expect that the
realizable value of our assets will no longer exceed the aggregate of our
liabilities and our issued share capital and share premium accounts. In order
for Quanta Holdings to have the flexibility to pay dividends to shareholders, we
are evaluating a proposal to reduce the share premium account and allocate sums
to our contributed surplus account.

We estimate that we currently have investments of approximately
$1,011.7 million, including cash and cash equivalent balances of approximately
$197.1 million. We estimate that our cash and cash equivalents and investment
balances include approximately $260.5 million that is pledged as collateral for
letters of credit, approximately $169.5 million held in trust funds for the
benefit of ceding companies and to fund our obligations associated with the
assumption of an environmental remediation liability, $156.4 million that is
held by Lloyd's to support our underwriting activities, $52.7 million held in
trust funds that are related to our deposit liabilities and $30.7 million that
is on deposit with, or has been pledged to, U.S. state insurance departments.
After giving effect to these assets pledged or placed in trust, we estimate that
we presently have net investments of $341.9 million, including net cash and cash
equivalents of approximately $107.9 million. Substantially all of our capital
has been distributed among our rated operating subsidiaries based on our
assessment of the levels of capital that we believe are prudent to support our
business, the applicable regulatory requirements, and the recommendations of the
insurance regulatory authorities and rating agencies. We believe our operating
subsidiaries have sufficient assets to pay their respective currently foreseen
liabilities as they become due. We also believe that our operating subsidiaries
can distribute sufficient funds to Quanta Holdings to enable to pay its
currently foreseen liabilities as they become due, subject to the constraints
under the Companies Act that affect our ability to pay dividends on our shares
as described above.

Some of our insurance and many of our reinsurance contracts contain
termination rights that are triggered by the A.M. Best rating downgrade. Some of
these insurance and reinsurance contracts also require us to post additional
security. Further, a downgrade in our rating below "B++" (very good) will
trigger termination provisions or require the posting of additional security in
certain of our other insurance and reinsurance contracts. As a result, we may be
required to post additional security either through the issuance of letters of
credit or the placement of securities in trust under the terms of those
insurance or reinsurance contracts. In addition, many of our insurance contracts
and certain of our reinsurance contracts provide for cancellation at the option
of the policyholder regardless of our financial strength rating. Accordingly, we
may also elect to post security under these other contracts in order to maintain
that business.

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We estimate that we currently have net cash and cash equivalent
balances and other investments of approximately $341.9 million that are
available to post as security or place in trust. We currently believe that we
have sufficient assets to pay our foreseen liabilities as they become due and
meet our foreseen collateral requirements. However, we cannot draw letters of
credit or borrow under the credit agreement if we have incurred a material
adverse effect or if a default exists under the agreement. A downgrade in our
rating below "B++" (very good) will cause a default in our credit facility. The
obligations under the credit facility are currently fully secured by investments
and cash. If a default occurs under the credit agreement, our lenders may
require us to cash collateralize a portion or all of the outstanding letters of
credit issued under the facility, which may be accomplished through the
substitution or liquidation of collateral. The lenders would also have the
right, among other things, to cancel outstanding letters of credit issued under
the facility. If we fail to maintain or enter into adequate letter of credit
facilities on a timely basis, we would be required to place securities in trust
or similar arrangements, which would be more difficult and costly to establish
and administer.

FINANCIAL CONDITION

Our board of directors established our investment policies and created
guidelines for hiring external investment managers. Management implements our
investment strategy with the assistance of the external managers. Our investment
guidelines specify minimum criteria on the overall credit quality, liquidity and
risk-return characteristics of our investment portfolio and include limitations
on the size of particular holdings, as well as restrictions on investments in
different asset classes. The board of directors monitors our overall investment
returns and reviews compliance with our investment guidelines.

We have determined that $607.2 million of investment securities,
with unrealized losses of approximately $10.2 million were other-than-
temporarily impaired as of December 31, 2005. The realization of these losses
represents the maximum amount of potential losses in our investment securities
if we would have sold all of these securities at December 31, 2005. As a result
of our decision, the affected investments were reduced to their estimated fair
value, which becomes their new cost basis. The recognition of the losses has no
affect on our shareholders' equity, the market value of our investments, our
cash flows or our liquidity. The evaluation for other-than-temporary impairments
requires the application of significant judgment, including our intent and
ability to hold the investment for a period of time sufficient to allow for
possible recovery. We believe we have sufficient assets to pay our currently
foreseen liabilities as they become due and we have no immediate intent to
liquidate the investments securities affected by our decision. However, due to
the general uncertainties surrounding our business resulting from A.M. Best's
March 2006 downgrade of our financial strength ratings and our decision to
explore strategic alternatives, we concluded that there are no absolute
assurances that we will have the ability to hold the affected investments for a
sufficient period of time. It is possible that the investment securities' fair
values could change in subsequent periods, resulting in further material
impairment charges.

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transactions, which are defined as a set of derivative, insurance and/or
securities transactions that when combined produce the equivalent economic
results of an investment meeting our investment guidelines. While we expect that
the majority of our investment holdings will be denominated in U.S. dollars, we
may make investments in other currency denominations depending upon the
currencies in which loss reserves are maintained, or as may be required by
regulation or law.

Our available-for-sale investments, excluding trading investments
related to deposit liabilities, totaled $699.1 million as of December 31, 2005
compared to $559.4 million at December 31, 2004. The market value of our total
investment portfolio was $737.4 million, of which $662.5 million related to
available-for-sale fixed maturity investments, $36.6 million related to
available for sale short-term investments and $38.3 million to trading
investments related to deposit liabilities. The majority of our investment
portfolio consists of fixed maturity investments which are managed by the
following external investment advisors: Pacific Investment Management Company
LLC, JP Morgan Investment Management Inc. and Deutsche Asset Management.
Custodians of our externally managed investment portfolios are JP Morgan Chase
Bank N.A., Citibank N.A. and Comerica Incorporated.

Our investment guidelines require that the average credit quality of
the investment portfolio is typically Aa3/AA- and that no more than 5% of the
investment portfolio's market value shall be invested in securities rated below
Baa3/BBB-. As of December 31, 2005, all of the fixed maturity investments were
investment grade, with a weighted average credit rating of "AA+" based on
ratings assigned by S&P. Our cash and cash equivalents totaled $260.9 million as
of December 31, 2005 compared to $75.3 million at December 31, 2004. The
increase in our available-for-sale investments and cash and cash equivalents is
primarily due to the net proceeds raised from the sale of our common shares and
preferred shares of $131.6 million in December 2005, the growth in our premiums
written during the year ended December 31, 2005, the issuance of $20.6 million
of junior subordinated debentures, and $20.0 million proceeds from the sale of a
mortality-risk-linked security, partially offset by claims notifications and
associated loss payments we have made up to and including December 31, 2005.

Our insurance and reinsurance premiums receivable balances totaled
$146.8 million as of December 31, 2005 compared to $146.8 million at December
31, 2004. The decrease in premiums receivable reflects our decision to
discontinue writing new and renewal business in our property reinsurance and
technical risk property lines of business during the fourth quarter of 2005,
partially offset by our growth across the specialty insurance segment during the
year ended December 31, 2005. Included in our premiums receivable are
approximately $104.2 million of written premium installments that are not yet
currently due under the terms of the related insurance and reinsurance
contracts. As of December 31, 2005, based on our review of the remaining balance
of $42.6 million, which represents premiums installments that are currently due,
we believe there are no individually significant balances that are delinquent or
uncollectible.

Our deferred acquisition costs and unearned premiums, net of deferred
reinsurance premiums, totaled $33.1 million and $224.5 million, respectively, as
of December 31, 2005 compared to $41.5 million and $200.5 million as of December
31, 2004. The decrease in our deferred acquisition costs during the year ended
December 31, 2005 is due to the ceding commission income that we are recovering
on our specialty insurance segments reinsurance treaties and as a result of
recovering commission income from the third-party reinsurer under the Property
Transaction. The increase in unearned premiums, net of deferred reinsurance, is
due to the growth in our premiums written during the year ended December 31,
2005, which is in part offset by an increase in deferred reinsurance premiums as
a result of the ceding of premiums from the third-party reinsurer under the
Property Transaction. These amounts represent premiums and acquisition expenses
on written contracts of insurance and reinsurance that will be recognized in
earnings in future periods. Substantially all of these amounts will be
recognized over the next 12 months.

Our reserves for losses and loss adjustment expenses, net of
reinsurance recoverable, totaled $343.6 million as December 31, 2005 compared to
$146.3 million as of December 31, 2004. The increase in our net loss and loss
expense reserves reflects the growth in our business, the associated

114

insured risks we assumed during the year ended December 31, 2005 and include our
estimate of ultimate unpaid net loss expenses totaling $71.9 million relating to
Hurricanes Katrina, Rita and Wilma, our remaining unpaid loss expenses totaling
$5.4 million relating to Hurricanes Charley, Frances, Ivan and Jeanne and $4.7
million relating to the environmental claim that we incurred during the year
ended December 31, 2005. The increase also represents general strengthening of
our loss reserves for 2005 by approximately $13.2 million as part of our
year-end closing process. Given the immaturity of our business and very limited
claims history, we have relied on pricing, loss and expense data accumulated by
our consulting actuary, historical industry results, and to a limited extent,
our own reported claims history in establishing loss ratios for each line of
business. Although we have not experienced significant reported claims in our
casualty insurance line, we have worked closely with our independent loss
specialist and concluded to generally strengthen our loss ratios in our HBW
program, Lloyd's, professional and environmental lines with respect to the year
ended December 31, 2005. Our estimate of our unpaid exposure to ultimate claim
costs associated with these losses is based on currently available information,
claim notifications received to date, industry loss estimates, output from
industry models, a review of affected contracts and discussion with clients,
cedants and brokers. The actual amount of future loss payments relating to these
loss events may vary significantly from this estimate. As of December 31, 2005
we have received a limited amount of other reported losses. However, we
participate in lines of business where claims may not be reported for some
period of time after those claims are incurred. A description of the method we
use to determine our loss reserves is included above under "Results of
operations."

Our estimate of our reserves for losses and loss adjustment expenses
as of December 31, 2005 of $343.6 million is net of reinsurance recoverable of
$190.4 million. The increase in our reinsurance recoverable balance reflects the
growth in our business, and includes our estimate of unpaid loss expenses
recoverable totaling $106.9 million relating to Hurricanes Katrina, Rita and
Wilma and $5.0 million relating to the environmental claim that we incurred
during the year ended December 31, 2005. Our estimate of our reinsurance
recoverable balance associated with these losses is based on currently available
information, claim notifications received to date, industry loss estimates,
output from industry models, a detailed review of affected ceded reinsurance
contracts and an assessment of the credit risk to which the Company is subject.
The actual amount of future loss payments relating to these loss events may vary
significantly from this estimate. The average credit rating of the Company's
reinsurers as of December 31, 2005 is "A" (excellent) by A.M. Best. As of
December 31, 2005, the losses and loss adjustment expenses recoverable from
reinsurers balance in the consolidated balance sheet included approximately 22%
due from Everest Reinsurance Ltd., a reinsurer rated "A+" (superior) by A.M.
Best, and approximately 17% due from various Lloyd's syndicates, which are rated
"A" (excellent) by A.M. Best. No other reinsurers accounted for more than 10% of
the losses and loss adjustment expense recoverable balance as of December 31,
2005. Less than 10% of the Company's loss and loss adjustment expenses
recoverable from reinsurers are due from reinsurers that are rated below "A-"
(excellent). Less than 7.4% of our loss and loss adjustment expenses recoverable
from reinsurers are due from reinsurers that are rated below "A-" (excellent)
and are not collateralized.

The following table lists our largest reinsurers measured by the
amount of losses and loss adjustment expenses recoverable at December 31, 2005
and the reinsurers' financial strength rating from A.M. Best:

115

LOSSES AND LOSS
ADJUSTMENT EXPENSES A.M. BEST
REINSURER RECOVERABLE RATING
--------- ------------------- ---------
($ in millions)
Everest Reinsurance Company $ 41.8 A+
Lloyd's 32.3 A
XL Capital Ltd. 11.5 A+
Arch Reinsurance 10.9 A-
Allianz Marine & Aviation 10.7 A+
New Reinsurance Company 10.0 A+
PXRE Group Ltd. 9.2 B+
Glacier Reinsurance AG 7.7 A-
The Toa Reinsurance Company, Ltd. (Tokyo) 6.5 A
Aspen Insurance 6.2 A
Transatlantic Reinsurance Company 6.1 A
Odyssey America Reinsurance 5.5 A
Max Re 5.2 A-
Ritchie Risk-Linked Strategies Ltd. 5.0 NR(1)
Other Reinsurers Rated A- or Better 16.9 A-
All Other Reinsurers 4.9 Various
------
Total $190.4
======

----------
(1) Amount is fully collateralized by a letter of credit.

Our shareholders' equity was $384.2 million as of December 31, 2005
compared to $430.9 million as of December 31, 2004, reflecting a decrease of
$46.7 million that was primarily the result of a net loss of $105.9 million for
the year ended December 31, 2005 partially offset by the net proceeds from the
common shares issued during December 2005 of $58.3 million and a net change in
unrealized gains on our investment portfolios of $0.9 million. As of December
31, 2005, we have provided a 100% cumulative valuation allowance against our
deferred tax assets in the amount of $24.8 million. These deferred tax assets
were generated primarily from net operating losses. As a start-up company with
limited operating history, the realization of these deferred tax assets is
neither assured nor accurately determinable.

On December 14, 2005, we issued 3,000,000 shares of our series A
preferred shares at $25.00 per share with a liquidation preference of $25.00 per
share. The gross proceeds to the Company were $75.0 million. The series A
preferred shares are reflected as redeemable preferred shares on our balance
sheet as of December 31, 2005.

Upon liquidation, dissolution or winding-up, the holders of our series
A preferred shares will be entitled to receive from our assets legally available
for distribution to shareholders a liquidation preference of $25 per share, plus
declared but unpaid dividends and additional amounts, if any, to the date fixed
for distribution. Dividends on our series A preferred shares will be payable on
a non-cumulative basis only when, as and if declared by our board of directors,
quarterly in arrears on the fifteenth day of March, June, September and December
of each year, commencing on March 15, 2006. Dividends declared on our series A
preferred shares will be payable at a rate equal to 10.25% of the liquidation
preference per annum (equivalent to $2.5625 per share).

On and after December 15, 2010, we may redeem our series A preferred
shares, in whole or in part, at any time, at the redemption price set forth in
the Certificate of Designation relating to preferred shares, plus declared but
unpaid dividends and additional amounts, if any, to the date of redemption. We
may not redeem our series A preferred shares before December 15, 2010 except
that

116

we may redeem our series A preferred shares before that date pursuant to certain
tax redemption provisions described in the Certificate of Designation. If we
experience a change of control, we may be required to make offers to redeem our
series A preferred shares at a price of $25.25 per share, plus declared but
unpaid dividends and additional amounts, if any, to the date of redemption and
on the terms described in the Certificate of Designation. Our series A preferred
shares have no stated maturity and are not subject to any sinking fund and are
not convertible into any of our other securities or property.

LIQUIDITY

OPERATING CASHFLOW; CASH AND CASH EQUIVALENTS

We generated net operating cash flow of approximately $156.0 million
during the year ended December 31, 2005, primarily related to premiums and
investment income received and offset by losses and loss expenses as well as
general and administrative expenses paid. In addition, we also generated net
proceeds from the issuance of our common shares and preferred shares of $130.1
million and net proceeds from the February 2005 issuance of junior subordinated
debt securities of $19.6 million. During the same period, we invested net cash
of $165.3 million in our investment assets. Our cash flows from operations for
the year ended December 31, 2005 provided us with sufficient liquidity to meet
operating cash requirements during that period.

We estimate that we currently have investments of approximately
$1,011.7 million, including cash and cash equivalent balances of approximately
$197.1 million. We estimate that our cash and cash equivalents and investment
balances include approximately $260.5 million that is pledged as collateral for
letters of credit, approximately $169.5 million held in trust funds for the
benefit of ceding companies and to fund our obligations associated with the
assumption of an environmental remediation liability, $156.4 million that is
held by Lloyd's to support our underwriting activities, $52.7 million held in
trust funds that are related to our deposit liabilities and $30.7 million that
is on deposit with, or has been pledged to, U.S. state insurance departments.
After giving effect to these assets pledged or placed in trust, we estimate that
we presently have net investments of $341.9 million, including net cash and cash
equivalents of approximately $107.9 million. We believe our operating
subsidiaries currently have sufficient assets to pay their respective foreseen
liabilities as they become due. We also believe that our operating subsidiaries
can distribute sufficient funds to Quanta Holdings to enable Quanta Holdings to
pay its currently foreseen liabilities as they become due, subject to the
constraints under the Companies Act that affect our ability to pay dividends on
our shares.

SOURCES OF CASH

Our sources of cash consist primarily of existing cash and cash
equivalents, premiums written, proceeds from sales and redemptions of investment
assets, capital or debt issuances, investment income, reinsurance recoveries,
and, to a lesser extent, our secured bank credit facility and collections of
receivables for technical services rendered to third parties. As a result of our
recent ratings downgrade by A.M. Best, the resulting loss of business and
business opportunities, our decision to currently cease writing new business in
many of our product lines and pending termination of our agreement with the
program manager of the HBW program, cash flows associated with the receipt of
premiums will decrease substantially in 2006.

On December 14, 2005, the Company issued 13,136,841 common shares at
$4.75 per share and 3,000,000 shares of our series A preferred shares at $25.00
per share with a liquidation preference of $25.00 per share. The gross proceeds
to the Company were $137.4 million, of which $62.4 million was from the sale of
common shares and $75.0 million was from the sale of preferred shares. In
addition, on December 29, 2005, the underwriters exercised their over-allotment
option to acquire an additional 130,525 series A preferred shares at the
offering price of $25.00 per share. This resulted in gross proceeds of $3.3
million which were received and recorded on January 11, 2006. The proceeds from

117

both the common shares offering and series A preferred shares offering will be
used for general corporate purposes.

On July 11, 2005, Quanta Holdings and certain designated insurance
subsidiaries entered into an amended and restated credit agreement, dated July
11, 2005, providing for a secured bank letter of credit facility and a revolving
credit facility with a syndicate of lenders in the amount of $250 million. Up to
$25 million may be borrowed under the facility on a revolving basis for general
corporate purposes and working capital requirements. The facility is secured by
specified investments of the borrowers. We have approximately $228.9 million of
secured letters of credit issued and outstanding under the facility. We have not
made any borrowings under the revolving credit facility. The obligations under
the credit facility are currently fully secured by investments and cash. The
availability to a borrower is based on the amount of eligible investments
pledged by that borrower. Regulatory restrictions will also limit the amount of
investments that may be pledged by our U.S. insurance borrowers and,
consequently, the amount available for letters of credit and borrowings under
the facility to those borrowers. In addition, we cannot draw letters of credit
or borrow under the credit agreement if we have incurred a material adverse
effect or if a default exists under the agreement.

The credit agreement has certain financial covenants, including a
leverage ratio (consolidated indebtedness to consolidated total capital) of not
greater than 0.35 to 1, a minimum consolidated net worth of at least $301
million which shall be increased immediately following the last day of each
fiscal quarter by an amount equal to 50% of the net income of the Company and
its subsidiaries and maintenance of the Company's insurance ratings. In
addition, the credit agreement contains certain covenants restricting the
activities of Quanta Holdings and its subsidiaries, such as the incurrence of
additional indebtedness, liens and dividends and other payments to Quanta
Holdings. A ratings downgrade below B++ would also create an event of default
under the credit agreement. If a default occurs under the credit agreement, our
lenders may require us to cash collateralize a portion or all of the outstanding
letters of credit issued under the facility, which may be accomplished through
the substitution or liquidation of collateral. The lenders would also have the
right, among other things, to cancel outstanding letters of credit issued under
the facility. Quanta Holdings has unconditionally and irrevocably guaranteed all
of the obligations of its subsidiaries to the lenders. The facility terminates
on July 11, 2008.

On December 21, 2004, we participated in a private placement of $40.0
million of floating rate capital securities issued by Quanta Capital Statutory
Trust I ("Quanta Trust I"), a subsidiary Delaware trust formed on December 21,
2004. The trust preferred securities mature on March 15, 2035, are redeemable at
our option at par beginning March 15, 2010, and require quarterly distributions
of interest by Quanta Trust I to the holder of the trust preferred securities.
Distributions will be payable at a variable per annum rate of interest, reset
quarterly, equal to the London Interbank Offered Rate ("LIBOR") rate plus 385
basis points. Quanta Trust I used the proceeds from the sale of the trust
preferred securities and the issuance of its common securities to purchase $41.2
million of junior subordinated debt securities, due March 15, 2035, in the
principal amount of $41.2 million issued by us (the "Trust I Debentures").

On February 24, 2005, we participated in a private placement of $20.0
million of floating rate capital securities issued by Quanta Capital Statutory
Trust II ("Quanta Trust II"), a subsidiary Delaware trust formed on February 24,
2004. The trust preferred securities mature on September 15, 2035, are
redeemable at our option at par beginning September 15, 2010, and require
quarterly distributions of interest by Quanta Trust II to the holder of the
trust preferred securities. Distributions will be payable at a variable per
annum rate of interest, reset quarterly, equal to LIBOR plus 350 basis points.
Quanta Trust II used the proceeds from the sale of the trust preferred
securities and the issuance of its common securities to purchase $20.6 million
of junior subordinated debt securities, due March 15, 2035, in the principal
amount of $20.6 million issued by us (the "Trust II Debentures" and, together
with the Trust I Debentures, the "Debentures").

118

USES OF CASH AND LIQUIDITY

Some of our insurance and many of our reinsurance contracts contain
termination rights that are triggered by the A.M. Best rating downgrade. Some of
these insurance and reinsurance contracts also require us to post additional
security. As a result, we may be required to post additional security either
through the issuance of letters of credit or the placement of securities in
trust under the terms of those insurance or reinsurance contracts. We may also
elect to post security under other insurance contracts in order to maintain that
business. We estimate that we currently have net cash and cash equivalent and
investment balances of approximately $341.9 million that are available to post
as security or place in trust.

If A.M. Best downgrades our financial strength ratings below our
current rating of "B++," we will be in default under our credit agreement. We
cannot draw letters of credit or borrow under our existing credit agreement if
we have incurred a material adverse effect or if a default exists under the
agreement. If we fail to maintain or enter into adequate letter of credit
facilities on a timely basis, we may be unable to provide necessary security to
cedent companies under our existing retrocessional and reinsurance contracts
that have the right to require the posting of additional security by reason of
the downgrade of our A.M. Best rating. We cannot assure you that we will be able
to increase the commitment under our existing bank credit facility or obtain
additional credit facilities at terms acceptable to us. Our inability to
maintain or enter into adequate credit facilities would have a material adverse
effect on our results of operations. The obligations under the credit facility
are currently fully secured. If a default occurs under the credit agreement, our
lenders may require us to cash collateralize a portion or all of the outstanding
letters of credit issued under the facility, which may be accomplished through
the substitution or liquidation of collateral. The lenders would also have the
right, among other things, to cancel outstanding letters of credit issued under
the facility. If we fail to maintain or enter into adequate letter of credit
facilities on a timely basis, we would be required to place securities in trust
or similar arrangements, which would be more difficult and costly to establish
and administer.

In the near term, our other principal cash requirements 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 our business strategy, including potential severance payments,
other operating expenses, premiums ceded, capital expenditures, the servicing of
borrowing arrangements (including the Debentures), dividend payments on our
series A preferred shares, and taxes. The potential for a large claim under one
of our insurance or reinsurance contracts means that we may need to make
substantial and unpredictable payments within relatively short periods of time.
As a result of the recent downgrade of our financial strength ratings by A.M.
Best, we are closely analyzing our business lines, positioning in the market and
internal operations and identifying steps we should take to preserve shareholder
value and improve our position, including the exploration of strategic
alternatives. We may incur substantial costs, including severance payments, in
connection with the implementation of any changes based on such analysis. These
initiatives and their

119

implementation also involve significant uncertainties and risks that may result
in restructuring charges and unforeseen expenses and costs associated with
exiting lines of business and complications or delays, including, among others
things, the risk of failure. We estimate that severance charges that will be
incurred in the first quarter of 2005 will be approximately $5.2 million.
Additionally, in order to retain the services of our chief financial officer,
Jonathan J.R. Dodd, and a number of other key employees, we have entered into
retention agreements with these employees that provide for specified severance
payments in the event of termination without cause or following a change of
control. In the event of payout to all employees covered by these retention
agreements, our cash requirements would include a total payment of approximately
$9.1 million to all such employees.

We paid additional gross claims of $111.7 million during 2005 relating
to the environmental claim and the hurricane events of 2005 and 2004. We expect
that our cash requirements for the payment of these and other claims will be
significant in future periods as we receive and settle claims, including those
relating to these specific claims and in particular, claims related to the
hurricanes that occurred in 2005.

As a result of our recent ratings downgrade by A.M. Best, Lloyd's has
informed us that in order for Syndicate 4000 to continue underwriting in the
Lloyd's of London market during the 2007 underwriting year, Syndicate 4000 must
diversify its capital base with one or more third-party capital sources. This
capital, including the third-party source, must be in place by November 30,
2006. Based on the amount of capital provided by any third-party source, we
believe we will be able to remove some of the funds we have deposited to support
our underwriting capacity of our Lloyd's syndicate. However, we can make no
assurances that we will be successful in obtaining any third-party source of
capital to support our Lloyd's syndicate. If we fail to meet Lloyd's capital
diversification requirements by November 30, 2006, we will no longer be able to
participate in the Lloyd's of London market in future underwriting years, which
will have a material adverse effect on our business.

We incurred capital expenditures of $3.4 million during the year ended
December 31, 2005 related primarily to the purchase and development of
information technology assets. As we are currently closely analyzing our
business lines and our position, and exploring strategic alternatives, we are
unable at this time to quantify the amount of future capital expenditures we may
incur.

In addition to these cash requirements, under the purchase agreement
with ESC, we will be required to pay ESC's former shareholders an earn-out
payment of $5.0 million. We may also have substantial liabilities to clients,
third parties and government authorities for property damage, personal injuries,
breach of contract or breach of warranty claims, fines and penalties and
regulatory action that could adversely affect our business arising from the
assessment, analysis and assumption of environmental liabilities, and the
management, remediation, and engineering of environmental conditions constitute
a significant portion of our technical services business. From time to time, we
have offered a liability assumption program under which a special-purpose entity
assumes specified liabilities associated with environmental conditions for which
we provide technical services, which may be insured or guaranteed by us. These
businesses involve significant risks, including the possibility that we may have
substantial liabilities to clients, third parties and governmental authorities
for property damage, personal injuries, breach of contract or breach of warranty
claims, fines and penalties and regulatory action that could adversely affect
our business.

While insurance regulation differs by location, each jurisdiction
requires that minimum levels of capital be maintained in order to write new
insurance business. Factors that affect capital requirements generally include
premium volume, the extent and nature of loss and loss expense reserves, the
type and form of insurance and reinsurance business underwritten and the
availability of reinsurance protection from adequately rated retrocessionaires
on terms that are acceptable to us. Additionally, we seek to capitalize our
insurance operations in excess of the minimum regulatory requirements so that we
may maintain our current financial ratings from A.M. Best. These regulatory and
rating agency requirements restrict the amount of capital we are able to
distribute to Quanta Holdings and other insurance subsidiaries. For further
discussion, see "--Adequacy of Regulatory and

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Rating Capital." Substantially all of our capital has been distributed among our
rated operating subsidiaries based on our assessment of the levels of capital
that we believe are prudent to support our expected levels of business, the
applicable regulatory requirements, and the recommendations of the insurance
regulatory authorities and rating agencies.

We are subject to large losses, including those relating to the 2005
hurricanes. Since the timing and amount of losses from such exposures is
unknown, we invest our assets so that should an event occur, we would have
sufficient liquidity to pay claims on the underlying contracts. As of December
31, 2005, the average duration of our investment portfolio was approximately 2.6
years with an average credit rating of approximately "AA+." If a default occurs
under the credit agreement, our lenders may require us to cash collateralize a
portion or all of the outstanding letters of credit issued under the facility,
which may be accomplished through the substitution or liquidation of collateral.
These events may cause us to incur capital losses. Should additional loss events
actually occur, we believe we have dedicated assets, including cash equivalents
and other short-term investments, in such a manner that cash would be on hand to
pay those claims. As a result of these steps, we believe we have sufficient
liquidity to meet the currently foreseen need of our clients. We also believe
our operating subsidiaries have sufficient assets to pay their respective
currently foreseen liabilities as they become due. We also believe that our
operating subsidiaries can distribute sufficient funds to Quanta Holdings to
enable Quanta Holdings to pay its currently foreseen liabilities as they become
due, subject to the constraints under the Companies Act that affect our ability
to pay dividends on our shares.

While we have had sufficient liquidity to pay the losses we
experienced in the past hurricane season, in the future, we may need to raise
capital through debt or equity or other securities to further expand our
business strategy or enter new lines of business. The amount and timing of any
capital raise will depend on many factors, including our ability to write new
business successfully and to establish premium rates and reserves at levels
sufficient to cover losses. At this time, we are not able to quantify the amount
of additional capital we may raise or will require in the future or predict the
timing of any other future capital needs. Any future equity or debt financing,
if available at all, may be on terms that are not favorable to us. If we raise
capital through equity financings, your interest in our company will be diluted,
and the securities we issue may have rights, preferences and privileges that are
senior to those of the shares that are currently issued and outstanding. If we
cannot maintain or obtain adequate capital to manage our business strategy, our
business, results of operations and financial condition may be adversely
affected.

DIVIDENDS AND REDEMPTIONS

As a holding company, we depend on future dividends and other
permitted payments from our subsidiaries to pay dividends to our common and
preferred shareholders. Our subsidiaries' ability to

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pay dividends, as well as our ability to pay dividends, is subject to
regulatory, contractual, rating agency and other constraints. Furthermore, the
terms of our letter of credit and revolving credit facility prohibit us from
repurchasing shares and paying dividends on our shares without the consent of
our lenders. We have obtained a consent under our current letter of credit and
revolving credit facility for the payment of dividends on our series A preferred
shares. However, the facility prohibits us from paying dividends on our series A
preferred shares so long as there is a default under that agreement. Future
credit agreements or other agreements relating to our indebtedness may also
contain provisions prohibiting or limiting the payment of dividends on our
shares under certain circumstances. If we experience a change of control, we may
be required to make offers to redeem our series A preferred shares at a price of
$25.25 per share, plus declared but unpaid dividends and additional amounts, if
any, to the date of redemption and on the terms described in the Certificate of
Designation. Our series A preferred shares have no stated maturity and are not
subject to any sinking fund and are not convertible into any of our other
securities or property.

We are also subject to Bermuda regulatory constraints that affect our
ability to pay dividends on our shares, redeem our series A preferred shares and
make other payments. Under the Companies Act, even though we are solvent and
able to pay our liabilities as they become due, we may not declare or pay a
dividend or make a distribution if we have reasonable grounds for believing that
we are, or will after the payment be, unable to pay our liabilities as they
become due or if the realizable value of our assets will thereby be less than
the aggregate of our liabilities and our issued share capital and share premium
accounts. Under the Companies Act, when a company issues shares, the aggregate
paid in par value of the issued shares comprises the company's share capital
account. When shares are issued at a "premium", that is, where the actual sum
paid for a share exceeds the par value of the share, the amount paid in excess
of the par value must be allocated to and maintained in a capital account called
the "share premium account." Currently, Quanta Holdings has approximately $626.8
million in its share premium account. Quanta Holdings has a high share premium
account due to the significant difference between the $0.01 par value of our
common shares and series A preferred shares and the amounts paid for those
shares in recent and historical offerings of the Company. The Companies Act
requires shareholder approval prior to any reduction of our share capital or
share premium accounts. Bermuda law also provides that we maintain a contributed
surplus account, to which we must allocate, among other things, shareholder
capital which is unrelated to any share subscription.

We believe that we currently have sufficient assets to pay our
foreseen liabilities as they become due. As a result of our losses, for Bermuda
company law purposes, we expect that the realizable value of our assets will no
longer exceed the aggregate of our liabilities and our issued share capital and
share premium accounts. So long as this deficiency continues, we are prohibited
by Bermuda company law from paying dividends or making distributions to our
shareholders, including our holders of series A preferred shares. In order for
Quanta Holdings to have the flexibility to pay dividends to shareholders, we are
evaluating a proposal to reduce the share premium account and allocate sums to
our contributed surplus account. This reduction of our share premium account and
reallocation to the contributed surplus account would require the approval of
our common shareholders to be effective. If our common shareholders do not
approve any such proposal, we may be restricted by Bermuda company law from
declaring or paying dividends to our holders of series A preferred shares and
other shareholders. We cannot make any assurances that we will have the ability
to declare and pay dividends under Bermuda law to our shareholders in the
future. In addition, even if we submit, and our shareholders approve, any
proposal and we are permitted by law to declare and pay dividends, we cannot
assure you that future losses or other events could not impair our ability to
pay dividends to our shareholders.

While our financial advisors will also help us evaluate the potential
use of excess capital to return value to our shareholders, in addition to the
restrictions described above relating to our operating subsidiaries, we may be
limited in the amount of any dividends that could be paid on, or the amount of
any redemption of, our shares. Under Bermuda law, we may not declare or pay a
dividend or redeem our shares (including our series A preferred shares) at any
time if we have reasonable

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grounds for believing that we are, or after the payment or redemption would be,
unable to pay our liabilities as they become due. We also may not declare or pay
a dividend or redeem our shares (including our series A preferred shares) except
out of the capital paid up thereon, out of our issued share capital and share
premium accounts or, in the case of a redemption, out of the proceeds of a new
issue of shares made for the purpose of the redemption. Our secured letter of
credit and revolving credit facility also contain provisions prohibiting the
payment of dividends on or redemption of our shares under certain circumstances.

For additional discussion concerning risks relating to our dividend
policy and our holding company structure and its effect on our ability to
receive and pay dividends, see "Item 1A.--Risk Factors--Risks Related to our
Securities--Our holding company structure and certain regulatory and other
constraints, including our credit facility, affect our ability to pay dividends
on our shares, make payments on our indebtedness and other liabilities and our
ability to redeem our series A preferred shares." See also notes 21 and 23 to
our consolidated financial statements. For a discussion of certain additional
limitations on our ability to pay dividends on our common shares relating to
certain preferential rights associated with the Company's series A preferred
shares, see "Item 1A.--Risk Factors--Risks Related to our Securities--Our series
A preferred shares have rights, preferences and privileges senior to those of
holders of our common shares."

COMMITMENTS

We have contractual obligations relating to our reserves for losses
and loss expenses and commitments under the trust preferred securities,
preferred shares and non-cancelable operating leases for property and office
equipment described above under "Liquidity" as of December 31, 2005 as follows:

PAYMENTS DUE BY PERIOD
($IN THOUSANDS)
------------------------------------------------------------
LESS THAN 1 MORE THAN 5
CONTRACTUAL OBLIGATIONS ($000'S) TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
------------------------------------ -------- ----------- --------- --------- -----------

Reserve for losses and loss expenses $533,983 $267,477 $124,957 $ 71,335 $ 70,214
Interest on long-term debt
obligations(1) 142,651 4,703 9,406 9,406 119,136
Long-term debt obligations 61,857 -- -- -- 61,857
Operating lease obligations 42,631 5,588 8,622 6,525 21,896
Dividend on preferred shares(2) 39,780 8,022 16,044 15,714 (2)
Total $820,902 $285,790 $159,029 $102,980 $273,103

----------
(1) The interest on the long-term debt obligation is based on a spread above
LIBOR. We have reflected the interest due based upon the current interest
rate at December 31, 2005 on the facility.

(2) Dividends on our 10.25% series A preferred shares is based on a dividend of
$2.5625 per share. We have not estimated dividends payable on our series A
preferred shares as they are perpetual and have no fixed mandatory
redemption date unless a change of control occurs or we are able to redeem
the preferred shares. We do not have the right to redeem our series A
preferred shares until on or after December 15, 2010. Assuming 3,000,000
shares of our series A preferred shares are outstanding during any
applicable period, we would be required to pay dividends, on an annual
basis, of an aggregate of approximately $7.7 million.

Our reserve for losses and loss expenses consists of case reserves and
IBNR. In assessing the adequacy of these reserves, it must be noted that the
actual costs of settling claims is uncertain as it depends upon future events.
Many of these events will be out of our control and could potentially affect the
ultimate liability and timing of any potential payment. There is necessarily a
range of

123

possible outcomes and the eventual outcome will certainly differ from the
projections currently made. This uncertainty is heightened by the short time in
which we have operated, thereby providing limited Company-specific claims loss
emergence patterns. Consequently, we must use industry benchmarks, on a line by
line basis, in deriving IBNR which, despite management's and our independent
actuary's care in selecting them, will differ from actual experience.

Similarly, we have limited loss payout pattern information specific to
our experience, therefore we have used industry data, on a line by line basis,
to estimate our expected payments. Consequently, despite management's care in
selecting them, the actual payment of our reserve for losses and loss expenses
will differ from estimated payouts.

OFF-BALANCE SHEET ARRANGEMENTS

Other than as described under "Liquidity" related to our trust
preferred securities offerings through the Quanta Trust I and Quanta Trust II
(together "Quanta Trust I and II"), as of December 31, 2005, we have not entered
into any off-balance sheet arrangements with special purpose entities or
variable interest entities. We did not consolidate Quanta Trust I and II, the
issuer of the trust preferred securities and a variable interest entity, since
we are not the primary beneficiary of Quanta Trust I or II. As of December 31,
2005, we have recorded the $61.9 million of Debentures, which were issued to
Quanta Trust I and II, on our consolidated balance sheet. The net proceeds of
$58.4 million from the sale of the Debentures to Quanta Trust I and II were used
for working capital purposes and our business. Distributions will be payable at
a variable per annum rate of interest, reset quarterly, equal to LIBOR plus 385
basis points by the Company to Quanta Trust I and equal to LIBOR plus 350 basis
points by the Company to Quanta Trust II as described above under "Commitments."
The Debentures are redeemable at the Company's option at par beginning March 15,
2010.

ADEQUACY OF REGULATORY AND RATING CAPITAL

In all of the jurisdictions in which we operate insurers and
reinsurers are required to maintain certain minimum levels of capital and
risk-based capital, the calculation of which includes numerous factors as
specified by the respective insurance regulatory authorities and the related
insurance regulations. We capitalize our insurance operations in excess of the
minimum regulatory requirements in order to enable us to write more business and
to be more selective in the business we underwrite. Accordingly, allocation of
capital sufficient to achieve business objectives is a critical aspect of any
insurance organization, particularly an insurance operation with a limited
operating history such as ours.

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what rating actions A.M. Best may take now or in the future or whether A.M. Best
will further downgrade our rating or will remove any qualification of our
rating.

Substantially all of our capital has been distributed among our rated
operating subsidiaries based on our assessment of the levels of capital that we
believe are prudent to support our expected levels of business, the applicable
regulatory requirements, and the recommendations of the insurance regulatory
authorities and rating agencies.

POSTING OF 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 United
States. Many U.S. jurisdictions do not permit insurance companies to take credit
on their U.S. statutory financial statements for reinsurance to cover unpaid
liabilities, such as loss and loss adjustment expense and unearned premium
reserves, obtained from unlicensed or non-admitted insurers without appropriate
security acceptable to U.S. insurance commissioners. Typically, this type of
security will take the form of a letter of credit issued by an acceptable bank,
the establishment of a trust, funds withheld or a combination of these elements.

As described under "Liquidity" above we entered into a secured bank
credit facility with a syndicate of lenders that allows us to provide to our
insured clients up to $250 million in letters of credit as security under the
terms of insurance and reinsurance contracts. The availability to a borrower is
based on the amount of eligible investments pledged by that borrower and no
material adverse change provisions. Regulatory restrictions will also limit the
amount of investments that may be pledged by our U.S. insurance borrowers and,
consequently, the amount available for letters of credit and borrowings under
the facility to those borrowers. We currently have approximately $260.5 million
of secured letters of credit issued and outstanding under the facility.

As of December 31, 2005, we have approximately $217.2 million that is
pledged as collateral for letters of credit, approximately $134.2 million held
in trust funds for the benefit of ceding companies and to fund our obligations
associated with the assumption of an environmental remediation liability, $143.2
million that is held by Lloyd's to support our underwriting activities, $51.8
million held in trust funds that are related to our deposit liabilities and
$29.7 million that is on deposit with, or has been pledged to, U.S. state
insurance departments.

Some of our insurance and many of our reinsurance contracts contain
termination rights that are triggered by the A.M. Best rating downgrade. Some of
these insurance and reinsurance contracts also require us to post additional
security. As a result, we may be required to post additional security either
through the issuance of letters of credit or the placement of securities in
trust under the terms of those insurance or reinsurance contracts. We may also
elect to post security under other insurance contracts in order to maintain that
business. We currently have net cash and cash equivalent balances of
approximately $107.9 million that are available to post as security or place in
trust.

We cannot draw letters of credit or borrow under our existing credit
agreement if we have incurred a material adverse effect or if a default exists
under the agreement. If we fail to maintain or enter into adequate letter of
credit facilities on a timely basis, we may be unable to provide necessary
security to cedent companies under our existing retrocessional and reinsurance
contracts that have the right to require the posting of additional security by
reason of the downgrade of our A.M. Best rating. We cannot assure you that we
will be able to increase the commitment under our existing bank credit facility
or obtain additional credit facilities at terms acceptable to us. Our inability
to maintain or enter into adequate credit facilities would have a material
adverse effect on our results of operations.

RATINGS

Ratings by independent agencies are an important factor in
establishing the competitive position of insurance and reinsurance companies and
are important to our ability to market and sell our

125

products. Rating organizations continually review the financial positions of
insurers. S&P maintains a letter scale rating system ranging from "AAA"
(Extremely Strong) to "R" (under regulatory supervision). A.M. Best maintains a
letter scale rating system ranging from "A++" (Superior) to "F" (in
liquidation). The objective of S&P and A.M. Best's ratings systems is to provide
an opinion of an insurer's or reinsurer's financial strength and ability to meet
ongoing obligations to its policyholders. These ratings reflect our ability to
pay policyholder claims and are not applicable to our securities, nor are they a
recommendation to buy, sell or hold our shares. These ratings are subject to
periodic review by, and may be revised or revoked at the sole discretion of, S&P
and A.M. Best.

On March 2, 2006, A.M. Best announced that it had downgraded the
financial strength rating assigned to Quanta Bermuda and its subsidiaries and
Quanta Europe, to "B++" (very good), and placed those companies under review
with negative implications. The recent downgrade of our financial ratings has
had a significant adverse effect on our ability to conduct our business in our
current product lines and on our ability to execute our business strategy. For
further discussion of these recent developments, see "Item 1. Business--Recent
Developments." As a result of the deterioration of our business due to the
recent downgrade of our financial strength ratings, A.M. Best may further
downgrade our ratings. There is no assurance as to what rating actions A.M. Best
may take now or in the future or whether A.M. Best will further downgrade our
rating or will remove any qualification of our rating. A "B++" (very good)
rating is the fifth highest of fifteen rating levels and indicates A.M. Best's
opinion of our financial strength and ability to meet ongoing obligations to our
future policyholders. We have not been rated by any rating agency other than
A.M. Best.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our significant accounting policies are described in Note 2 of our
consolidated financial statements.

Our consolidated financial statements contain certain amounts that are
inherently subjective in nature and require management to make certain
judgments, estimates and assumptions in the application of accounting policies
used to determine inherently subjective amounts reported in the consolidated
financial statements. The use of different assumptions and estimates could
produce materially different estimates of the reported amounts. In addition, if
actual events differ materially from management's assumptions used in applying
the relevant accounting policy, there could be a material adverse effect on our
results of operations and financial condition and liquidity.

We believe that the following critical accounting policies affect
significant estimates used now or to be used in the future in the preparation of
our consolidated financial statements.

PREMIUMS WRITTEN, CEDED AND EARNED

The method by which we record and recognize premiums written differs
based upon the nature of the underlying insurance or reinsurance contract.

Insurance premiums written are generally defined in the associated
policies, are recorded on the inception date of the policies and are earned over
the terms of the policies in proportion to the amount of insurance protection
provided. Typically this results in the earning of premium on a pro rata as to
time basis over the term of the related insurance coverage.

Reinsurance premiums written are recorded based on the type of the
associated reinsurance contract. Typically, we write losses occurring and risks
attaching contracts on a single year basis. We may on occasion write multi-year
reinsurance contracts. Losses occurring reinsurance contracts cover losses that
occur during the term of the reinsurance contract. Risks attaching contracts
cover claims that arise on underlying insurance policies that incept during the
term of the reinsurance contract. Reinsurance premiums written are earned on a
pro rata over time basis over the expected term of the contract, typically 12
months for losses occurring contracts. Premiums written on risks attaching

126

reinsurance contracts are recorded in the period in which the underlying
policies or risks are expected to incept. Premiums earned on risks attaching
contracts usually extend beyond the original term of the reinsurance contract
resulting in recognition of premium earnings over an extended period, typically
24 months.

Reinsurance premiums on multi-year losses occurring reinsurance
contracts that are payable in annual installments are recorded as premiums
written on an annual basis at inception and on the contract anniversary dates if
the reinsured has the ability to cancel, commute or change the coverage during
the contract term or if the contract provides for varying amounts of reinsurance
coverage for each annual period for which there is a specified premium
installment.

Reinsurance premiums written on certain types of contracts, notably
treaty quota share contracts, may not be known definitively on the inception
date of the contract and therefore include estimates of premiums written. These
estimates are based on data provided by the ceding companies or brokers, our
underwriters' judgment and underlying economic conditions. Our estimates of
written premiums are re-evaluated over the term of the contract period as
underwriting information becomes available and as actual premiums are reported
by the ceding companies or brokers. For certain excess of loss reinsurance
contracts we record the minimum premium, as defined in the contract, as our
estimated premium written at inception of the contract. Subsequent changes to
our premium estimates are recorded as adjustments to premiums written in the
period in which they become known and could be material. Adjustments may
significantly impact net income in the period in which they are determined,
particularly when the subject contract is fully or substantially expired
resulting in the premium adjustment being fully or substantially earned.

Some of our contracts include retrospective rating provisions that
adjust estimated premiums or acquisition expenses based upon experience and
underwriting results. We also write certain structured insurance and reinsurance
contracts as risk management solutions that cannot otherwise be provided by
traditional contracts. Typically, we assume a measured amount of risk in
exchange for a premium, a specified portion of which may be returnable to the
insured based on the level of loss experience or underwriting profitability.
Adjustments related to retrospective rating provisions that adjust estimated
premiums or acquisition expenses are recognized over contract periods in
accordance with the underlying contract terms based on current experience under
the contracts. Reinstatement premiums that reinstate coverage limits under
pre-defined contract terms and are triggered by the occurrence of a loss are
written and earned at the time the associated loss event occurs. The original
contract premium is earned over the remaining exposure period of the contract.
Profit commissions are expenses that vary with and are directly related to
acquiring new and renewal insurance and reinsurance business. Profit commission
accruals are recorded in acquisition costs and are adjusted at the end of each
reporting period based on the experience of the underlying contract. No claims
bonuses are accrued as a reduction of earned premium and are adjusted at the end
of each reporting period based on the experience of the underlying contract.
Retrospective rating adjustments are necessarily based on underwriting results
that include certain estimates relating to premiums and losses, and are
therefore subject to adjustment as underwriting experience develops and actual
underwriting results become known.

In the normal course of business, we purchase reinsurance or
retrocessional coverage in order to increase our underwriting capacity and to
limit our individual and aggregate exposures to risks of losses arising from the
contracts of insurance or reinsurance that we underwrite. Reinsurance premiums
ceded to reinsurers are recorded and recognized in a manner consistent with the
terms of reinsurance agreement and the related premiums written under the
original reinsured contracts or policies.

Premiums written and ceded relating to the unexpired periods of
coverage or policy terms are recorded as unearned premium reserves and deferred
reinsurance premiums, respectively.

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In the normal course of our operations, we may enter into certain
contracts that do not meet the risk transfer provisions of Statement of
Financial Accounting Standards ("SFAS") No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS 113") for
financial reporting purposes either due to insufficient underwriting risk or
insufficient timing risk or provide indemnification for insurance accounting
under SFAS No. 60, "Accounting and Reporting by Insurance Enterprises" ("SFAS
60"). For these contracts we follow the deposit method of accounting as
prescribed in American Institute of Certified Public Accountants, known as the
AICPA, Statement of Position 98-7, "Deposit Accounting: Accounting for Insurance
and Reinsurance Contracts That Do Not Transfer Insurance Risk" ("SOP 98-7"). The
deposit method of accounting requires that the premium we receive or pay, less
any explicitly defined margins or fees retained or paid, is accounted for as
deposit asset or deposit liability on our consolidated balance sheet. Explicitly
defined fees retained or paid are deferred and recognized in other income in our
consolidated statement of operations and comprehensive (loss) income according
to the nature of the product or service provided.

For those contracts that transfer significant underwriting risk only
and for reinsurance contracts where it is not reasonably possible that we can
realize a significant loss even though we assume significant insurance risk, the
deposit asset or liability is measured based on the unexpired portion of the
coverage provided. The deposit asset or liability is adjusted for any losses
incurred or recoverable based on the present value of the expected future cash
flows arising from the loss event with the adjustment being recorded in net
losses and loss expenses within our results of operations.

For those contracts that transfer neither significant underwriting
risk nor significant timing risk and for contracts that transfer significant
timing risk only, the deposit asset or liability is adjusted, and corresponding
interest income or expense recognized within our results of operations, by using
the interest method to calculate the effective yield on the deposit based on the
estimated amount and timing of cash flows. If a change in the actual or
estimated timing or amount of cash flows occurs, the effective yield is
recalculated and the deposit is adjusted to the amount that would have existed
had the new effective yield been applied since the inception of the insurance or
reinsurance contract. The adjustment is recorded as interest income or interest
expense.

NON-TRADITIONAL CONTRACTS

We write non-traditional contracts of insurance and reinsurance. We
may account for these transactions as deposits held on behalf of our clients
instead of as insurance and reinsurance premiums, as appropriate. Under the
deposit method of accounting, revenues and expenses from insurance and
reinsurance contracts are not recognized as written premium and incurred losses.
Instead, amounts from these contracts are recognized as other income or
investment income over the expected contract or service period.

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

128

During the years ended December 31, 2005 and 2004, we recognized in
"other income" $2.5 million and $1.2 million of fees and revenues relating to
non-traditional contracts which we accounted for using the deposit method. If
these contracts transferred risk as determined by Statement of Financial
Accounting Standards ("SFAS") No. 113 "Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts", gross premium relating to these
contracts would total approximately $110.7 million and $44.0 million in the
years ended December 31, 2005 and 2004.

Of the $2.5 million and $1.2 million, $0.7 million and $0.1 million of
other income recognized during the years ended December 31, 2005 and 2004 relate
to fees earned from a surplus relief life reinsurance arrangement with a U.S.
insurance company which meets the Company's definition of a non-traditional
contract. As of December 31, 2005 and 2004, the Company has provided
approximately $13.1 million and $13.8 million of statutory surplus relief to the
U.S. insurance company under this contract. In the fourth quarter of 2004, under
this contract the Company entered into an arrangement with a client and assumed,
through novation agreements, several life reinsurance contracts it had made.
Because the Company assumed these contracts, the client, which is subject to
insurance regulation in the United States and therefore is required to maintain
a certain amount of statutory capital, may reduce its statutory capital
requirements. In exchange for the Company's assumption of the contracts it
received a fee. The arrangement, among other things, also provides that on
certain dates and during specific periods, the client has the right but not the
obligation to recapture the life reinsurance contracts the Company has assumed,
provided that the underlying cedants do not reasonably withhold their consent to
this recapture. The Company believes that its client is economically
incentivized to exercise the recapture provision in the future, as the amount of
expected profit on the underlying life reinsurance contracts emerges over time.

We believe the arrangement, including the client's option to
recapture, and the assumption of the life insurance contracts constitute one
contract with minimal mortality, credit or other insurance or economic risk
which results in deposit accounting. Although the Company believes its client
will exercise the recapture, it is not assured that this will be the case. If
the Company's client does not recapture the underlying insurance contracts in
the future, the Company may be viewed as having had the risks described above
and, as a result, the Company could be deemed to have retained life reinsurance
risk and, as a result, may be required to account for some or all of the
underlying insurance contracts as life insurance, recognizing life premiums
written and life benefit reserves in the consolidated statement of operations.
If deposit accounting had not been used with respect to this particular
arrangement, the Company would have recognized gross life reinsurance premiums
written of approximately $16.8 million and $5.6 million for the years ended
December 31, 2005 and 2004. At this time, the Company believes that the
recognition of these premiums written would not have had a material effect on
the Company's financial position and results of operations. However, as the
underlying life insurance contracts mature the effect on the Company's financial
condition and results of operations may become material.

In respect of the life reinsurance arrangements written on a
coinsurance basis, where investment assets have been transferred to the Company,
such assets have been recorded within the Company's trading investment portfolio
and are separately presented as Investments related to deposit liabilities in
the consolidated balance sheet. A deposit liability has been recorded in the
consolidated balance sheet in accordance with SFAS 97 "Accounting and Reporting
by Insurance Enterprises for Certain Long-Duration Contracts and for Realized
Gains and Losses from the Sale of Investments" for non-risk investment contracts
as an interest bearing instrument using the effective yield method. The
Investments related to deposit liability are held in trust funds and are pledged
to the ceding companies.

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of contracts, nor are there expected to be net cash flows through the life of
the contracts, other than the Company's explicitly defined fees. Notional
contract assets and liabilities contemplated by the contract terms are offset in
accordance with FIN 39 and as such the Company does not present such assets or
deposit liabilities in its consolidated balance sheet.

Certain of the Company's coinsurance and modified coinsurance
agreements may contain provisions that qualify as embedded derivatives under
Derivatives Implementation Group Issue No. B36 "Embedded Derivatives: Modified
Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk
Exposures That Are Unrelated or Only Partially Related to the Creditworthiness
of the Obligor under Those Instruments" ("DIG Issue B36") The value of embedded
derivatives in these contracts is currently considered immaterial. The Company
monitors the performance of these treaties on a quarterly basis. Significant
adverse performance or changes in the Company's expectations of future cashflows
on these treaties could result in losses associated with the embedded
derivative.

Of the $2.5 million and $1.2 million, $0.2 million and $0.8 million of
other income recognized during the years ended December 31, 2005 and 2004 relate
to explicitly defined margins on one short duration contract written by the
Company's specialty reinsurance segment that does not meet the risk transfer
provisions of SFAS 113. This contract was written on a funds withheld basis,
such that the deposit liability of $21.7 million and $6.2 million recorded is
equal to a funds withheld asset according to the contract terms. In accordance
with Financial Accounting Standards Board ("FASB") Interpretation No. 39 ("FIN
39") "Offsetting of Amounts Related to Certain Contracts", the funds withheld
asset and the deposit liability have been offset in the consolidated balance
sheet.

The remaining $1.6 million and $0.3 million of other income derived
from non-traditional contracts recognized during the years ended December 31,
2005 and 2004 relates to revenues earned from five and one reinsurance contracts
accounted for as deposits. Although these contracts did possess some
underwriting and timing risks as prescribed by SFAS No. 113, the Company does
not believe it is exposed to a reasonable possibility of significant loss.
Included in the remaining $1.6 million and $0.3 million of other income are $1.1
million and $0.3 million related to one surplus relief life reinsurance
agreement. Underlying treaties attach to this contract on a coinsurance basis.
As of December 31, 2005 and 2004, the Company has provided approximately $33.2
million and $13.9 million of statutory surplus relief to a U.S. insurance
company under this contract.

ACQUISITION EXPENSES AND CEDING COMMISSION INCOME

Acquisition costs are policy issuance related costs that vary with and
are directly related to the acquisition of new and renewal insurance and
reinsurance business, and primarily consist of commissions, third-party
brokerage and insurance premium taxes. Ceding commission income consists of
commissions we receive on insurance and reinsurance business that we cede to our
reinsurers. Typically acquisition costs and commission income are based on a
fixed percentage of the premium written or ceded. This percentage varies for
each line or class of business and each type of contract written. Acquisition
expenses and commission income are recorded and deferred at the time premium is
written or ceded and are subsequently amortized in earnings as the premiums to
which they relate are earned or expensed. Acquisition expenses are reflected in
the consolidated statement of operations net of ceding commission income from
our reinsurers. Acquisition costs relating to unearned premiums are deferred in
the balance sheet as deferred acquisition costs net of commission income
relating to deferred reinsurance premiums ceded.

Net deferred acquisition costs are carried at their estimated
realizable value and are limited to the amount expected to be recovered from
future net earned premiums and anticipated investment income. Any limitation is
referred to as a premium deficiency. A premium deficiency exists if the sum of
our anticipated losses, loss expenses and unamortized acquisition costs exceeds
the recorded unearned premium reserve and anticipated net investment income. A
premium deficiency is recognized by charging any deferred acquisition costs to
acquisition expenses to the extent required to eliminate

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the deficiency. If the deficiency exceeds the deferred acquisition cost asset
then a liability is accrued within loss and loss expense reserves for the excess
deficiency.

REINSURANCE RECOVERABLES

Reinsurance assets due from our reinsurers under the terms of ceded
reinsurance contracts include unpaid loss recoveries, loss and loss expense
reserves recoverable and deferred reinsurance premiums. We are subject to credit
risk with respect to our reinsurance ceded because the ceding of risk does not
relieve us from our obligations to our insureds. To the extent our reinsurers
default, we must settle these obligations without the benefit of reinsurance
protection. Failure of our reinsurers to honor their obligations could result in
credit losses. If the financial condition of any of our reinsurers deteriorates,
resulting in their inability to make payments to us, we establish allowances for
amounts considered potentially uncollectible from such reinsurers. We evaluate
the financial condition of our reinsurers and monitor concentrations of credit
risk arising from similar geographic regions, activities, or economic
characteristics of our reinsurers to minimize our exposure to losses from
reinsurer insolvencies.

As of December 31, 2005, our reinsurance recoverables recorded in the
consolidated balance sheet were $190.4 million, of which approximately 22% and
17% were due from two reinsurers rated A+ and A by A.M. Best.

DEFERRED TAX VALUATION ALLOWANCE

We record a valuation allowance to reduce our deferred tax assets to
amounts that are more likely than not to be realized from future anticipated
taxable income.

As of December 31, 2005, our net deferred tax assets were $24.8
million against which we provided a 100% valuation allowance on the basis that,
given our limited operating history, the realization of deferred tax assets from
our anticipated future taxable income is neither assured nor accurately
determinable. If we subsequently assess that the valuation allowance, or any
portion thereof, is no longer required an income tax benefit will be recorded in
net income in the period in which such assessment is made.

INVESTMENTS

Our publicly traded and non-publicly traded fixed maturity, short-term
investments and equity securities that are classified as available-for-sale are
recorded at estimated fair value with the difference between cost or amortized
cost and fair value, net of the effect of taxes, included as a separate
component of accumulated other comprehensive income (loss) in the consolidated
balance sheet. Our publicly traded and non-publicly traded fixed maturity and
short-term investments that are classified as trading are recorded at estimated
fair value with the change in fair value included in net realized gains on
investments in the consolidated statement of operations and comprehensive (loss)
income.

Short-term investments include highly liquid debt instruments and
commercial paper that are generally due within one year of the date of purchase
and are held as part of our investment portfolios that are managed by
independent investment managers. The fair value of publicly traded securities is
based upon quoted market prices. The estimated fair value of non-publicly traded
securities is based on independent third party pricing sources.

In accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," we periodically review our investments to
determine whether an impairment, being a decline in fair value of a security
below its amortized cost, is other than temporary. If such a decline is
classified as other than temporary, we would write down, to fair value, the
impaired security resulting in a new cost basis of the security and the amount
of the write-down would be charged to the

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statement of operations and comprehensive (loss) income as a realized loss. The
new cost basis would not be changed for subsequent recoveries in fair value.
Some of the factors that we consider in determining whether an impairment is
other than temporary include (1) the amount of the impairment, (2) the period of
time for which the fair value has been below the amortized cost, (3) specific
reasons or market conditions which could affect the security, including the
financial condition of the issuer and relevant industry conditions or rating
agency actions, and (4) our ability and intent to hold the security for
sufficient time to allow for possible recovery.

Investments are recorded on a trade date basis. Our net investment
income is recognized when earned and consists primarily of interest, the accrual
of discount or amortization of premium on fixed maturity securities and
dividends, and is net of investment management and custody expenses. Gains and
losses realized on the sale of investments are determined on the first-in,
first-out basis.

As of December 31, 2005, approximately 71.8% and 95.9% of the
amortized cost of our available-for-sale investment portfolio was assigned an
"AAA" credit rating and an "A" credit rating or above by S&P.

CAPITALIZATION OF SOFTWARE COSTS

We capitalize software costs when the preliminary project stage is
completed and management commits to fund the software project which it deems
probable will be completed and used to perform the intended function. This
policy is in accordance with AICPA Statement of Position 98-1 "Accounting for
the costs of computer software developed or obtained for internal use" ("SOP
98-1"). Software costs that are capitalized include only external direct costs
of materials and services consumed in developing, or obtained for internal use
computer software.

We cease the capitalization of costs as soon as the project is
substantially complete and ready for its intended purpose. We review the
carrying value of capitalized software costs whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable, and a
loss is recognized when the value of estimated undiscounted cash flow benefit
related to the asset falls below the unamortized cost.

RESERVE FOR LOSSES AND LOSS EXPENSES

As an insurance and reinsurance company we are required, under GAAP
and applicable insurance regulations, to establish reserves for losses and loss
expenses for estimates of future amounts to be paid in settlement of our
ultimate liabilities for claims arising under the terms of written insurance and
reinsurance policies that have occurred at or before the balance sheet date.
Under GAAP, we are only permitted to establish loss and loss expense reserves
for actual losses that have occurred before the balance sheet date. We do not
record contingency reserves for expected future loss occurrences, nor do we
discount our reserves for losses and loss expenses to be paid in the future.

The estimation of future ultimate loss liabilities is the most
significant judgment made by management and is inherently subject to significant
uncertainties. These uncertainties are driven by many variables that are
difficult to quantify and include, for example, the period of time between the
occurrence of an insured loss and actual settlement, fluctuations in inflation,
prevailing economic, social and judicial trends, legislative changes, internal
and third-party claims handling procedures, and the lack of complete historical
data on which to base loss expectations. It may also be difficult for us to
accurately estimate ultimate losses based on our own historical claim
experiences because of our limited operating history.

The estimation of unpaid loss liabilities will be affected by the type
or structure of the policies we have written. In the case of our direct
insurance business we often assume risks for which claims experience will tend
to be frequency driven. As a result, historical loss development data may be
available and traditional actuarial methods of loss estimation may be used.
Conversely, the available

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amount of relevant loss experience that we can use to quantify the emergence,
severity and payout characteristics of the loss liabilities is limited for
policies that are written with the expectation that potential losses will be
characterized by lower frequency but higher severity claims, such as many of our
reinsurance contracts written.

The estimation of unpaid loss liabilities will also vary in
subjectivity depending on the lines or class of business involved. Short-tail
business describes lines of business for which losses become known and paid in a
relatively short period time after the loss actually occurs. Typically, there
will be less variability in the ultimate amount of losses from claims incurred
in the short-tail lines that we write such as technical risk property, property,
marine, and aviation. Long-tail business describes lines of business for which
actual losses may not be known for some time or for which the actual amount of
loss may take a significantly longer period of time to emerge or develop. Our
casualty, professional and environmental lines of business are generally
considered longer tail in nature. Because loss emergence and settlement periods
can be many years in duration, these lines of business will have more
variability in the estimates of their loss and loss expense reserves.

Our loss and loss expense reserves fall into two categories: reserves
for unpaid reported losses and for losses incurred but not reported, or IBNR,
claims. Reported claim reserves are based initially on claim reports received
from insureds, brokers or ceding companies, and may be supplemented by our
claims professionals with estimates of additional ultimate settlement costs.
IBNR reserves are calculated using generally accepted statistical and actuarial
techniques. In applying these techniques, we rely on the most recent information
available, including pricing information, industry data and on our historical
loss and loss expense experience. Where our historical loss information is
limited, we increase our reliance on individual pricing analyses and industry
loss information to guide our estimates. We may also utilize commercially
available computer models to evaluate future trends and to estimate ultimate
claim costs. From time to time we engage independent external actuarial
specialists to review our estimates of loss and loss expense reserves and our
reserving methods. Even though our reserving techniques are actuarially sound,
there may still be significant subsequent adjustments to loss and loss expense
reserves due to the nature of our business and the risks written.

As of December 31, 2005 and 2004, the primary reserving method we used
to estimate the ultimate cost of losses for our specialty reinsurance lines and
our fidelity and technical risk property specialty insurance business lines was
the Bornhuetter-Ferguson actuarial method. The Bornhuetter-Ferguson actuarial
method selects an initial expected loss and loss expense ratio supplemented with
our actual loss and loss expense experience to date to support the estimation of
losses and loss adjustment expenses. Our initial expected loss and loss expense
ratio for our specialty reinsurance business lines is derived from loss exposure
information provided by brokers and ceding companies and from loss and loss
expense ratios established during the pricing of individual contracts. Our
initial expected losses and loss expense ratios selected for our fidelity and
technical risk property specialty insurance lines are based on benchmarks
derived by our underwriters and actuaries during the initial pricing of the
business and from comparable market information. These benchmarks are then
adjusted for any rating increases and changes in terms and conditions that have
been observed in the market.

The primary reserving method we used to estimate the ultimate cost of
losses for our other specialty insurance business lines was an expected loss
ratio methodology whereby earned premiums are multiplied by an expected loss
ratio to derive ultimate losses and deducts any paid losses and loss expenses to
arrive at estimated losses and loss expense reserves. This method is commonly
applied when there is insufficient historical loss development experience
available. Our initial expected losses and loss expense ratios selected are
based on benchmarks derived by our underwriters and actuaries during the initial
pricing of the business and from comparable market information. These benchmarks
are then adjusted for any rating increases and changes in terms and conditions
that have been observed in the market.

As of December 31, 2003, given our limited operating history and
historical claims experience, the primary reserving method adopted was an
expected loss ratio methodology whereby earned

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premiums are multiplied by an expected loss ratio to derive ultimate losses and
deducts any paid losses and loss expenses to arrive at estimated loss and loss
expense reserves. This method is commonly applied when there is insufficient
historical loss development experience available. The initial expected loss
ratios were derived from pricing, loss and exposure information provided by
brokers, ceding companies and insureds and supplemented by available industry
data.

We believe that these assumptions represent a realistic and
appropriate basis for currently estimating our loss and loss expense reserves.
However, given our limited operating history, we believe that our estimates of
loss and loss expense reserves may be subject to significant volatility and as
our own loss experience begins to develop, we may expand our reserving analyses
to include other commonly used methods. These reserving methods may lead to
reserve estimates that are more volatile than those based upon a long,
consistent history of our own reported loss experience.

We continually review our reserve estimate and reserving methodologies
taking into account all currently known information and updated assumptions
related to unknown information. Loss and loss expense reserves established in
prior periods are adjusted as claim experience develops and new information
becomes available. Any adjustments to previously established reserves, resulting
from a change in estimate, may significantly impact current period underwriting
results and net income by reducing net income if previous period reserve
estimates prove to be deficient or improve net income if prior period reserves
become redundant. Losses and loss expense arising from future insured events
will be estimated and provided for at the time the losses are incurred and could
be substantial.

As of December 31, 2005, a 10% change in our reserves for loss and
loss expenses of $343.6 million would equate to a $34.4 million change in our
reserves for loss and loss expenses, which would represent 32.4% of our net loss
for the year ended December 31, 2005 and 8.9% of our shareholders' equity as of
December 31, 2005.

ENVIRONMENTAL REMEDIATION LIABILITIES ASSUMED

In our technical services segment we assume environmental liabilities
in exchange for remediation fees and contracts to perform the required
remediation in accordance with the underlying remediation agreements. We
estimate our initial and ongoing ultimate liabilities for such environmental
remediation obligations using actual experience, past experience with similar
remediation projects, technical engineering examinations of the contaminated
sites and state, local and federal guidelines. However, we cannot assure you
that actual remediation costs will not significantly differ from our estimated
amounts. We continually review our estimates for ultimate remediation costs
taking into account all currently known information and updated assumptions
related to unknown information. Any adjustments to previously established
liabilities, resulting from a change in our estimates, may significantly impact
our current period operating results. As of December 31, 2005, we had assumed
two environmental remediation projects for which we have recorded an estimated
liability of $5.9 million.

When we receive consideration for the assumption of a remediation
liability that is in excess of our estimate of the related environmental
remediation liability, we initially defer the excess amount and record it in
deferred income on the consolidated balance sheet. This deferred remediation
revenue is recognized in earnings over the anticipated remediation period using
the cost recovery or percentage-of-completion method that is based on the ratio
of remediation expenses actually incurred and paid to total anticipated
remediation costs. As of December 31, 2005, we had deferred approximately $0.5
million of remediation revenue that was included in deferred income.

TECHNICAL SERVICES REVENUES

Technical services revenue is primarily derived from short-term
technical services arrangements with customers. Generally, technical services
revenue is earned in the period for which

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services are performed. Included in technical services revenue is accrued but
unbilled revenue that arises mainly due to a time lag in billing cycle and
special billing arrangements with customers.

From time to time, we retain subcontractors to perform certain
services under contracts with our technical services customers. Technical
services revenue is recognized on a gross basis when we are the primary obligor
in the arrangement and we bear the ultimate risks of providing such
subcontracted services. In assessing whether gross revenue reporting is
appropriate, we consider a number of factors such as whether we act as principal
in the transaction, retain the general risks of loss for collection, delivery,
or returns, or whether we have control over contract pricing and vendor
selection. For the years ended December 31, 2005 and 2004 and the period from
September 3, 2003 to December 31, 2003, we incurred approximately $24.9 million,
$12.3 million and $5.5 million of direct costs, exclusive of mark-up,
respectively, related to subcontractor arrangements. Our technical services
revenue would be significantly reduced if these arrangements were recorded on a
net of direct cost basis.

OTHER ACCOUNTS RECEIVABLE

The majority of our other accounts receivable balances comprise
amounts due under technical services arrangements with customers. We establish
bad debt allowances, or valuation reserves, based on specific identification of
likely losses of accounts with individual customers. We periodically re-evaluate
these valuation reserve estimates, if any, and adjust them as more information
about the ultimate collectibility of accounts receivable becomes available.
Circumstances that could cause these valuation reserves to be revised include
changes in our clients' financial standing such as liquidity and credit quality,
and other factors that negatively impact our clients' ability to pay their
obligations as they become due.

STOCK-BASED COMPENSATION

We currently account for stock compensation in accordance with APB 25.
Compensation expense for stock options and stock-based awards granted to
employees is recognized using the intrinsic value method to the extent that the
fair value of the stock exceeds the exercise price of option or similar award at
the measurement date. The compensation expense, if any, is recorded in our
results of operations over the shorter of the vesting period of the award or
employee service period. Generally, we will issue stock options and stock-based
awards to employees with a strike price equal to the estimated fair value of the
stock on the grant date of the award such that no compensation expense
recognition is required, in accordance with APB 25.

In December 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004) "Share-based payment" ("SFAS 123(R)").
SFAS 123(R) replaces SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123") and supersedes Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations ("APB
25"). Generally, the approach in SFAS 123(R) is similar to SFAS 123, however,
SFAS 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the consolidated financial
statements based on their fair values and, accordingly, SFAS 123(R) does not
allow pro forma disclosure as an alternative to financial statement recognition.
SFAS 123(R) is effective for the beginning of the first annual period beginning
after September 15, 2005.

In March 2005, the Staff of the SEC issued Staff Accounting Bulletin
No. 107 ("SAB 107") providing guidance on SFAS 123(R). SAB 107 was issued to
assist issuers in their initial implementation of SFAS 123(R) and enhance the
information received by investors and other users of the financial statements.

The Company plans to adopt SFAS 123(R) using the modified prospective
method under which compensation cost is recognized beginning with the effective
date (a) based on the requirements of SFAS 123(R) for all share-based payments
granted after the effective date and (b) based on the

135

requirements of SFAS 123 for all awards granted to employees prior to the
effective date of SFAS 123(R) that remain unvested on the effective date.

As permitted by SFAS 123, the Company currently accounts for
share-based payments to employees using APB 25's intrinsic value method and, as
such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS 123(R)'s fair value method will have a
significant impact on our result of operations, although it will have no impact
on our overall financial position. The impact of adoption of SFAS 123(R) during
the year ended December 31, 2006 will be approximately $1.4 million, however,
this may vary depending on levels of share-based payments granted during 2006.
However, had we adopted SFAS 123(R) in prior periods, the impact of that
standard would have approximated the impact of SFAS 123 as described in the
disclosure of pro forma net loss and loss per share in Note 2(s) to our
consolidated financial statements.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We engage in certain derivative related activities and have adopted
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") and SFAS 149,
"Amendment of Statement No. 133 on Derivative Instruments and Hedging
Activities."

We primarily enter into investment related derivative transactions, as
permitted by our investment guidelines, and typically for the purposes of
managing investment duration, interest rate and foreign currency exposure, and
enhancing total investment returns. We may also, as part of our business, enter
into derivative transactions for the purpose of replicating approved investment,
insurance or reinsurance transactions that meet our investment or our
underwriting guidelines. As of December 31, 2004, we held in our
available-for-sale fixed maturity portfolio a mortality-risk-linked security for
which the repayment of principal was dependent on the performance of a specified
mortality index. The component of the bond that was linked to the mortality
index had been determined, under SFAS 133, to be an embedded derivative that was
not clearly and closely related to its host contract (a debt security) and was
therefore bifurcated and accounted for as a derivative under SFAS 133. This
security was sold during the year ended December 31, 2005. We have not
designated any of our derivative instruments as hedging instruments.

We recognize all standalone derivative instruments as either other
assets or liabilities and embedded derivatives as part of their host instruments
in our consolidated balance sheet and we measure all derivative instruments at
their fair value. The fair values of derivative instruments are based on market
prices and equivalent data provided by independent third parties. When market
data is not readily available, we use analytical models to estimate the fair
values of these instruments based on their structure, terms and conditions and
prevailing market conditions. We recognize changes in the fair value of
derivative instruments in our consolidated statement of operations in other
income. The nature of derivative instruments and estimates used in estimating
their fair value, changes in fair value of derivatives and realized gains and
losses on settled derivative instruments may create significant volatility in
our results of operations in future periods.

ANNUAL INCENTIVE PLAN

We adopted an Annual Variable Cash Compensation Plan ("Annual
Incentive Plan") which is generally available to our employees. Awards paid
under this plan are dependent on performance measured at an individual and line
of business level. In general, our Annual Incentive Plan provides for an annual
bonus award to employees that is based on a sharing of profit in excess of a
minimum return on capital to our shareholders for each calendar year. Profit for
each calendar year is measured by estimating the ultimate net present value of
after-tax profit generated from business during that calendar year and is
re-estimated on an annual basis through the vesting period. Annual Incentive
Plan awards vest and are paid out over four annual installments. However, with
respect to 2005, as part of the company's retention plan, awards vest in two
annual installments, the first of

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which was 25% of the award and was paid in 2005 and the second of which will be
75% of the award and will be paid in 2006. Unvested amounts are subject to be
adjustments to the extent that estimates of calendar year profit and estimated
net present value deviate from initial estimates as assumptions are updated and
actual information becomes known.

We recognize expenses related to Annual Incentive Plan awards by
applying the graded vesting method as prescribed by Financial Accounting
Standards Board Interpretation No. 28 "Accounting for Stock Appreciation Rights
and Other Variable Stock Option or Award Plans" ("FIN 28"). We continually
review and adjust our provisions for Annual Incentive Plan awards and other
bonus awards taking into account known information and updated assumptions
related to unknown information. Award provisions are necessarily an estimate and
amounts established in prior periods are adjusted in our current results of
operations as new information becomes available to us. Any adjustments we make
to previously established provisions or the establishment of new provisions may
significantly impact our current period results and net income.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2(x) to the consolidated financial statements which are
included in "Item 8. Financial Statements and Supplementary Data" for a
discussion of recent accounting pronouncements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

DERIVATIVE VALUATION RISK

Our derivative policy permits the use of derivatives to manage our
portfolio's duration, yield curve, currency exposure, credit exposure, exposure
to volatility and to take advantage of inefficiencies in derivatives markets. We
may also enter into derivative transactions (1) to hedge capital market risks
that may be present in our contracts of insurance or reinsurance and (2) as
replication transactions which we define as a set of derivative, insurance
and/or securities transactions that, when combined, produce the equivalent
economic result of an investment security or insurance or reinsurance contract
that meets our investment or underwriting guidelines.

We utilize derivative instruments only when we believe the terms and
structure of the contracts are thoroughly understood and its total return
profile and risk characteristics can be fully analyzed. Also, any single
derivative or group of derivatives in the aggregate cannot create risk
characteristics that are inconsistent with our overall risk profile and
investment portfolio guidelines.

FOREIGN CURRENCY RISK AND FUNCTIONAL CURRENCY

Our reporting currency is the U.S. dollar. Although we have not
experienced any significant net exposures to foreign currency risk, we expect
that in the future our exposure to market risk for changes in foreign exchange
rates will be concentrated in our investment assets, investments in foreign
subsidiaries, premiums receivable and insurance reserves arising from known or
probable losses that are denominated in foreign currencies. We generally manage
our foreign currency risk by maintaining assets denominated in the same currency
as our insurance liabilities resulting in a natural hedge or by entering into
foreign currency forward derivative contracts in an effort to hedge against
movements in the value of foreign currencies against the U.S. dollar. These
contracts are not designated as specific hedges for financial reporting purposes
and therefore realized and unrealized gains and losses on these contracts are
recorded in income in the period in which they occur. These contracts generally
have maturities of three months or less. A foreign currency forward contract
results in an obligation to purchase or sell a specified currency at a future
date and price specified at the time of the contract. Foreign currency forward
contracts will not eliminate fluctuations in the value of our assets and
liabilities denominated in foreign currencies but rather allow us to establish a
rate of exchange for a future point in time. We have not and do not expect to
enter into such contracts with respect to a material amount of our assets or
liabilities.

Our non-U.S. subsidiaries maintain both assets and liabilities in
their functional currencies, principally Euro and sterling. Assets and
liabilities denominated in foreign currencies are exposed to changes in currency
exchange rates. Exchange rate fluctuations in Euro and sterling functional
currencies against our U.S. dollar reporting currency are reported as a separate
component of other comprehensive (loss) income in shareholders' equity. Foreign
exchange risk associated with non-US dollar functional currencies of our foreign
subsidiaries is reviewed as part of our risk management process and we employ
foreign currency risk management strategies, as described above, to manage our
exposure. Exchange rate fluctuations against non-U.S. dollar functional
currencies may materially impact our consolidated statement of operations and
financial position.

138

Our investment guidelines limit the amount of our investment portfolio
that may be denominated in foreign currencies to 20% (as measured by market
value). Furthermore, our guidelines limit the amount of foreign currency
denominated investments that can be held without a corresponding hedge against
the foreign currency exposure to 5% (as measured by market value). As of
December 31, 2005, our investment portfolio included $3.5 million, or 0.5%, of
our total net invested assets, of securities that were denominated in foreign
currencies and were purchased by our investment managers for the purpose of
improving overall portfolio yield. These securities were rated AAA and were
substantially hedged into U.S. dollars according to our investment guidelines by
entering into foreign currency forward contracts. At December 31, 2005, the net
fair market value of foreign currency forward contracts relating to foreign
currency denominated investments was negligible.

INTEREST RATE RISK

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

Our strategy for managing interest rate risk includes maintaining a
high quality investment portfolio that is actively managed by our managers in
accordance with our investment guidelines in order to balance our exposure to
interest rates with the requirement to tailor the duration, yield, currency and
liquidity characteristics to the anticipated cash outflow characteristics of
claim reserve liabilities. As of December 31, 2005, assuming parallel shifts in
interest rates, the impact of an immediate 100 basis point increase in market
interest rates on our net invested assets, including cash and cash equivalents,
under management by third-party investment managers of approximately $767.3
million would have been an estimated decrease in market value of approximately
$21.9 million, or 2.9%, and the impact on our net invested assets, including
cash and cash equivalents, under management by third-party investment managers
of an immediate 100 basis point decrease in market interest rates would have
been an estimated increase in market value of approximately $15.1 million, or
2.0%.

As of December 31, 2005, our investment portfolio included AAA rated
mortgage-backed securities with a market value of $255.2 million, or 34.6%,
excluding trading investments related to deposit liabilities. As with other
fixed income investments, the fair market value of these securities fluctuates
depending on market and other general economic conditions and the interest rate
environment. Changes in interest rates can also expose us to prepayment and
extension risks on these investments. In periods of declining interest rates,
the frequency of mortgage prepayments generally increase as mortgagees seek to
refinance at a lower interest rate cost. Mortgage prepayments result in the
early repayment of the underlying principal of mortgage-backed securities
requiring us to reinvest the proceeds at the then current market rates. When
interest rates increase, these assets are exposed to extension risk, which
occurs when holders of underlying mortgages reduce the frequency on which they
prepay the outstanding principal before the maturity date and delay any
refinancing of the outstanding principal.

CREDIT RISK

We have exposure to credit risk primarily as a holder of fixed income
securities. This risk is defined as the default or the potential loss in market
value resulting from adverse changes in the borrower's ability to repay the
debt. Our risk management strategy and investment policy is to invest in debt
instruments of high credit quality issuers and to limit the amount of credit
exposure with respect to particular ratings categories and to any one issuer. We
attempt to limit our overall credit exposure by purchasing fixed income
securities that are generally rated investment grade by Moody's Investors

139

Service, Inc. and/or S&P. Our investment guidelines require that the average
credit quality of our portfolio will be Aa3/AA- and that no more than 5% of our
investment portfolio's market value shall be invested in securities rated below
BBB-/Baa3. We also limit our exposure to any single issuer to 5% or less of our
portfolio's market value at the time of purchase, with the exception of U.S.
government and agency securities. As of December 31, 2005, the average credit
quality of our investment portfolio was AA+, and all fixed income securities
held were investment grade.

We are also exposed to the credit risk of our insurance and
reinsurance brokers to whom we make claims payments for insureds and our
reinsureds, as well as to the credit risk of our reinsurers and
retrocessionaires who assume business from us. As of December 31, 2005, our loss
and loss adjustment expenses recoverable from reinsurers balance was $190.4
million. To mitigate the risk of nonpayment of amounts due under these
arrangements, we have established business and financial standards for reinsurer
and broker approval, incorporating ratings by major rating agencies and
considering the financial condition of the counterparty and the current market
information. In addition, we monitor concentrations of credit risk arising from
our reinsurers, regularly review our reinsurers' financial strength ratings and
obtain letters of credit to collateralize balances due.

We are also exposed to credit risk relating to our premiums receivable
balance. As of December 31, 2005, our premiums receivable balance was $146.8
million. We believe that credit risk exposure related to these balances is
mitigated by several factors, including but not limited to credit monitoring
controls performed as part of the underwriting process and monitoring of aged
receivable balances. In addition, as the majority of our insurance and
reinsurance contracts provide the right to offset the premiums receivable
against losses payable, we believe that the credit risk in this area is
substantially reduced.

EFFECTS OF INFLATION

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to Item 15(a) of this annual report for the
Consolidated Financial Statements of Quanta Capital Holdings Ltd. and the Notes
thereto, as well as the Schedules to the Consolidated Financial Statements.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

In connection with the preparation of this annual report, we have
carried out an evaluation under the supervision of, and with the participation
of, our management, including our Interim Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e)
of the Exchange Act) as of December 31, 2005. There are inherent limitations to
the effectiveness of any system of disclosure

140

controls and procedures, including the possibility of human error and the
circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives. Our evaluation identified
material weaknesses in our internal control over financial reporting as
discussed in "Management's Report on Internal Control Over Financial Reporting"
presented below. Deficiencies in internal control over financial reporting may
also constitute deficiencies in our disclosure controls and procedures.

Because of the material weaknesses discussed below, our Interim Chief
Executive Officer and Chief Financial Officer have concluded our disclosure
controls and procedures were not effective as of December 31, 2005, to provide
reasonable assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the applicable
rules and forms, and that such information is accumulated and communicated to
our management, including our Interim Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.

Notwithstanding the material weaknesses discussed below, management
believes the financial statements contained in this annual report are fairly
presented in all material respects, in accordance with generally accepted
accounting principles.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company relocated a significant portion of its U.S. accounting
function in the fourth quarter of 2005 from Reston, VA to New York, NY. This
relocation resulted in the change of several key personnel who were completing
quarterly and year end closing analyses and procedures for the first time. These
changes in personnel together with inadequate training in the Company's highly
manual and complex accounting environment, contributed in part to the material
weaknesses discussed below.

There were no other changes in our internal control over financial
reporting during the quarter ended December 31, 2005 that materially affected,
or are reasonably likely to affect, our internal control over financial
reporting.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule 13a-15(f) of the
Exchange Act). Internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies and procedures may deteriorate.

Under the supervision and with the participation of our Interim Chief
Executive Officer and Chief Financial Officer, our management conducted an
assessment of our internal control over financial reporting as of December 31,
2005, based on the criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
("COSO").

A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. In connection with management's assessment of our

141

internal control over financial reporting as of December 31, 2005, management
identified the following control deficiencies which constitute material
weaknesses:

1. We did not maintain a sufficient complement of personnel within our U.S.
accounting function with appropriate experience and training commensurate
with our financial reporting requirements. Specifically, certain financial
reporting positions were not staffed with individuals possessing the
appropriate experience and training to meet their responsibilities. In
addition, these individuals were not in their positions for an adequate
period of time. This control deficiency contributed to the material
weaknesses described in 2 and 3 below. Additionally, this control
deficiency could result in a misstatement of significant accounts or
disclosures, including those described below, that would result in a
material misstatement to our annual or interim consolidated financial
statements that would not be prevented or detected. Accordingly, management
has determined that this control deficiency constitutes a material
weakness.

2. We did not maintain effective controls over the accuracy and completeness
of, and access to, certain spreadsheets used in the Company's financial
reporting process. The spreadsheets used in the financial reporting process
are complex and require the manual input of data and formulas used in
calculations. These spreadsheets are utilized to accumulate or calculate
certain gross and ceded revenue, losses, expenses, and asset and liability
balances for transactions processed by our key program manager.
Specifically, effective controls were not designed and in place to monitor
and ensure spreadsheet formula logic and input data were adequately
reviewed, tested and analyzed to ensure the accuracy and completeness of
spreadsheet calculations. In addition, effective controls were not designed
and in place to prevent or detect unauthorized access to and modification
of the data or formulas contained within the spreadsheets. This control
deficiency resulted in an audit adjustment to our 2005 consolidated
financial statements to correct commission expense and the related accrual.
Additionally, this control deficiency could result in a misstatement of the
aforementioned accounts or disclosures that would result in a material
misstatement to our annual or interim consolidated financial statements
that would not be prevented or detected. Accordingly, management has
determined that this control deficiency constitutes a material weakness.

3. We did not maintain effective controls over the completion of
reconciliations and analyses for gross and ceded premiums, losses, other
expenses, and the related balance sheet accounts for our U.S. processed
transactions. Specifically, effective controls were not designed and in
place to ensure the reconciliation of (i) gross written premiums and losses
reported by our program manager to the underlying administration systems of
our program manager; (ii) premium receivables to the general ledger; and
(iii) certain cash, underwriting, expense and reported claims data to
amounts recorded in the general ledger. This control deficiency did not
result in an adjustment to our 2005 consolidated financial statements.
However, this control deficiency could result in a misstatement of the
aforementioned accounts or disclosures that would result in a material
misstatement to our annual or interim consolidated financial statements
that would not be prevented or detected. Accordingly, management has
determined that this control deficiency constitutes a material weakness.

As a result of the material weaknesses described above, management
concluded our internal control over financial reporting was not effective as of
December 31, 2005, based on the criteria established in Internal Control -
Integrated Framework issued by the COSO.

Our management's assessment of the effectiveness of our internal
control over financial reporting as of December 31,2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which appears herein.

142

MANAGEMENT'S REMEDIATION PLAN

In response to the identified material weaknesses, our management,
with oversight from our audit committee, is developing and implementing our
remediation plan to address the material weaknesses and expect this plan will
extend into fiscal year 2007. The following describes the remedial actions we
continue to implement across our business lines, as part of our ongoing and
developing remediation plan. Notwithstanding such actions, the material
weaknesses described above will not be remediated until new controls operate for
a sufficient period of time and are tested to enable management to conclude the
new controls are effective:

o We plan to perform a thorough independent review of each account
reconciliation with a focus on improving and simplifying the process.
We also plan to establish standards for the timely preparation and
management review of each reconciliation in connection with the
closing process.

o We have created a Finance Internal Control Committee to assist in the
oversight and the further development and implementation of our
remediation plans;

o We plan to hire a Chief Accounting Officer to fill a vacancy, who will
be initially tasked with the implementation of the remediation plans
in addressing the material weaknesses noted above. The
responsibilities of the Chief Accounting Officer will include, among
other things, oversight of internal control over financial reporting
including accounting reconciliations and spreadsheets;

o We will use our recently hired Vice President of Finance and Strategic
Planning to monitor key account balances, on a quarterly basis,
against budgeted expectations and historical results including those
processed by the U.S. accounting function;

o We plan to implement a training program for accounting personnel to
further develop the knowledge base and skills surrounding the details
of the underlying business transactions and, specifically, the
associated accounting principles, processes and review and monitoring
controls commensurate with (i) the nature of those transactions and
(ii) the Company's financial data and system infrastructure; and

o As we are implementing our remediation plan, we plan to use our
internal audit department to provide additional focus on reviewing the
completeness and accuracy of key spreadsheets and account
reconciliations at each quarter end.

We believe the foregoing actions will improve our internal control
over financial reporting, as well as our disclosure controls and procedures.
Furthermore, certain of these remediation efforts will require significant
ongoing effort and investment. Our management, with the oversight of our audit
committee, will continue to identify and take steps to remedy the material
weaknesses as expeditiously as possible and enhance the overall design and
operating effectiveness of our internal control over financial reporting.

The recent A.M. Best downgrade of our financial strength ratings,
which is currently requiring management to devote significant time and resources
to analyzing our business lines, our technology and system needs, our
positioning in the market, our internal operations and potential strategic
alternatives could adversely affect our ability to retain, attract and integrate
members of our management team and other employees and remediate the material
weaknesses discussed above.

ITEM 9B. OTHER INFORMATION

None.

143

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Reference is made to the sections entitled "Executive Officers,"
"Election of Directors" and "Audit Committee" of the Company's Proxy Statement
for its 2006 Annual General Meeting of Shareholders, which sections are
incorporated herein by reference.

Reference is made to the section entitled "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Company's Proxy Statement for its 2006
Annual General Meeting of Shareholders, which section is incorporated herein by
reference.

We have adopted a Code of Business Conduct and Ethics, which applies
to all employees, including our chief executive officer and our chief financial
officer and principal accounting officer. The full text of our Code of Business
Conduct and Ethics is published on our website, at www.quantaholdings.com, under
the "Investor Information" caption. We intend to disclose future amendments to,
or waivers from, certain provisions of our Code of Business conduct and Ethics
by filing a Current Report on Form 8-K with the U.S. Securities and Exchange
Commission.

ITEM 11. EXECUTIVE COMPENSATION

Information responsive to Item 11 is incorporated by reference from
the sections entitled "Executive Compensation" and "Non-Employee Director
Compensation" of the Company's Proxy Statement for its 2006 Annual General
Meeting of Shareholders, which sections are incorporated herein by reference.

The portion of the incorporated material from the Compensation
Committee Report, references to the independence of directors and the Stock
Performance Graph are not deemed to be "soliciting material" or "filed" with the
SEC, are not subject to the liabilities of Section 18 of the Exchange Act and
shall not be deemed incorporated by reference into any of the filings previously
made or made in the future by our company under the Exchange Act or the
Securities Act of 1933, as amended (except to the extent our company
specifically incorporates any such information into a document that is filed).

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Information responsive to Item 12 is incorporated by reference from
the section entitled "Security Ownership" of the Company's Proxy Statement for
its 2006 Annual General Meeting of Shareholders.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN

Our shareholders and our board approved our 2003 long term incentive
plan in July 2003. The plan is intended to advance our interests and those of
our shareholders by providing a means to attract, retain and motivate employees
and directors upon whose judgment, initiative and efforts and our continued
success, growth and development is dependent. The compensation committee of our
board of directors administers the plan and makes all decisions with respect to
the plan. The compensation committee is composed solely of independent
directors. The persons eligible to receive awards under the plan include our
directors, officers, employees and consultants and those of our affiliated
entities.

The plan provides for the grant to eligible employees, directors and
consultants of stock options, stock appreciation rights, restricted shares,
restricted share units, performance awards, dividend equivalents and other
share-based awards. The plan also provides our directors with the opportunity to
receive their annual retainer fee for board of director service in shares.

144

The compensation committee selects the recipients of awards granted
under the plan and determines the dates, amounts, exercise prices, vesting
periods and other relevant terms of the awards. The maximum number of shares
reserved for issuance under the plan is 9,350,000. The maximum number of shares
with respect to which options and stock appreciation rights may be granted
during a calendar year to any eligible employee is 700,000 shares. The maximum
number of shares that may be granted with respect to performance awards,
restricted shares and restricted share units intended to qualify as
performance-based compensation within the meaning of Section 162(m)(4)(C) of the
Internal Revenue Code is the equivalent of 250,000 shares during a calendar year
to any eligible employee.

The compensation committee determines the pricing of awards granted
under the plan as of the date the award is granted. The compensation committee
determines the vesting schedule of awards granted under the plan. Recipients of
awards may exercise awards at any time after they vest and before they expire,
except that no awards may be exercised after ten years from the date of grant.
Awards are generally not transferable by the recipient during the recipient's
life. Awards granted under the plan are evidenced by either an agreement that is
signed by us and the recipient or a confirming memorandum issued by us to the
recipient setting forth the terms and conditions of the awards. Award recipients
and beneficiaries of award recipients have no right, title or interest in or to
any shares subject to any award or to any rights as a shareholder, unless and
until shares are actually issued to the recipient.

NUMBER OF WEIGHTED NUMBER OF SECURITIES
SECURITIES TO BE AVERAGE REMAINING AVAILABLE FOR
ISSUED UPON EXERCISE PRICE FUTURE ISSUANCE UNDER
EXERCISE OF OF OUTSTANDING EQUITY COMPENSATION
OUTSTANDING OPTIONS, PLANS (EXCLUDING
OPTIONS, WARRANTS WARRANTS AND SECURITIES REFLECTED IN
AND RIGHTS RIGHTS COLUMN (A))
PLAN CATEGORY (A) (B) (C)
-------------------------------------- ----------------- -------------- -----------------------

Equity compensation plans approved 3,550,529(1) $9.46 5,799,471
by security holders
Equity compensation plans not approved
by security holders -- -- --
--------- ----- ---------
TOTAL 3,550,529 $9.46 5,799,471

----------
(1) These securities were granted to employees and directors between September
3, 2003 and December 8, 2005. Of the 3,550,529 securities granted, a total
of 3,402,194 are options which have a term of either seven or ten years,
vest in equal installments over four years starting on the first
anniversary of the grant and range in exercise price from $4.59 to $12.50.
The remaining 148,335 securities are performance shares which vest three
years from date of issue contingent upon attaining an average ROE of 20%
per year from the date of issue.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Additional information responsive to Item 13 is incorporated by
reference from the section entitled "Certain Transactions" of the Company's
Proxy Statement for its 2006 Annual General Meeting of Shareholders.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by
reference from the section entitled "Independent Registered Public Accounting
Firm" of the Company's Proxy Statement for its 2006 Annual General Meeting of
Shareholders.

145

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Financial Statements

(1) The financial statements and schedules listed in the accompanying
index to financial statements and schedules are filed as part of this
annual report.

(2) All other schedules for which provision is made in the applicable
accounting regulations of the SEC are not required under the related
instructions or are not applicable and therefore have been omitted.

(b) Exhibits

Exhibit
Number Description
------- ----------------------------------------------------------------------
2.1 Stock Purchase Agreement by and among Quanta Reinsurance U.S. Ltd. and
the former shareholders of Environmental Strategies Corporation dated
July 17, 2003 (incorporated by reference from Exhibit 2.1 to the
Company's Registration Statement on Form S-1 (No. 333-111535) filed on
December 24, 2003)

3.1 Memorandum of Association of the Company (incorporated by reference
from Exhibit 3.1 to the Company's Registration Statement on Form S-1
(No. 333-111535) filed on December 24, 2003)

3.2 Amended and Restated Bye-Laws of the Company (incorporated by
reference from Exhibit 3.2 to the Company's Registration Statement on
Form S-1 (No. 333-111535) filed on December 24, 2003)

4.1 Memorandum of Association of the Company (included as Exhibit 3.1)

4.2 Amended and Restated Bye-Laws of the Company (included as Exhibit 3.2)

4.3 Form of Common Share Certificate (incorporated by reference from
Exhibit 4.1 to the Company's Amendment No. 1 to Registration Statement
on Form S-1/A (No. 333-111535) filed on February 13, 2004)

4.4 Certificate of Designation setting forth the designation, powers,
preferences and rights and the qualifications, limitations and
restrictions of the Company's 10.25% Series A Preferred Shares
(incorporated by reference from Exhibit 4.1 to the Company's Current
Report on Form 8-K dated December 20, 2005)

4.5 Form of Share Certificate evidencing the Company's 10.25% Series A
Preferred Shares (incorporated by reference from Exhibit 4.2 to the
Company's Current Report on Form 8-K dated December 20, 2005)

10.1+ Employment Agreement of Michael J. Murphy, dated September 3, 2003
(incorporated by reference from Exhibit 10.2 to the Company's
Registration Statement on Form S-1 (No. 333-111535)
filed on December 24, 2003)

10.2+ Amendment to Employment Agreement dated as of March 18, 2005 between
Quanta Capital Holdings Ltd. and Michael J. Murphy (incorporated by
reference from Exhibit 10.1 to the

146

Company's Current Report on Form 8-K dated March 22, 2005)

10.3+ Quanta Capital Holdings Ltd. 2003 Long Term Incentive Plan, as amended
on June 2, 2005 (incorporated by reference from Exhibit 10.1 to the
Company's Current Report on Form 8-K dated June 8, 2005)

10.4*+ Form of Non-Qualified Stock Option Agreement for recipients of options
under 2003 Long Term Incentive Plan

10.5*+ Form of Performance-Based Share Unit Agreement for recipients of
performance-based share units under 2003 Long Term Incentive Plan

10.6+ Option Agreement between the Company and Tobey J. Russ, dated
September 3, 2003 (incorporated by reference from Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (No. 333-111535) filed on
December 24, 2003)

10.7+ Option Agreement between the Company and Michael J. Murphy, dated
September 3, 2003 (incorporated by reference from Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (No. 333-111535) filed on
December 24, 2003)

10.8 Warrant dated September 3, 2003 granted by the Company to Russ Family,
LLC (incorporated by reference from Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (No. 333-111535) filed on December
24, 2003)

10.9 Warrant dated September 3, 2003 granted by the Company to CPD &
Associates, LLC (incorporated by reference from Exhibit 10.8 to the
Company's Registration Statement on Form S-1 (No. 333-111535) filed on
December 24, 2003)

10.10 Warrant dated September 3, 2003 granted by the Company to BEM
Specialty Investments, LLC (incorporated by reference from Exhibit
10.9 to the Company's Registration Statement on Form S-1(No.
333-111535) filed on December 24, 2003)

10.11 Registration Rights Agreement by and among the Company, Friedman,
Billings, Ramsey & Co., Inc., MTR Capital Holdings, LLC and BEM
Investments, LLC, dated September 3, 2003 (incorporated by reference
from Exhibit 10.10 to the Company's Registration Statement on Form S-1
(No. 333-111535) filed on December 24, 2003)

10.12+ Employment Agreement of Jonathan J.R. Dodd dated December 22, 2004
(incorporated by reference from Exhibit 10.1 to the Company's Current
Report on Form 8-K dated July 26, 2005)

10.13+ Employment Agreement of Gary G. Wang, dated July 7, 2003 (incorporated
by reference from Exhibit 10.12 to the Company's Amendment No. 1 to
Registration Statement on Form S-1/A (No. 333-111535) filed on
February 13, 2004)

10.14 Registration Rights Agreement by and among the Company and the Nigel
W. Morris Revocable Trust dated as of March 23, 2004 (incorporated by
reference from Exhibit 10.13 to the Company's Amendment No. 2 to
Registration Statement on Form S-1/A (No. 333-111535) filed on April
5, 2004)

10.15 Placement Agreement, dated as of December 17, 2004, between Quanta
Capital Holdings Ltd., Quanta Capital Statutory Trust I and Cohen
Bros. & Company (incorporated by reference from Exhibit 10.1 to the
Company's Current Report on Form 8-K dated December 23, 2004)

147

10.16 Guarantee Agreement, dated December 21, 2004, by and between Quanta
Capital Holdings Ltd. and JPMorgan Chase Bank, N.A. (incorporated by
reference from Exhibit 10.2 to the Company's Current Report on Form
8-K dated December 23, 2004)

10.17 Indenture, dated as of December 21, 2004, between Quanta Capital
Holdings Ltd. and JPMorgan Chase Bank, N.A., as trustee (incorporated
by reference from Exhibit 10.3 to the Company's Current Report on Form
8-K dated December 23, 2004)

10.18 Amended and Restated Declaration of Trust, dated December 21, 2004, by
and among Chase Manhattan Bank UAS, National Association, as
institutional trustee; JPMorgan Chase Bank, N.A., as Delaware trustee;
Quanta Capital Holdings Ltd., as sponsor; John S. Brittain, Jr. and
Kenneth King, as trust administrators; and the holders from time to
time of undivided beneficial interests in the assets of the Quanta
Capital Statutory Trust I (incorporated by reference from Exhibit 10.4
to the Company's Current Report on Form 8-K dated December 23, 2004)

10.19 Junior Subordinated Debt Security due 2035 issued by Quanta Capital
Holdings Ltd., dated December 21, 2004 (incorporated by reference from
Exhibit 10.5 to the Company's Current Report on Form 8-K dated
December 23, 2004)

10.20 Form of Capital Security Certificate (incorporated by reference from
Exhibit 10.6 to the Company's Current Report on Form 8-K dated
December 23, 2004)

10.21 Placement Agreement, dated as of February 22, 2005, between Quanta
Capital Holdings Ltd., Quanta Capital Statutory Trust II and Cohen
Bros. & Company (incorporated by reference from Exhibit 10.01 to the
Company's Current Report on Form 8-K dated March 1, 2005)

10.22 Guarantee Agreement, dated February 24, 2005, by and between Quanta
Capital Holdings Ltd. and JPMorgan Chase Bank, National Association
(incorporated by reference from Exhibit 10.02 to the Company's Current
Report on Form 8-K dated March 1, 2005)

10.23 Indenture, dated as of February 24, 2005, between Quanta Capital
Holdings Ltd. and JPMorgan Chase Bank, National Association, as
trustee (incorporated by reference from Exhibit 10.03 to the Company's
Current Report on Form 8-K dated March 1, 2005)

10.24 Amended and Restated Declaration of Trust, dated February 24, 2005, by
and among Chase Manhattan Bank USA, National Association, as Delaware
trustee; JPMorgan Chase Bank, National Association, as institutional
trustee; Quanta Capital Holdings Ltd., as sponsor; John S. Brittain,
Jr. and Kenneth King, as trust administrators; and the holders from
time to time of undivided beneficial interests in the assets of the
Quanta Capital Statutory Trust II (incorporated by reference from
Exhibit 10.04 to the Company's Current Report on Form 8-K dated March
1, 2005)

10.25 Junior Subordinated Debt Security due 2035 issued by Quanta Capital
Holdings Ltd., dated February 24, 2005 (incorporated by reference from
Exhibit 10.05 to the Company's Current Report on Form 8-K dated March
1, 2005)

10.26 Form of Capital Securities Certificate (incorporated by reference from
Exhibit 10.06 to the Company's Current Report on Form 8-K dated March
1, 2005)

10.27 Common Securities Certificate dated February 24, 2005 (incorporated by
reference from Exhibit 10.07 to the Company's Current Report on Form
8-K dated March 1, 2005)

148

10.28 Credit Agreement dated as of July 13, 2004 and Amended and Restated as
of July 11, 2005, between Quanta Capital Holdings Ltd., various
designated subsidiary borrowers, the lenders party thereto, BNP
Paribas, Calyon, New York Branch, Comerica Bank, and Deutsche Bank AG
New York Branch, as Co-Documentation Agents, and JPMorgan Chase Bank,
N.A., as Administrative Agent (incorporated by reference from Exhibit
10.01 to the Company's Current Report on Form 8-K dated July 15, 2005)

10.29 Second Consent to Credit Agreement among the Company, JP Morgan, Chase
Bank, Bank of America, N.A., Calyon Bank, New York Branch and the
other lenders named therein, dated February 16, 2005 (incorporated by
reference from Exhibit 10.29 to the Company's Annual Report on For
10-K for the year ended December 31, 2004 filed on March 31, 2005)

10.30* Technical Property Binder of Reinsurance dated November 18, 2005,
between Quanta Indemnity Company, Quanta Specialty Lines Insurance
Company and Quanta Reinsurance US Ltd. and Arch Reinsurance Ltd.

10.31* Treaty Property Reinsurance Binder dated November 18, 2005, between
Quanta Reinsurance Ltd., Quanta Indemnity Company, Quanta Reinsurance
US Ltd., and Quanta Specialty Lines Insurance Company and Arch
Reinsurance Ltd.

10.32* Commutation and Mutual Release Agreement dated November 21, 2005,
between Quanta Reinsurance Limited and Houston Casualty Company and
certain of its subsidiaries

10.33+ Separation Agreement and General Release, effective January 3, 2006,
by and between Quanta Capital Holdings Ltd. and Tobey J. Russ
(incorporated by reference from Exhibit 10.1 to the Company's Current
Report on Form 8-K dated January 9, 2006)

10.34*+ Form of Restricted Share Agreement for recipients of restricted shares
under 2003 Long Term Incentive Plan

10.35*+ Retention Agreement by and between Quanta Capital Holdings Ltd. and
Jonathan J.R. Dodd, dated March 30, 2006

12* Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Dividends

21* List of subsidiaries of the Company

23* Consent of PricewaterhouseCoopers LLP

31.1* Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002

31.2* Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002

32.1* Certification of Principal Executive Officer of Quanta Capital
Holdings Ltd. pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

32.2* Certification of Principal Financial Officer of Quanta Capital
Holdings Ltd. pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

----------
* Filed herewith
+ Represents a management contract or compensatory plan arrangement

149

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 31 day of March
2006.

QUANTA CAPITAL HOLDINGS LTD.

By: /s/ Robert Lippincott III
------------------------------------
Robert Lippincott III
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report is signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.

Signature Title Date
------------------------- -------------------------------------- --------------

/s/ Robert Lippincott III Interim Chief Executive Officer and March 31, 2006
------------------------- Director (Principal Executive Officer)
Robert Lippincott III

/s/ Jonathan J.R. Dodd Chief Financial Officer March 31, 2006
------------------------- (Principal Financial Officer and
Jonathan J.R. Dodd Principal Accounting Officer)

/s/ James J. Ritchie Chairman of the Board of Directors March 31, 2006
-------------------------
James J. Ritchie

Director
-------------------------
Nigel W. Morris

/s/ Michael J. Murphy Director March 31, 2006
-------------------------
Michael J. Murphy

Director
-------------------------
W. Russell Ramsey

/s/ Roland C. Baker Director March 31, 2006
-------------------------
Roland C. Baker

/s/ Robert B. Shapiro Director March 31, 2006
-------------------------
Robert B. Shapiro

/s/ Robert Lippincott III Authorized Representative in the March 31, 2006
------------------------- United States
Robert Lippincott III

150

QUANTA CAPITAL HOLDINGS LTD.

Page No.
--------

FINANCIAL INFORMATION

Financial Statements

Reports of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets at December 31, 2005 and December 31,
2004 (successor) F-4

Consolidated Statements of Operations and Comprehensive (Loss)
Income for the years ended December 31, 2005 (successor) and
December 31, 2004 (successor), the period from May 23, 2003 (date of
incorporation) to December 31, 2003 (successor) and the period
from January 1, 2003 to September 3, 2003 (predecessor) F-5

Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2005 (successor) and December 31, 2004
(successor), the period from May 23, 2003 (date of incorporation) to
December 31, 2003 (successor) and the period from January 1, 2003 to
September 3, 2003 (predecessor) F-6

Consolidated Statements of Cash Flows for the years ended December
31, 2005 (successor) and December 31, 2004 (successor), the period
from May 23, 2003 (date of incorporation) to December 31, 2003
(successor) and the period from January 1, 2003 to September 3, 2003
(predecessor) F-7

Notes to the Consolidated Financial Statements F-8

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Quanta Capital Holdings Ltd.

We have completed an integrated audit of Quanta Capital Holdings Ltd.'s 2005
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2005 and audits of its 2004 and 2003 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.

Consolidated financial statements and financial statement schedules
-------------------------------------------------------------------

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Quanta
Capital Holdings Ltd. and its subsidiaries (the "Successor Company") at December
31, 2005 and 2004, and the results of their operations and their cash flows for
the period from May 23, 2003 to December 31, 2003 and for each of the two years
in the period ended December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedules listed in the index on page S-1 present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 23 to the consolidated financial statements, the Company
was downgraded by A.M. Best with regards to its financial strength during March
2006.

Internal control over financial reporting
-----------------------------------------

Also, we have audited management's assessment, included in Management's Report
on Internal Control Over Financial Reporting appearing under Item 9A, that
Quanta Capital Holdings Ltd. did not maintain effective internal control over
financial reporting as of December 31, 2005 because the Company did not maintain
(1) a sufficient complement of personnel within the Company's U.S. accounting
function with appropriate experience and training commensurate with financial
reporting requirements; (2) effective controls over the accuracy and
completeness of, and access to, certain spreadsheets used in the Company's
financial reporting process; and (3) effective controls over the completion of
reconciliations and analyses for gross and ceded premiums, losses, other
expenses, and the related balance sheet accounts for its U.S. processed
transactions based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit.

We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

1. The Company did not maintain a sufficient complement of personnel within
its U.S. accounting function with appropriate experience and training
commensurate with its financial reporting requirements. Specifically,
certain financial reporting positions were not staffed with individuals
possessing the appropriate experience and training to meet their
responsibilities. In addition, these individuals were not in their
positions for an adequate period of time. This control deficiency
contributed to the material weaknesses described in 2 and 3 below.
Additionally, this control deficiency could result in a misstatement of
significant accounts or disclosures, including those described below, that
would result in a material misstatement to the Company's annual or interim
consolidated financial statements that would not be prevented or detected.
Accordingly, management has determined that this control deficiency
constitutes a material weakness.

2. The Company did not maintain effective controls over the accuracy and
completeness of, and access to, certain spreadsheets used in the Company's
financial reporting process. The spreadsheets used in the financial
reporting process are complex and require the manual input of data and
formulas used in calculations. These spreadsheets are utilized to
accumulate or calculate certain gross and ceded revenue, losses, expenses,
and asset and liability balances for transactions processed by the
Company's key program manager. Specifically, effective controls were not
designed and in place to monitor and ensure spreadsheet formula logic and
input data were adequately reviewed, tested and analyzed to ensure the
accuracy and completeness of spreadsheet calculations. In addition,
effective controls were not designed and in place to prevent or detect
unauthorized access to and modification of the data or formulas contained
within the spreadsheets. This control deficiency resulted in an audit
adjustment to the Company's 2005 consolidated financial statements to
correct commission expense and the related accrual. Additionally, this
control deficiency could result in a misstatement of the aforementioned
accounts or disclosures that would result in a material misstatement to the
Company's annual or interim consolidated financial statements that would
not be prevented or detected. Accordingly, management has determined that
this control deficiency constitutes a material weakness.

3. The Company did not maintain effective controls over the completion of
reconciliations and analyses for gross and ceded premiums, losses, other
expenses, and the related balance sheet accounts for its U.S. processed
transactions. Specifically, effective controls were not designed and in
place to ensure the reconciliation of (i) gross written premiums and losses
reported by the Company's program manager to the underlying administration
systems of its program manager; (ii) premium receivables to the general
ledger; and (iii) certain cash, underwriting, expense and reported claims
data to amounts recorded in the general ledger. This control deficiency did
not result in an adjustment to the Company's 2005 consolidated financial
statements. However, this control deficiency could result in a misstatement
of the aforementioned accounts or disclosures that would result in a
material misstatement to the Company's annual or interim consolidated
financial statements that would not be prevented or detected. Accordingly,
management has determined that this control deficiency constitutes a
material weakness.

These material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2005 consolidated financial
statements, and our opinion regarding the effectiveness of the Company's
internal control over financial reporting does not affect our opinion on those
consolidated financial statements.

In our opinion, management's assessment that Quanta Capital Holdings Ltd. did
not maintain effective internal control over financial reporting as of December
31, 2005, is fairly stated, in all material respects, based on criteria
established in Internal Control - Integrated Framework issued by the COSO. Also,
in our opinion, because of the effects of the material weaknesses described
above on the achievement of the objectives of the control criteria, Quanta
Capital Holdings Ltd. has not maintained effective internal control over
financial reporting as of December 31, 2005, based on criteria established in
Internal Control - Integrated Framework issued by the COSO.

/s/ PricewaterhouseCoopers LLP
New York, New York
March 31, 2006

F-2

Report of Independent Registered Public Accounting Firm

To the Shareholder of
Environmental Strategies Consulting, LLC (formerly, "Environmental Strategies
Corporation")

In our opinion, the accompanying consolidated statements of operations and
comprehensive (loss) income, of cash flows and of changes in shareholders'
equity of Environmental Strategies Corporation and its subsidiaries (the
"Predecessor Company") present fairly, in all material respects, the results of
their operations and their cash flows for the period from January 1, 2003 to
September 3, 2003 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. We conducted our audit of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP
New York, New York
December 5, 2003

F-3

CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of U.S. dollars except for share and per share amounts)

DECEMBER 31, DECEMBER 31,
2005 2004
------------ ------------
(Successor)

ASSETS

Investments at fair value (amortized cost: December 31, 2005,
$736,425; December 31, 2004, $600,161) .........................
Available for sale investments .............................. $ 699,121 $559,430
Trading investments related to deposit liabilities .......... 38,316 40,492
---------- --------
Total investments at fair value .......................... 737,437 599,922
Cash and cash equivalents ......................................... 178,135 32,775
Restricted cash and cash equivalents .............................. 82,843 42,482
Accrued investment income ......................................... 5,404 4,719
Premiums receivable ............................................... 146,837 146,784
Losses and loss adjustment expenses recoverable ................... 190,353 13,519
Other accounts receivable ......................................... 11,434 11,575
Net receivable for investments sold ............................... 3,047 --
Deferred acquisition costs, net ................................... 33,117 41,496
Deferred reinsurance premiums ..................................... 112,096 47,416
Property and equipment, net of accumulated depreciation of $4,874
(December 31, 2004: $1,625) .................................... 5,034 4,875
Goodwill and other intangible assets .............................. 24,877 20,617
Other assets ...................................................... 21,477 14,553
---------- --------
Total assets .......................................... $1,552,091 $980,733
========== ========
LIABILITIES

Reserve for losses and loss expenses .............................. $ 533,983 $159,794
Unearned premiums ................................................. 336,550 247,936
Environmental liabilities assumed ................................. 5,911 6,518
Reinsurance balances payable ...................................... 57,499 24,929
Accounts payable and accrued expenses ............................. 39,051 17,360
Net payable for investments purchased ............................. -- 3,749
Deposit liabilities ............................................... 51,509 43,365
Deferred income and other liabilities ............................. 9,729 4,935
Junior subordinated debentures .................................... 61,857 41,238
---------- --------
Total liabilities ..................................... $1,096,089 $549,824

MANDATORILY REDEEMABLE PREFERRED SHARES
($0.01 par value; 25,000,000 shares authorized; 3,000,000
issued and outstanding at December 31, 2005;
none issued and outstanding at December 31, 2004) .............. $ 71,838 $ --

Commitments and contingencies (Note 13)

SHAREHOLDERS' EQUITY
Common shares
($0.01 par value; 200,000,000 shares authorized; 69,946,861
issued and outstanding at December 31, 2005
and 56,798,218 issued and outstanding at December 31, 2004) .... 699 568
Additional paid-in capital ........................................ 581,929 523,771
Accumulated deficit ............................................... (199,010) (93,058)
Accumulated other comprehensive income (loss) ..................... 546 (372)
---------- --------
Total shareholders' equity ............................ $ 384,164 $430,909
---------- --------
TOTAL LIABILITIES, REDEEMABLE PREFERRED SHARES AND
SHAREHOLDERS' EQUITY ........................................... $1,552,091 $980,733
========== ========

The accompanying notes are an integral part of these consolidated financial
statements

F-4

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(Expressed in thousands of U.S. dollars except for share and per share amounts)

FOR THE
PERIOD FOR THE PERIOD
FOR THE YEAR FOR THE YEAR FROM MAY 23 FROM
ENDED ENDED TO JANUARY 1 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 3,
2005 2004 2003 2003
------------- ------------- ------------ --------------
(SUCCESSOR) (PREDECESSOR)

REVENUES

Gross premiums written ........................................ $ 608,935 $ 494,412 $ 20,465 $ --
=========== =========== =========== ==========

Net premiums written .......................................... $ 390,041 $ 419,541 $ 20,060 $ --
Change in net unearned premiums ............................... (25,966) (182,401) (18,120) --
----------- ----------- ----------- ----------
Net premiums earned ........................................... 364,075 237,140 1,940 --

Technical services revenues ................................... 47,265 32,485 11,680 20,350
Net investment income ......................................... 27,181 14,307 2,290 13
Net realized (losses)
gains on investments ....................................... (13,020) 228 109 --
Net foreign exchange gains .................................... 331 978 -- --
Other income .................................................. 5,279 2,017 126 --
----------- ----------- ----------- ----------
Total revenues .......................................... 431,111 287,155 16,145 20,363
----------- ----------- ----------- ----------
EXPENSES

Net losses and loss expenses .................................. 324,084 198,916 1,191 --
Acquisition expenses .......................................... 69,624 53,995 164 --
Direct technical services costs ............................... 37,027 23,182 8,637 12,992
General and administrative expenses ........................... 97,930 63,392 44,196 5,820
Interest expense .............................................. 4,165 71 -- --
Depreciation of fixed assets and
amortization of intangible assets .......................... 3,989 2,180 434 151
----------- ----------- ----------- ----------
Total expenses .......................................... 536,819 341,736 54,622 18,963
----------- ----------- ----------- ----------
(Loss) income before income taxes ............................. (105,708) (54,581) (38,477) 1,400
Income tax expense ......................................... 244 -- -- --
----------- ----------- ----------- ----------
NET (LOSS) INCOME ............................................. (105,952) (54,581) (38,477) 1,400
----------- ----------- ----------- ----------
OTHER COMPREHENSIVE INCOME (LOSS)

Net unrealized investment (losses) gains
arising during the period, net of income taxes ............. (12,429) (1,235) 1,280 --
Foreign currency translation adjustments ...................... 327 (66) (14) --
Reclassification of net realized losses (gains)
on investments included in net loss, net of income taxes ... 13,020 (228) (109) --
----------- ----------- ----------- ----------
Other comprehensive income (loss) ............................. 918 (1,529) 1,157 --
----------- ----------- ----------- ----------
COMPREHENSIVE (LOSS) INCOME ................................... $ (105,034) $ (56,110) $ (37,320) $ 1,400
=========== =========== =========== ==========

Weighted average common share and
common share equivalents -
basic ...................................................... 57,205,342 56,798,218 31,369,001 1,093,250
diluted .................................................... 57,205,342 56,798,218 31,369,001 1,093,250
Basic (loss) income per share ................................. $ (1.85) $ (0.96) $ (1.23) $ 1.28
Diluted (loss) income per share ............................... $ (1.85) $ (0.96) $ (1.23) $ 1.28

The accompanying notes are an integral part of these consolidated financial
statements

F-5

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Expressed in thousands of U.S. dollars except for share and per share amounts)

FOR THE PERIOD FOR THE PERIOD
FOR THE YEAR ENDED FOR THE YEAR ENDED FROM MAY 23 TO FROM JANUARY 1
DECEMBER 31, 2005 DECEMBER 31, 2004 DECEMBER 31, 2003 TO SEPTEMBER 3, 2003
------------------ ------------------ ----------------- --------------------
(SUCCESSOR) (PREDECESSOR)

SHARE CAPITAL - PREFERRED SHARES OF PAR
VALUE $0.01 EACH........................ $ -- $ -- $ -- $ --
--------- -------- -------- -------
SHARE CAPITAL - COMMON SHARES OF PAR
VALUE $0.01 EACH
Balance at beginning of period............. 568 568 -- 11
Issued during period....................... 131 -- 573 --
Repurchased and retired during period...... -- -- (5) --
--------- -------- -------- -------
Balance at end of period................... 699 568 568 11
--------- -------- -------- -------

ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 523,771 524,235 -- 779
Common shares issued during period......... 62,341 -- 547,710 --
Net offering costs......................... (4,183) (464) (40,200) --
Non-cash stock compensation expense........ -- -- 16,725 --
--------- -------- -------- -------
Balance at end of period................... 581,929 523,771 524,235 779
--------- -------- -------- -------

(ACCUMULATED DEFICIT) / RETAINED
EARNINGS
Balance at beginning of period............. (93,058) (38,477) -- 5,660
Dividends.................................. -- -- -- (1,800)
Net (loss) income for period............... (105,952) (54,581) (38,477) 1,400
--------- -------- -------- -------
Balance at end of period................... (199,010) (93,058) (38,477) 5,260
--------- -------- -------- -------

ACCUMULATED OTHER COMPREHENSIVE
(LOSS) INCOME
Balance at beginning of period............. (372) 1,157 -- --
Net change in unrealized gains (losses)
on investments, net of income taxes..... 591 (1,463) 1,171 --
Foreign currency translation adjustments... 327 (66) (14) --
--------- -------- -------- -------
Balance at end of period................... 546 (372) 1,157 --
--------- -------- -------- -------

TOTAL SHAREHOLDERS' EQUITY................. $ 384,164 $430,909 $487,483 $ 6,050
========= ======== ======== =======

The accompanying notes are an integral part of these consolidated financial
statements

F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of U.S. dollars)

FOR THE PERIOD FOR THE PERIOD
FROM MAY 23 TO FROM 1 TO
FOR THE YEAR ENDED FOR THE YEAR ENDED DECEMBER 31, SEPTEMBER 3,
DECEMBER 31, 2005 DECEMBER 31, 2004 2003 2003
------------------ ------------------ -------------- --------------
(SUCCESSOR) (PREDECESSOR)

CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income....................................... $ (105,952) $ (54,581) $ (38,477) $ 1,400
ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Depreciation of property and equipment............... 3,249 1,440 185 151
Amortization of intangible assets.................... 740 740 249 --
Amortization of net discounts on investments......... 157 2,949 669 --
Net realized losses (gains) on investments........... 13,020 (228) (109) --
Net change in fair value of derivative instruments... 324 401 (207) --
Non-cash stock compensation expense.................. 72 -- 16,725 --
Changes in assets and liabilities:
Restricted cash and cash equivalents................. (40,361) (31,925) (10,557) --
Accrued investment income............................ (685) (1,724) (2,781) --
Premiums receivable.................................. (53) (135,823) (10,961) --
Losses and loss adjustment expenses recoverable...... (176,834) (10,256) 209 --
Deferred acquisition costs........................... 8,379 (34,880) (6,616) --
Deferred reinsurance premiums........................ (64,680) (45,491) (270) --
Other accounts receivable............................ 141 (2,618) 977 (883)
Other assets......................................... (5,896) (9,804) (1,818) 20
Reserve for losses and loss expenses................. 374,189 155,340 982 --
Unearned premiums.................................... 88,614 227,892 18,390 --
Environmental liabilities assumed.................... (607) (500) 7,018 --
Reinsurance balances payable......................... 32,570 24,595 334 --
Accounts payable and accrued expenses................ 16,691 (249) 12,924 1,398
Deposit liabilities.................................. 8,144 43,365 --
Deferred income and other liabilities................ 4,794 2,882 1,757 129
----------- ----------- --------- -------
Net cash provided by (used in) operating activities..... 156,016 131,525 (11,377) 2,215
----------- ----------- --------- -------

CASH FLOWS USED IN INVESTING ACTIVITIES
Proceeds from sale of fixed maturities and short-term
investments.......................................... 1,407,597 940,704 377,160 --
Purchases of fixed maturities and short-term
investments.......................................... (1,564,491) (1,109,262) (794,593) --
Purchases of property and equipment..................... (3,408) (5,198) (870) (66)
Net cash paid in acquisition of subsidiaries............ -- -- (41,704) --
----------- ----------- --------- -------
Net cash used in investing activities................... (160,302) (173,756) (460,007) (66)
----------- ----------- --------- -------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Distributions to shareholders........................... -- -- -- (1,800)
Repayment of notes payable.............................. -- -- -- (6)
Repayment of capital lease obligations.................. -- -- -- (3)
Proceeds from issuance of common shares, net of
offering costs....................................... 58,217 (464) 508,078 --
Proceeds from issuance of preferred shares, net of
offering costs....................................... 71,838 -- -- --
Proceeds from junior subordinated debentures, net of
issuance costs....................................... 19,591 38,776 -- --
----------- ----------- --------- -------
Net cash provided by (used in) financing activities..... 149,646 38,312 508,078 (1,809)
----------- ----------- --------- -------
Increase (decrease) in cash and cash equivalents........ 145,360 (3,919) 36,694 340
Cash and cash equivalents at beginning of period........ 32,775 36,694 -- 73
----------- ----------- --------- -------
Cash and cash equivalents at end of period.............. $ 178,135 $ 32,775 $ 36,694 $ 413
=========== =========== ========= =======
Supplemental information:
Interest paid........................................... $ 3,937 $ 2 $ 1 $ 2
=========== =========== ========= =======
Taxes paid.............................................. $ 244 $ -- $ -- $ --
=========== =========== ========= =======

The accompanying notes are an integral part of these consolidated financial
statements

F-7

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Quanta Capital Holdings Ltd. ("Quanta Holdings"), incorporated on May 23,
2003, is a holding company organized under the laws of Bermuda. Quanta Holdings
and its subsidiaries, collectively referred to as the "Company" or the
"Successor" were formed to provide specialty insurance, reinsurance, risk
assesment and risk technical services and products on a global basis. Quanta
Holdings conducts its insurance and reinsurance operations principally through
wholly-owned subsidiaries incorporated in Bermuda, the United States of America
(the "U.S.") and Europe.

In connection with its formation, Quanta Holdings issued 1,200,000 shares
at a $0.01 par value. Of these shares, 1,000,000 shares were issued to MTR
Capital Holdings, LLC ("MTR") and 200,000 shares were issued to BEM Investments,
LLC ("BEMI"). On July 3, 2003, Quanta Holdings issued an additional 800,000
shares. Following this issuance, MTR and BEMI (collectively, the "Founders")
held 1,250,000 and 750,000 shares, respectively. MTR and BEMI were beneficially
owned and controlled by certain directors of Quanta Holdings.

On September 3, 2003, Quanta Holdings sold 55,000,000 common shares through
a private placement (the "Private Offering") in a transaction exempt from
registration under the Securities Act of 1933. Friedman, Billings, Ramsey & Co.
("FBR") was the initial purchaser of the majority of the shares and acted as the
placement agent for the sale of shares to accredited investors. Contemporaneous
with the Private Offering, Quanta Holdings repurchased and retired 493,044
shares from the Founders such that they, immediately after the repurchase, did
not own, in the aggregate, more than the sum of 376,817 shares plus 2.00% of the
outstanding shares after the Private Offering. Subsequent to the Private
Offering, MTR was liquidated and its shares in Quanta Holdings were distributed
among its members, including Russ Family, LLC, CPD & Associates, LLC and BEM
Specialty Investments, LLC.

On September 3, 2003, Quanta Reinsurance U.S. Ltd. ("Quanta U.S. Re")
acquired all of the outstanding shares of Environmental Strategies Corporation
("ESC" or the "Predecessor"), a Virginia corporation. ESC provides environmental
engineering, remediation risk management and technical services. Immediately
upon acquisition, ESC was converted into a Virginia limited liability company.

Quanta Reinsurance Ltd. ("Quanta Bermuda"), a wholly owned subsidiary of
Quanta Holdings, was incorporated under the laws of Bermuda on August 15, 2003
and is licensed as a Class 4 insurer under the Insurance Act 1978 of Bermuda
("Insurance Act 1978"). Quanta Bermuda underwrites insurance and reinsurance
business in Bermuda. There are four classifications of insurers carrying on
general business in Bermuda. Each class is subject to varying degrees of
regulation with respect to capital, solvency, liquidity and reporting
requirements. Class 4 insurers are subject to the strictest regulation.

Quanta U.S. Holdings Inc. ("Quanta U.S. Holdings"), a wholly owned
subsidiary of Quanta Bermuda, was incorporated in Delaware on May 30, 2003.

Quanta U.S. Re, a wholly owned subsidiary of Quanta U.S. Holdings, was
incorporated under the laws of Bermuda on June 6, 2003, and is licensed as a
Class 3 reinsurer under the Insurance Act 1978. Quanta U.S. Re underwrites U.S.
sourced insurance and reinsurance business in Bermuda.

Quanta (Capital) Ireland Ltd. ("Quanta Ireland") was incorporated on
September 16, 2003, and is a wholly owned subsidiary of Quanta Holdings. On May
25, 2004, Quanta Ireland was renamed Quanta Europe Limited ("Quanta Europe") and
on September 9, 2004 received approval from the Irish Financial Services
Regulatory Authority to write insurance and reinsurance business in Europe.

On October 28, 2003, Quanta U.S. Holdings acquired all of the outstanding
common stock of Chubb Financial Solutions Corporation ("CFSC"), an Indiana
insurance company, from The Chubb Corporation ("Chubb"). CFSC was subsequently
renamed Quanta Specialty Lines Insurance Company ("Quanta Specialty Lines").
Quanta Specialty Lines underwrites U.S. sourced specialty insurance on an excess
and surplus lines basis and U.S. reinsurance on a non-admitted basis.

On December 19, 2003, Quanta U.S. Holdings acquired from National Farmers
Union Property Casualty

F-8

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

Insurance Company ("NFU") all of the outstanding common stock of National
Farmers Union Standard Insurance Company ("NFU Standard"), a Colorado insurance
company. NFU Standard was subsequently renamed Quanta Indemnity Company ("Quanta
Indemnity"). Quanta Indemnity underwrites admitted insurance business in 44
states in the U.S. On July 1, 2005, Quanta U.S. Holdings contributed Quanta U.S.
Re and Quanta Specialty Lines to Quanta Indemnity.

Quanta Technical Services LLC ("QTS"), a wholly owned subsidiary of Quanta
U.S. Re, was formed as a Virginia limited liability company on December 23,
2003. Quanta U.S. Re contributed ESC to QTS to provide risk assessment and
evaluation technical services in our other specialty lines of insurance and to
third parties on a fee basis.

Quanta 4000 Holding Company Ltd. ("Quanta 4000 Holding"), a wholly owned
subsidiary of Quanta Bermuda, was incorporated under the laws of Bermuda on
November 19, 2004. Quanta 4000 Limited, ("Quanta 4000"), a wholly owned
subsidiary of Quanta 4000 Holding, was incorporated in England on September 30,
2004 as the Company's Corporate Member at Lloyd's, Quanta 4000 underwrites
insurance business through, and as the sole member of, Lloyd's Syndicate 4000
("Syndicate 4000"). Quanta 4000 provides 100% of the capacity to Syndicate 4000.
Syndicate 4000 commenced underwriting specialty lines insurance business on
December 9, 2004. Chaucer Syndicates Limited, an unrelated party, manages
Syndicate 4000 on behalf of Quanta 4000.

On December 21, 2004, the Company participated in a private placement of
$40.0 million of floating rate capital securities (the "Trust Preferred
Securities") issued by Quanta Capital Statutory Trust I ("Quanta Trust"), a
subsidiary Delaware trust formed on December 21, 2004. Quanta Trust used the
proceeds from the sale of the Trust Preferred Securities to purchase for $41.2
million junior subordinated debt securities, due March 15, 2035, in the
principal amount of $41.2 million issued by the Company.

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

On February 24, 2005, the Company participated in a private placement of
$20.0 million of floating rate capital securities (the "Trust Preferred
Securities II") issued by Quanta Capital Statutory Trust II ("Quanta Trust II"),
a subsidiary Delaware trust formed on February 24, 2005. Quanta Trust II used
the proceeds from the sale of the Trust Preferred Securities II and the issuance
of its common securities to purchase for $20.6 million junior subordinated debt
securities, due June 15, 2035, in the principal amount of $20.6 million issued
by the Company. The issuance of the Quanta Trust I and Quanta Trust II Trust
Preferred Securities are discussed further in Note 12.

On December 20, 2005, Quanta Holdings, pursuant to an Underwriting
Agreement dated December 14, 2005 with FBR and BB&T Capital Markets (the
"Underwriters"), sold 3,000,000 10.25% Series A Preferred Shares. On January 11,
2006, the Underwriters purchased an additional 130,525 10.25% Series A Preferred
Shares following the exercise of the over-allotment option that was granted to
them on December 14, 2005.

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

2. SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("U.S. GAAP"), which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities reported at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reported period. While management believes the amounts
included in the consolidated financial statements reflect management's

F-9

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

best estimates and assumptions, the actual results could ultimately be
materially different from the amounts currently provided for in the consolidated
financial statements. The Company's principal estimates relate to the
development or determination of the following:

o reserves for losses and loss adjustment expenses;

o certain estimated premiums written, unearned premiums and
receivables;

o reinsurance balances recoverable;

o the valuation of goodwill and intangible assets;

o environmental liabilities assumed;

o investment valuations;

o annual incentive plan provisions; and

o deferred income taxes and liabilities.

A) BASIS OF PRESENTATION

The Successor company's consolidated financial statements include the
financial statements of the Company and all of its wholly-owned subsidiaries.
All significant balances and transactions among related companies have been
eliminated on consolidation. The results of subsidiaries have been included from
either their dates of acquisition, or their dates of incorporation. The
consolidated financial statements also include the earnings of Quanta Trust and
Quanta Trust II, wholly owned unconsolidated subsidiaries of the Company. Quanta
Trust and Quanta Trust II were formed in relation to the issuance of Trust
Preferred Securities as further described in Note 12.

Lloyd's syndicates use cash basis accounting to determine results by
underwriting year over a three year period. The Company makes adjustments to
convert from Lloyd's cash basis accounting to accrual basis accounting in
accordance with US GAAP. Generally, adjustments are made to recognize
underwriting results on an accrual basis, including estimated written and earned
premiums and estimated losses and expenses incurred.

The Predecessor's historical consolidated financial statements for the
period from January 1, 2003 to September 3, 2003 have been derived from the
consolidated financial statements of the Company's predecessor, ESC, to the date
of its acquisition by the Company. The Predecessor's historical consolidated
financial statements for the period from January 1 to September 3, 2003 have
been reclassified to conform with the presentation for the year ended December
31, 2005. The Successor's consolidated statement of operations and comprehensive
(loss) income for the period from May 23, 2003 (date of incorporation) to
December 31, 2003 includes the operations of ESC since September 3, 2003, the
date of its acquisition by the Company.

During the year ended December 31, 2004, the Company renamed its consulting
segment as the technical services segment. Accordingly, the consulting revenues
and direct consulting costs captions in the consolidated statement of operations
and comprehensive (loss) income have been renamed Technical service revenues and
Direct technical service costs.

Certain balances included in the consolidated financial statements for the
period from May 23, 2003 (date of incorporation) to December 31, 2003 and year
ended December 31, 2004 have been reclassified to conform with the presentation
for the year ended December 31, 2005.

B) PREMIUMS WRITTEN, CEDED AND EARNED

Insurance and reinsurance premiums written are earned over the terms of the
associated insurance policies and reinsurance contracts in proportion to the
amount of insurance protection provided. Typically this results in the earning
of premium on a pro rata over time basis over the term of the related insurance
or reinsurance coverage, which is generally a 12 month period. Premiums written
on risks attaching reinsurance contracts are recorded in the period in which the
underlying policies or risks are expected to incept and are earned on a pro rata
over time basis over the expected term of the underlying policies. As a result,
premiums earned on risks attaching reinsurance contracts usually extend beyond
the original term of the reinsurance

F-10

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

contract resulting in recognition of premium earnings over an extended period,
typically up to 24 months.

Premiums written and ceded on certain types of contracts include estimates
based on information received from the ceding companies, brokers or insureds.
Estimates of written premiums are re-evaluated over the term of the associated
contracts as underwriting information becomes available and as actual premiums
are reported by the ceding companies, brokers or insureds. Subsequent changes to
the premium estimates are recorded as adjustments to premiums written in the
period in which they become known.

Adjustments related to retrospective rating provisions that adjust
estimated premiums or acquisition expenses are recognized over contract periods
in accordance with the underlying contract terms based on current experience
under the contracts. Reinstatement premiums that reinstate coverage limits under
pre-defined contract terms are written and earned at the time the associated
loss event occurs. The original premium is earned over the remaining exposure
period of the contract. Profit commissions are expenses that vary with and are
directly related to acquiring new and renewal insurance and reinsurance
business. Profit commission accruals are recorded as acquisition costs and are
adjusted at the end of each reporting period based on the experience of the
underlying contract. No claims bonuses are accrued as a reduction of earned
premium and are adjusted at the end of each reporting period based on the
experience of the underlying contract.

In the normal course of business, the Company purchases reinsurance or
retrocessional coverage to increase its underwriting capacity and to limit
individual and aggregate exposures to risks of losses arising from contracts of
insurance or reinsurance that it underwrites. Reinsurance premiums ceded to
reinsurers are recorded and earned in a manner consistent with that of the
original contracts or policies written and the terms of the reinsurance
agreements.

Premiums written and ceded relating to the unexpired periods of coverage or
policy terms are recorded on the consolidated balance sheet as unearned premiums
and deferred reinsurance premiums.

In the normal course of its operations, the Company may enter into certain
contracts that do not meet the risk transfer provisions of Statement of
Financial Accounting Standards ("SFAS") No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS 113") for
financial reporting purposes either due to insufficient underwriting risk or
insufficient timing risk or do not provide the indemnification required for
insurance accounting under SFAS No. 60, "Accounting and Reporting by Insurance
Enterprises" ("SFAS 60"). For these contracts we follow the deposit method of
accounting as prescribed in American Institute of Certified Public Accountants
("AICPA") Statement of Position 98-7, "Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk" ("SOP
98-7"). The deposit method of accounting requires that the premium we receive or
pay, less any explicitly defined fees retained or paid, is accounted for as a
deposit asset or a deposit liability on the consolidated balance sheet.
Explicitly defined fees retained or paid are deferred and earned to other income
in the consolidated statement of operations and comprehensive (loss) income
according to the nature of, and in proportion to, the product or service
provided.

For those contracts that transfer significant underwriting risk only and
for reinsurance contracts where it is not reasonably possible that we can
realize a significant loss even though we assume significant insurance risk, the
deposit asset or liability is measured based on the unexpired portion of the
coverage provided. The deposit asset or liability is adjusted for any losses
incurred or recoverable based on the present value of the expected future cash
flows arising from the loss event with the adjustment being recorded in net
losses and loss expenses within our results of operations.

For those contracts that transfer neither significant underwriting risk nor
significant timing risk and for contracts that transfer significant timing risk
only, the deposit asset or liability is adjusted, and corresponding interest
income or expense recognized within our results of operations, by using the
interest method to calculate the effective yield on the deposit based on the
estimated amount and timing of cash flows. If a change in the actual or
estimated timing or amount of cash flows occurs, the effective yield is
recalculated and the deposit is adjusted to the amount that would have existed
had the new effective yield been applied since the inception of the insurance or
reinsurance contract. The adjustment is recorded as

F-11

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

interest income or interest expense.

C) ACQUISITION EXPENSES AND CEDING COMMISSION INCOME

Acquisition expenses are policy issuance related costs that vary with and
are directly related to the acquisition of insurance and reinsurance business,
and primarily consist of commissions, third party brokerage and insurance
premium taxes. Ceding commission income consists of commissions the Company
receives on business that it cedes to its reinsurers. Acquisition expenses and
commission income are recorded and deferred at the time the associated premium
is written or ceded and are subsequently amortized in earnings as the premiums
to which they relate are earned or expensed. Acquisition expenses are reflected
in the consolidated statement of operations net of ceding commission income from
reinsurers. Acquisition costs relating to unearned premiums are deferred in the
consolidated balance sheet as deferred acquisition costs and reported net of
commission income relating to deferred reinsurance premiums ceded.

Net deferred acquisition costs are carried at their estimated realizable
value and are limited to the amount expected to be recovered from future net
earned premiums, after deducting anticipated losses and other costs and
considering anticipated investment income. Any limitation is referred to as a
premium deficiency.

D) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

The Company establishes reserves for losses and loss expenses for estimates
of future amounts to be paid in settlement of its ultimate liabilities for
claims arising under its contracts of insurance and reinsurance that have
occurred at or before the consolidated balance sheet date. The estimation of
ultimate loss and loss expense liabilities is a significant judgment made by
management and is inherently subject to significant uncertainties.

The Company's loss reserves fall into two categories: case reserves for
reported losses and loss expenses and reserves for losses and loss expenses
incurred but not reported, or IBNR reserves. Case reserves are based initially
on claim reports received from insureds, brokers or ceding companies, and may be
supplemented by the Company's claims professionals with estimates of additional
ultimate settlement costs. IBNR reserves are estimated by management using
generally accepted statistical and actuarial techniques and are reviewed by
independent actuaries. In applying these techniques, management uses estimates
as to ultimate loss emergence, severity, frequency, settlement periods and
settlement costs. In making these estimates, the Company relies on the most
recent information available, including pricing information, industry
information and on its historical loss and loss expense experience.

As of December 31, 2005 and 2004, the primary reserving method used by the
Company to estimate the ultimate cost of losses for its specialty reinsurance
lines and its fidelity and technical risk property specialty insurance business
lines was the Bornhuetter-Ferguson actuarial method. The Bornhuetter-Ferguson
actuarial method selects an initial expected loss and loss expense ratio
supplemented with the Company's actual loss and loss expense experience to date
to support the estimation of losses and loss adjustment expenses. The Company's
initial expected loss and loss expense ratio for the specialty reinsurance
business lines is derived from loss exposure information provided by brokers and
ceding companies and from loss and loss expense ratios established during the
pricing of individual contracts. The Company's initial expected losses and loss
expense ratios selected for its fidelity and technical risk property specialty
insurance lines are based on benchmarks derived by its underwriters and
actuaries during the initial pricing of the business and from comparable market
information. These benchmarks are then adjusted for any rating increases and
changes in terms and conditions that have been observed in the market.

The primary reserving method used by the Company to estimate the ultimate
cost of losses for its other specialty insurance business lines was an expected
loss ratio methodology whereby earned premiums are multiplied by an expected
loss ratio to derive ultimate losses and any paid losses and loss expenses are
deducted to arrive at estimated losses and loss expense reserves. This method is
commonly applied when there is insufficient historical loss development
experience available. The initial expected losses and loss expense ratios
selected are based on benchmarks derived by its underwriters and actuaries
during the initial

F-12

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

pricing of the business and from comparable market information. These benchmarks
are then adjusted for any rating increases and changes in terms and conditions
that have been observed in the market.

As of December 31, 2003, given the Company's limited operating history and
historical claims experience, its reserving method was an expected loss ratio
methodology. The Company believes that these assumptions represented a realistic
and appropriate basis for estimating its loss and loss expense reserves at that
time.

Even though the Company's reserving techniques represent a reasonable and
appropriate basis for estimating ultimate claim costs and management believes
that the reserves for losses and loss expenses are sufficient to cover claims
from losses occurring up to the consolidated balance sheet date, ultimate losses
and loss expenses may be subject to significant volatility given the Company's
limited operating history and may differ materially from the amounts recorded in
the consolidated financial statements.

The Company continually reviews and adjusts its reserve estimates and
reserving methodologies taking into account all currently known information and
updated assumptions related to unknown information. Loss and loss expense
reserves established in prior periods are adjusted in current operations as
claim experience develops and new information becomes available. Any adjustments
to previously established reserves may significantly impact current period
underwriting results and net income by reducing net income.

E) REINSURANCE RECOVERABLE

Reinsurance recoverable under the terms of ceded reinsurance contracts
includes loss and loss expense reserves recoverable and deferred reinsurance
premiums. The Company is subject to credit risk with respect to the reinsurance
ceded because the ceding of risk does not relieve the Company from its original
obligations to its insureds. To the extent reinsurers default, the Company must
settle these obligations without the benefit of reinsurance protection. Failure
of the Company's reinsurers to honor their obligations could result in credit
losses. The Company establishes allowances for amounts recoverable that are
considered potentially uncollectible from its reinsurers. The valuation of this
allowance for uncollectible reinsurance recoverable includes a review of the
credit ratings of the reinsurance recoverables by reinsurer, an analysis of
default probabilities as well as identifying whether coverage issues exist.
These factors require management judgement and the impact of any adjustments to
those factors is reflected in net income in the period that the adjustment is
determined.

F) NON-TRADITIONAL CONTRACTS

The Company writes non-traditional contracts of insurance and reinsurance.
The Company may account for these transactions as deposits held on behalf of
clients instead of as insurance and reinsurance premiums, as appropriate. Under
the deposit method of accounting, revenues and expenses from insurance and
reinsurance contracts are not recognized as written premium and incurred losses.
Instead, amounts from these contracts are recognized as other income or
investment income over the expected contract or service period.

During the years ended December 31, 2005 and 2004, the Company recognized
in other income $2.5 million and $1.2 million of fees and revenues relating to
non-traditional contracts which were accounted for using the deposit method. If
these contracts transferred risk as determined by SFAS 113, gross premium
relating to these contracts would total approximately $110.7 million and $44.0
million in the years ended December 31, 2005 and 2004.

F-13

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

assumed these contracts, the client, which is subject to insurance regulation in
the United States and therefore is required to maintain a certain amount of
statutory capital, may reduce its statutory capital requirements. In exchange
for the Company's assumption of the contracts it received a fee. The
arrangement, among other things, also provides that on certain dates and during
specific periods, the client has the right but not the obligation to recapture
the life reinsurance contracts the Company has assumed, provided that the
underlying cedants do not reasonably withhold their consent to this recapture.
The Company believes that its client is economically incentivized to exercise
the recapture provision in the future, as the amount of expected profit on the
underlying life reinsurance contracts emerges over time.

The Company believes the arrangement, including the client's option to
recapture, and the assumption of the life insurance contracts constitute one
contract with minimal mortality, credit or other insurance or economic risk
which results in deposit accounting. Although the Company believes its client
will exercise the recapture, it is not assured that this will be the case. If
the Company's client does not recapture the underlying insurance contracts in
the future, the Company may be viewed as having had the risks described above
and, as a result, the Company could be deemed to have retained life reinsurance
risk and, as a result, may be required to account for some or all of the
underlying insurance contracts as life insurance, recognizing life premiums
written and life benefit reserves in the consolidated statement of operations.
If deposit accounting had not been used with respect to this particular
arrangement, the Company would have recognized gross life reinsurance premiums
written of approximately $16.8 million and $5.6 million for the years ended
December 31, 2005 and 2004. At this time, the Company believes that the
recognition of these premiums written would not have had a material effect on
the Company's financial position and results of operations. However, as the
underlying life insurance contracts mature the effect on the Company's financial
condition and results of operations may become material.

In respect of the life reinsurance arrangements written on a coinsurance
basis, where investment assets have been transferred to the Company, such assets
have been recorded within the Company's trading investment portfolio and are
separately presented as Investments related to deposit liabilities in the
consolidated balance sheet. A deposit liability has been recorded in the
consolidated balance sheet in accordance with SFAS 97 "Accounting and Reporting
by Insurance Enterprises for Certain Long-Duration Contracts and for Realized
Gains and Losses from the Sale of Investments" for non-risk investment contracts
as an interest bearing instrument using the effective yield method. The
investments related to the deposit liability are held in trust funds and are
pledged to the ceding companies.

In respect of the life reinsurance arrangements written on a modified
coinsurance basis, the ceding company's net statutory reserves and assets are
withheld and remain legally owned by the ceding company. These modified
coinsurance contracts represent "non-cash" financial reinsurance transactions,
whereby, in accordance with the contract terms, there are no net cash flows at
inception of contracts, nor are there expected to be net cash flows through the
life of the contracts, other than the Company's explicitly defined fees.
Notional contract assets and liabilities contemplated by the contract terms are
offset in accordance with FIN 39 and as such the Company does not present such
assets or deposit liabilities in its consolidated balance sheet.

Certain of the Company's coinsurance and modified coinsurance agreements
may contain provisions that qualify as embedded derivatives under Derivatives
Implementation Group Issue No. B36 "Embedded Derivatives: Modified Coinsurance
Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That
Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor
under Those Instruments" ("DIG Issue B36") The value of embedded derivatives in
these contracts is currently considered immaterial. The Company monitors the
performance of these treaties on a quarterly basis. Significant adverse
performance or changes in the Company's expectations of future cashflows on
these treaties could result in losses associated with the embedded derivative.

F-14

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

accordance with Financial Accounting Standards Board ("FASB") Interpretation No.
39 ("FIN 39") "Offsetting of Amounts Related to Certain Contracts", the funds
withheld asset and the deposit liability have been offset in the consolidated
balance sheet.

The remaining $1.6 million and $0.3 million of other income derived from
non-traditional contracts recognized during the years ended December 31, 2005
and 2004 relates to revenues earned from five and one reinsurance contracts
accounted for as deposits. Although these contracts did possess some
underwriting and timing risks as prescribed by SFAS No. 113, the Company does
not believe it is exposed to a reasonable possibility of significant loss.
Included in the remaining $1.6 million and $0.3 million of other income are $1.1
million and $0.3 million related to one surplus relief life reinsurance
agreement. Underlying treaties attach to this contract on a coinsurance basis.
As of December 31, 2005 and 2004, the Company has provided approximately $33.2
million and $13.9 million (unaudited) of statutory surplus relief to a U.S.
insurance company under this contract.

G) ENVIRONMENTAL LIABILITIES ASSUMED AND REMEDIATION REVENUE

The Company assumes environmental liabilities in exchange for remediation
fees and contracts to perform the required remediation in accordance with the
underlying remediation agreements. The Company estimates its initial and ongoing
ultimate liabilities for environmental remediation obligations based upon actual
experience, past experience with similar remediation projects, technical
engineering examinations of the contaminated sites and state, local and federal
guidelines. However, there can be no assurance that actual remediation costs
will not significantly differ from the estimated amounts.

As of December 31, 2005 and 2004, the Company had assumed two and one
environmental remediation projects, for which estimated liabilities of $5.9
million and $6.5 million had been recorded. The assumed environmental
remediation obligations for the project are contractually defined pursuant to a
site specific remediation plan.

The amount of consideration received for the assumption of remediation
liabilities in excess of the expected environmental remediation liability is
initially deferred and recorded in deferred income on the consolidated balance
sheet and subsequently recognized in earnings over the remediation period using
the cost recovery or percentage-of-completion method. These methods are based on
the ratio of remediation expenses actually incurred and paid to total estimated
remediation costs. As of December 31, 2005 and 2004, the Company had deferred
approximately $0.5 million and $0.6 million of remediation revenues. Anticipated
remediation losses, if any, are recorded in the period in which the Company
becomes aware of such losses.

H) TECHNICAL SERVICES REVENUES

Technical services revenue is recognized when evidence of an arrangement
for services exists, services have been rendered, the price is fixed or
determinable, and collectibility is reasonably assured. Technical services are
rendered under various short-term contractual arrangements, primarily on a time
and materials basis. From time to time, the Company retains subcontractors to
perform certain remediation services under the Company's contracts with its
customers. Revenue is recognized on a gross basis, which includes subcontractor
remediation services, when the Company is the primary obligor in the
arrangement. For the years ended December 31, 2005 and 2004, the period from May
23, 2003 (date of incorporation) to December 31, 2003 and the period from
January 1, 2003 to September 3, 2003 approximately $24.9 million, $12.3 million,
$5.5 million and $6.9 million of direct costs, exclusive of profit mark-ups,
related to these subcontractor arrangements was recorded as direct technical
services costs in the consolidated statement of operations and comprehensive
(loss) income.

Technical services revenue includes amounts related to services performed
but not yet billed to customers at the period end. Accounts receivable include
technical services revenues receivable that are settled within the Company's
normal collection cycle.

Prepayments from customers are recorded as part of deferred income in the
consolidated balance sheet and recognized in the consolidated statement of
operations and comprehensive (loss) income as

F-15

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

technical services revenue as the related services are performed.

I) DIRECT TECHNICAL SERVICES COSTS

Direct technical services costs consist of payroll costs associated with
direct labor incurred on technical services engagements, other direct costs such
as travel and subsistence, subcontracting and other contract expenses. The
Company maintains a team of in-house technical services consultants that assist
in technical services engagements. The costs associated with the time spent by
such technical services consultants on engagements are included in direct
technical services costs in the consolidated statement of operations and
comprehensive (loss) income.

J) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company has entered into certain derivative instruments and adopted
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133") and SFAS 149, "Amendment of Statement No. 133 on Derivative
Instruments and Hedging Activities."

The Company enters into investment related derivative transactions, as
permitted by its investment guidelines, for the purposes of managing investment
duration, interest rate and foreign currency exposure, and enhancing total
investment returns. The Company may also, as part of its business, enter into
derivative instruments for the purpose of replicating approved investment,
insurance or reinsurance transactions that meet the Company's investment or
underwriting guidelines. As of December 31, 2004, the Company carried within its
available-for-sale fixed maturity portfolio a mortality-risk-linked security for
which the repayment of principal was dependent on the performance of a
predefined mortality index over a fixed period of time. The Company has
determined that the component of the bond that is linked to the specified
mortality index was, under SFAS 133, an embedded derivative that was not clearly
and closely related to its host contract (a debt security) and was therefore
bifurcated and accounted for as a derivative under SFAS 133. This instrument was
sold during 2005. The Company has not designated any of its derivative
instruments as hedging instruments for financial reporting purposes.

The Company recognizes all standalone derivative instruments as either
other assets or liabilities and recognizes embedded derivatives as part of their
host instruments in the consolidated balance sheet. The Company measures all
derivative instruments at their fair values, which are based on market prices
and equivalent data provided by independent third parties. When market data is
not readily available, the Company uses analytical models to estimate the fair
values of these instruments based on their structure, terms and conditions and
prevailing market conditions. The Company recognizes changes in the fair value
of derivative instruments and realized gains and losses on derivative
instruments in its consolidated statement of operations and comprehensive (loss)
income as part of other income and net realized (losses) gains on investments,
respectively. The nature of derivative instruments and the estimates used in
estimating their fair value, changes in fair value of derivative instruments and
realized gains and losses on settled derivative instruments may create
significant volatility in the Company's results of operations in future periods.

DIG Issue B36 indicates that the Company's life financial reinsurance
contracts where the Company notionally receives a financial instrument with an
investment return based on our underlying referenced pool of assets may contain
an embedded derivative that must be bifurcated and accounted for in accordance
with SFAS 133 since the economic characteristics are not clearly and closely
related to the host instrument. Although the Company's life financial
reinsurance arrangements may contain embedded derivatives the Company believes
that due to the terms of these contracts, including the experience refund
provisions contained within the treaties, the value of embedded derivatives
contained in these contracts is currently considered to be immaterial.

K) ANNUAL INCENTIVE PLAN

During the year ended December 31, 2004, the Company adopted an Annual
Variable Cash Compensation Plan (the "Annual Incentive Plan") which is generally
available to employees. Awards paid under this plan will be dependent on
performance measured at an individual and line of business level. In

F-16

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

general, the Annual Incentive Plan provides for an annual bonus award to
employees that is based on a sharing of profit in excess of a minimum return on
capital to shareholders for each calendar year. Profit for each calendar year is
measured by estimating the ultimate net present value of after-tax profit
generated from business during that calendar year and is re-estimated on an
annual basis through the vesting period. Annual Incentive Plan awards vest and
are paid out over four annual installments. However, with respect to 2005, as
part of the Company's retention plan, awards vest in two annual installments,
the first of which was 25% of the award and was paid in 2005 and the second of
which will be 75% of the award and will be paid in 2006. Unvested amounts are
subject to adjustments to the extent that estimates of calendar year profit and
estimated net present value deviate from initial estimates as assumptions are
updated and actual information becomes known.

Annual Incentive Plan awards with respect to 2005 will vest, for calendar
year reporting purposes, 25% and 75% in 2005 and 2006, respectively (2004 awards
vest: 40%, 20%, 20% and 20% in 2004, 2005, 2006 and 2007). Expenses related to
the Annual Incentive Plan awards are recognized by applying the graded vesting
method as prescribed by FASB Interpretation No. 28 "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans" ("FIN 28").
The Company continually reviews and adjusts its provisions for Annual Incentive
Plan awards and other bonus awards taking into account known information and
updated assumptions related to unknown information. Award provisions are an
estimate and amounts established in prior periods are adjusted in current
operations as new information becomes available. Any adjustments to previously
established provisions or the establishment of new provisions may significantly
impact current period results and net income.

L) CASH AND CASH EQUIVALENTS

Cash equivalents include highly liquid instruments such as liquidity funds,
money market funds and other time deposits with commercial banks and financial
institutions which have maturities of less than three months from the date of
purchase.

M) INVESTMENTS AND NET INVESTMENT INCOME

The Company's publicly traded and non-publicly traded fixed maturity and
short-term investments that are classified as "available-for-sale" are recorded
at estimated fair value with the difference between cost or amortized cost and
fair value, net of the effect of income taxes, included as a separate component
of accumulated other comprehensive (loss) income.

The Company's publicly traded and non-publicly traded fixed maturity and
short-term investments that are classified as "trading" are recorded at
estimated fair value with the change in fair value included in net realized
gains on investments in the consolidated statement of operations and
comprehensive (loss) income.

Short-term investments include highly liquid debt instruments and
commercial paper that are generally due within one year of the date of purchase
and are held as part of the Company's investment portfolios that are managed by
independent investment managers.

The fair value of publicly traded securities is based upon quoted market
prices. The estimated fair value of non-publicly traded securities is based on
independent third party pricing sources.

The Company periodically reviews its investments to determine whether an
impairment, being a decline in fair value of a security below its amortized
cost, is other than temporary. If such a decline is classified as other than
temporary, the Company writes down, to fair value, the impaired security
resulting in a new cost basis of the security and the amount of the write-down
is charged to the consolidated statement of operations and comprehensive (loss)
income as a realized loss. Some of the factors that the Company considers in
determining whether an impairment is other than temporary include (i) the amount
of the impairment, (ii) the period of time for which the fair value has been
below the amortized cost, (iii) specific reasons or market conditions which
could affect the security, including the financial condition of the issuer and
relevant industry conditions or rating agency actions, and (iv) the Company's
ability and intent to hold the security for sufficient time to allow for
possible recovery.

Investments are recorded on a trade date basis. The Company's net
investment income is recognized

F-17

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

when earned and consists primarily of interest, the accrual of discount or
amortization of premium on fixed maturity securities and dividends, and is net
of investment management and custody expenses. Gains and losses realized on the
sale of investments are determined on the first-in, first-out basis.

N) PROPERTY AND EQUIPMENT

Property and equipment, which consist of furniture, equipment, and
leasehold improvements, are stated at cost less accumulated depreciation.
Depreciation is computed using an accelerated method over the estimated useful
lives of the related assets, ranging from three to seven years. Depreciation of
leasehold improvements is computed using the straight-line method over the
shorter of the estimated useful lives of the assets or the terms of the leases.

Repairs and maintenance are expensed as incurred. At the time of retirement
or other disposal of property or equipment, the cost and related accumulated
depreciation are deducted from their respective accounts and any resulting gain
or loss is included in the consolidated statement of operations and
comprehensive (loss) income.

O) CAPITALIZATION OF SOFTWARE COSTS

The Company capitalizes software costs when the preliminary project stage
is completed and management commits to fund the software project which it deems
probable will be completed and used to perform the intended function. This
policy is in accordance with AICPA Statement of Position 98-1 "Accounting for
the costs of computer software developed or obtained for internal use" ("SOP
98-1"). Software costs that are capitalized include only external direct costs
of materials and services consumed in developing, or obtained for internal use
computer software.

Capitalization of costs ceases as soon as the project is substantially
complete and ready for its intended purpose. The carrying value of software
costs is reviewed by the Company whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable, and a loss is
recognized when the value of estimated undiscounted cash flow benefit related to
the asset falls below the unamortized cost.

As of December 31, 2005 and 2004, the Company had capitalized approximately
$3.3 million and $1.9 million of software costs, of which approximately $1.4
million and $0.2 million was amortized during the years ended December 31, 2005
and 2004.

P) GOODWILL AND INTANGIBLE ASSETS

Goodwill and identifiable intangible assets that arise from business
combinations are accounted for in accordance with SFAS No. 141, "Business
Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142").

Identifiable amortizable intangible assets are amortized in accordance with
their useful lives. Goodwill and intangible assets with indefinite useful lives
are not amortized but are tested annually for impairment by discounting expected
cash flows to estimate fair value or more often if impairment indicators arise.
If the carrying amounts of goodwill or intangible assets are greater than their
fair values established during impairment testing, the carrying value is
immediately written-down to the fair value with a corresponding impairment loss
recognized in the consolidated statement of operations and comprehensive (loss)
income.

Q) OFFERING COSTS

Costs incurred in connection with, and that are directly attributable to
common share offerings are charged to additional paid-in capital. Costs incurred
in connection with, and that are directly attributable to, preferred share
offerings are charged to the preferred shares balance.

F-18

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

R) FOREIGN CURRENCY TRANSLATION

Generally, the U.S. dollar is the functional currency of the Company and
its subsidiaries. For entities where the U.S. dollar is the functional currency,
all foreign currency asset and liability amounts are translated into U.S.
dollars at end-of-period exchange rates, except for prepaid expenses, property
and equipment, goodwill, intangible assets, deferred acquisition costs, deferred
reinsurance premiums and unearned premiums which are translated at historical
rates. Foreign currency income and expenses are translated at average exchange
rates in effect during the period, except for expenses related to balance sheet
amounts translated at historical exchange rates. Exchange gains and losses
arising from the translation of foreign currency-denominated monetary assets and
liabilities are included in the consolidated statement of operations and
comprehensive (loss) income.

For subsidiaries where the local currency is the functional currency,
assets and liabilities denominated in local currencies are translated prior to
consolidation into U.S. dollars at end of period exchange rates, and the
resultant translation adjustments are reported, net of their related income tax
effects, as a component of accumulated other comprehensive income (loss) in
shareholders' equity. Subsidiary assets and liabilities denominated in other
than the local currency are translated into the local currency prior to
translation into U.S. dollars, and the resultant exchange gains or losses are
included in the consolidated statement of operations and comprehensive (loss)
income in the period in which they occur. Subsidiary income and expenses are
translated prior to consolidation into U.S. dollars at average exchange rates in
effect during the period.

S) STOCK-BASED COMPENSATION

Employee stock awards under the Company's long term incentive compensation
plan are accounted for in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations
("APB 25"). Compensation expense for stock options and stock-based awards
granted to employees is recognized using the intrinsic value method to the
extent that the fair value of the stock exceeds the exercise price of the option
at the measurement date. Any resulting compensation expense is recorded over the
shorter of the vesting or service period.

The Company provides the disclosure as set forth in SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), which requires pro-forma
compensation expense for the Company's employee stock options and performance
share units to be measured as the fair value at their grant date and recorded
over the shorter of the vesting or service period.

The following table summarizes the Company's stock-based compensation, net
loss and loss per share for the years ended December 31, 2005 and 2004 and for
the period from May 23, 2003 (date of incorporation) to December 31, 2003 had
the Company elected to recognize compensation cost based on the fair value of
the options granted at the grant date as prescribed by SFAS 123.

PERIOD FROM
YEAR ENDED YEAR ENDED MAY 23, 2003
DECEMBER DECEMBER TO DECEMBER
31, 2005 31, 2004 31, 2003
---------- ---------- ------------
STOCK COMPENSATION EXPENSE
As reported......................... $ -- $ -- $(16,725)
Additional stock-based employee
compensation expense determined
under fair value based method....
(3,028) (2,544) (9,739)
--------- -------- --------
Pro forma .......................... $ (3,028) $ (2,544) $(26,464)
========= ======== ========

NET LOSS
As reported ........................ $(105,952) $(54,581) $(38,477)
Additional stock-based employee
compensation expense determined
under fair value based method.... (3,028) (2,544) (9,739)
--------- -------- --------

F-19

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

Pro forma........................... $(108,980) $(57,125) $(48,216)
========= ======== ========

BASIC LOSS PER SHARE
As reported......................... $ (1.85) $ (0.96) $ (1.23)
Pro forma .......................... $ (1.91) $ (1.01) $ (1.54)

DILUTED LOSS PER SHARE
As reported......................... $ (1.85) $ (0.96) $ (1.23)
Pro forma .......................... $ (1.91) $ (1.01) $ (1.54)

Included in the pro-forma stock-based employee compensation expense for the
year ended December 31, 2005 is $1.0 million related to the accelerated vesting
of 649,830 options granted to the Company's former Chief Executive Officer that
were modified upon his resignation. The Company's predecessor did not incur any
compensation expense related to stock based awards during the period from
January 1, 2003 to September 3, 2003. The pro forma net impact of applying the
fair value recognition provisions of SFAS 123 was less than $1 for the period
from January 1, 2003 to September 3, 2003.

T) INCOME TAXES

Income taxes have been recognized in accordance with the provisions of SFAS
No. 109, "Accounting for Income Taxes", on those operations that are subject to
income taxes. Deferred tax assets and liabilities result from temporary
differences between the carrying amounts of existing assets and liabilities
recorded in the consolidated financial statements and their respective tax
bases. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the consolidated statement of operations and
comprehensive (loss) income in the period that includes the enactment date. A
valuation allowance for a portion or all of deferred tax assets is recorded as a
reduction to deferred tax assets if it is more likely than not that such portion
or all of such deferred tax assets will not be realized.

U) DEBT ISSUANCE COSTS

Debt issuance costs associated with the issuance of junior subordinated
debentures are initially capitalized within other assets in the consolidated
balance sheet and subsequently amortized over the term of the related
outstanding debt using the interest method.

V) EARNINGS PER SHARE

Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. All potentially dilutive securities
including stock options and warrants are excluded from the basic earnings per
share computation.

In calculating diluted earnings per share, the weighted average number of
shares outstanding for the period is increased to include all potentially
dilutive securities using the treasury stock method. Any common stock equivalent
shares are excluded from the computation if their effect is antidilutive.

Basic and diluted earnings per share are calculated by dividing income
available to common shareholders by the applicable weighted average number of
shares outstanding during the year.

W) SEGMENT REPORTING

The Company reports segment results in accordance with SFAS No. 131,
"Segment Reporting" ("SFAS 131"). Under SFAS 131, reportable segments represent
an aggregation of operating segments that meet certain criteria for aggregation
specified in SFAS 131.

The Company is comprised of three reportable segments and provides a number
of products which are operating segments for purposes of GAAP. The Company's
products include technical risk property,

F-20

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

professional liability, environmental liability, fidelity and crime, surety,
trade credit and political risk, property, casualty, marine and aviation, life
surplus relief and technical services. The Company organizes these products into
five product lines: speciality insurance, speciality reinsurance, programs,
structured products and technical services. Except for technical services, the
products the Company offers to its clients are written either as traditional
insurance or reinsurance policies or are provided as a program, a structured
product or a combination of a traditional policy with a program or a structured
product. These product lines are aggregated as reportable segments into
specialty insurance, specialty reinsurance and technical services. The
attribution of insurance and reinsurance results to these reportable segments is
based upon where the business is sourced and not necessarily where the business
is recorded. During the year ended December 31, 2005, the Company changed the
composition of its reportable segments such that the Lloyd's operating segment,
which was previously a reportable segment, is aggregated with the company's
specialty insurance reportable segment.

In determining how to aggregate its business lines, the Company considers
many factors including the lines of business products, production and
distribution strategies, geographic source of business and regulatory
environments.

The Company has three geographic segments - Bermuda, the U.S. and Europe.
These geographic segments represent the aggregation of legal entity locations
where revenues, expenses, assets and liabilities are recorded.

The Company's specialty insurance and specialty reinsurance (collectively
referred to herein as "underwriting") reportable segments represent the
Company's income and expenses from underwriting risks it retains. The technical
services segment represents the Company's income and expenses from the provision
of technical, environmental and remediation risk management services.

The accounting policies of the segments are the same as those used in the
preparation of the consolidated financial statements. The Company measures and
evaluates each segment based on net underwriting or technical services income
including other items of revenue and general and administrative expense directly
attributable to each segment and, as of April 1, 2004 with an effective date of
January 1, 2004, including an allocation of indirect corporate general and
administrative expenses.

Effective January 1, 2004, the Company adopted an accounting methodology
for the allocation of corporate general and administrative expenses to each of
its segments. Corporate general and administrative expenses are allocated to
each segment in proportion to each segment's amount of allocated capital for the
current reporting period. The Company's capital allocation methodology is based
upon an estimate of value-at-risk for each segment on an annual basis.

Because the Company does not manage its assets by segment, net investment
income, depreciation and amortization and total assets are not evaluated at the
segment level.

X) RECENT ACCOUNTING PRONOUNCEMENTS

In November 2005, the Financial Accounting Standards Board's ("FASB")
issued FSP FAS 115-1 and FAS 124-1, "The meaning of other than temporary
impairment and its Application to Certain Investments" ("FSP FAS 115-1"), which
addresses the determination as to when an investment is considered impaired,
whether that impairment is other than temporary, and the measurement of an
impairment loss by reference to various existing accounting literature. FSP FAS
115-1 replaces the guidance set forth in paragraphs 10-18 of Emerging Issues
Task Force ("EITF") 03-1 "The meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments", with references to existing
other-than-temporary impairment guidance. It also supersedes EITF D-44
"Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a
Security Whose Cost Exceeds Fair Value" and clarifies that an impairment should
be recognized as a loss at a date no later than the date the impairment is
deemed other-than-temporary, even if the decision to sell has not been made. The
new guidance will be applied prospectively and will be effective for other than
temporary impairment analysis conducted in periods beginning after December 15,
2005. The adoption of FSP FAS 115-1 is not expected to have a material effect on
the Company's consolidated results of operations, financial

F-21

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

position or cash flows.

In March 2005, the Staff of the SEC issued Staff Accounting Bulletin No.
107 ("SAB 107") providing guidance on SFAS 123(R). SAB 107 was issued to assist
issuers in their initial implementation of SFAS 123(R) and enhance the
information received by investors and other users of the financial statements.

The Company plans to adopt SFAS 123(R) using the modified prospective
method under which compensation cost is recognized from the effective date (a)
based on the requirements of SFAS 123(R) for all share-based payments granted
after the effective date and (b) based on the requirements of SFAS 123 for all
awards granted to employees prior to the effective date of SFAS 123(R) that
remain unvested on the effective date.

As permitted by SFAS 123, the Company currently accounts for share-based
payments to employees using APB 25's intrinsic value method and, as such,
generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS 123(R)'s fair value method will have a
significant impact on our results of operations, although it will have no impact
on our overall financial position. The impact of adoption of SFAS 123(R) during
the year ended December 31, 2006 will be approximately $1.4 million, however,
this may vary depending on levels of share-based payments granted during 2006.
However, had we adopted SFAS 123(R) in prior periods, the impact of that
standard would have approximated the impact of SFAS 123 as described in the
disclosure of pro forma net loss and loss per share in Note 2(s) to our
consolidated financial statements.

3. SEGMENT INFORMATION

The following tables summarize the Company's results before income taxes
for each reportable segment for the years ended December 31, 2005 and 2004 and
for the period from May 23, 2003 (date of incorporation) to December 31, 2003
based on the reportable segments in effect during the year ended December 31,
2005.

During the year ended December 31, 2005, the Company changed the
composition of its reportable segments such that the Lloyd's operating segment,
which was previously a reportable segment, is aggregated with the Company's
specialty insurance reportable segment. The prior year comparatives have been
restated to conform with the presentation for the year ended December 31, 2005.

For the period from January 1, 2003 to September 3, 2003, the Company's
predecessor business was wholly allocated to the technical services segment. As
a result, separate statements of operations by reportable segment for the
predecessor are not provided.

F-22

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

YEAR ENDED DECEMBER 31, 2005
---------------------------------------------------------------------------
ADJUSTMENTS
SPECIALTY SPECIALTY UNDERWRITING TECHNICAL AND
STATEMENT OF OPERATIONS BY SEGMENT INSURANCE REINSURANCE TOTAL SERVICES ELIMINATIONS CONSOLIDATED
---------------------------------- --------- ----------- ------------ --------- ------------ ------------

Direct insurance................................ $ 367,890 $ -- $ 367,890 $ -- $ -- $ 367,890
Reinsurance assumed............................. 24,133 216,912 241,045 -- -- 241,045
--------- --------- --------- -------- ------- ---------
Total gross premiums written.................... 392,023 216,912 608,935 -- -- 608,935
Premiums ceded.................................. 135,460 83,434 218,894 -- -- 218,894
--------- --------- --------- ---------- ------- ---------
Net premiums written............................ $ 256,563 $ 133,478 $ 390,041 $ -- $ -- $ 390,041
========= ========= ========= ======== ======= =========

Net premiums earned............................. $ 197,131 $ 166,944 $ 364,075 $ -- $ -- $ 364,075
Technical services revenues..................... -- -- -- 50,499 (3,234) 47,265
Other income.................................... 1,200 1,974 3,174 1,718 -- 4,892
Net losses and loss expenses.................... (145,362) (178,887) (324,249) -- 165 (324,084)
Direct technical services costs................. -- -- -- (37,027) -- (37,027)
Acquisition expenses............................ (26,910) (42,714) (69,624) -- -- (69,624)
General and administrative expenses............. (65,181) (25,154) (90,335) (10,664) 3,069 (97,930)
--------- --------- --------- -------- ------- ---------
SEGMENT (LOSS) INCOME........................... $ (39,122) $ (77,837) $(116,959) $ 4,526 $ -- $(112,433)
--------- --------- --------- -------- ------- ---------
Depreciation of fixed assets and amortization
of intangibles............................... $ (3,989)
Interest expense................................ (4,165)
Net investment income........................... 27,181
Net realized losses on investments.............. (13,020)
Other income.................................... 387
Net foreign exchange gains...................... 331
---------
NET LOSS BEFORE INCOME TAXES.................... $(105,708)
=========

F-23

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

YEAR ENDED DECEMBER 31, 2004
---------------------------------------------------------------------------
ADJUSTMENTS
SPECIALTY SPECIALTY UNDERWRITING TECHNICAL AND
STATEMENT OF OPERATIONS BY SEGMENT INSURANCE REINSURANCE TOTAL SERVICES ELIMINATIONS CONSOLIDATED
---------------------------------- --------- ----------- ------------ --------- ------------ ------------

Direct insurance................................ $136,600 $ -- $ 136,600 $ -- $ -- $ 136,600
Reinsurance assumed............................. 105,980 251,832 357,812 -- -- 357,812
-------- --------- --------- -------- ------- ---------
Total gross premiums written.................... 242,580 251,832 494,412 -- -- 494,412
Premiums ceded.................................. (72,259) (2,612) (74,871) -- -- (74,871)
-------- --------- --------- -------- ------- ---------
Net premiums written............................ $170,321 $ 249,220 $ 419,541 $ -- $ -- $ 419,541
======== ========= ========= ======== ======= =========

Net premiums earned............................. $75,167 $ 161,973 $ 237,140 $ -- $ -- $ 237,140
Technical services revenues..................... -- -- -- 34,752 (2,267) 32,485
Other income.................................... -- 1,571 1,571 586 -- 2,157
Net losses and loss expenses.................... (49,805) (149,111) (198,916) -- -- (198,916)
Direct technical services costs................. -- -- -- (23,182) -- (23,182)
Acquisition expenses............................ (14,287) (39,708) (53,995) -- -- (53,995)
General and administrative expenses............. (34,303) (21,301) (55,604) (10,055) 2,267 (63,392)
-------- --------- --------- -------- ------- ---------
SEGMENT (LOSS) INCOME........................... $(23,228) $ (46,576) $ (69,804) $ 2,101 $ -- $ (67,703)
-------- --------- --------- -------- ------- ---------
Depreciation of fixed assets and amortization
of intangibles............................... $ (2,180)
Interest expense................................ (71)
Net investment income........................... 14,307
Net realized gains on investments............... 228
Other loss...................................... (140)
Net foreign exchange gains...................... 978
---------
NET LOSS BEFORE INCOME TAXES.................... $ (54,581)
=========

F-24

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS, OR AS
OTHERWISE STATED)

PERIOD FROM MAY 23, 2003 TO DECEMBER 31, 2003
------------------------------------------------------------------------------
ADJUSTMENTS
SPECIALTY SPECIALTY UNDERWRITING TECHNICAL AND
STATEMENT OF OPERATIONS BY SEGMENT INSURANCE REINSURANCE TOTAL SERVICES ELIMINATIONS CONSOLIDATED
---------------------------------- --------- ----------- ------------ --------- ------------ ------------

Direct insurance...................... $7,469 $ -- $ 7,469 $ -- $ -- $ 7,469
Reinsurance assumed................... -- 12,996 12,996 -- -- 12,996
------ ------- ------- ------- ----- --------
Total gross premiums written.......... 7,469 12,996 20,465 -- -- 20,465
Premiums ceded........................ (405) -- (405) -- -- (405)
------ ------- ------- ------- ----- --------
Net premiums written.................. $7,064 $12,996 $20,060 $ -- $ -- $ 20,060
====== ======= ======= ======= ===== ========
Net premiums earned................... $ 339 $ 1,601 $ 1,940 $ -- $ -- $ 1,940
Technical services revenues........... -- -- -- 12,261 (581) 11,680
Other income.......................... -- -- -- 100 -- 100
Net losses and loss expenses.......... (183) (1,008) (1,191) -- -- (1,191)
Direct technical services costs....... -- -- -- (8,637) -- (8,637)
Acquisition expenses.................. (24) (140) (164) -- -- (164)
General and administrative expenses... -- -- -- (2,657) -- (2,657)
------ ------- ------- ------- ----- --------
SEGMENT INCOME........................ $ 132 $ 453 $ 585 $ 1,067 $(581) $ 1,071
------ ------- ------- ------- ----- --------
General and administrative expenses... $(24,814)
Depreciation of fixed assets and
amortization of intangibles........ (434)
Net investment income................. 2,290
Net realized gains on investments..... 109
Other income.......................... 26
Non-cash stock compensation expense... (16,725)
--------
NET LOSS BEFORE INCOME TAXES.......... $(38,477)
========

For the years ended December 31, 2005 and 2004, the Company allocated
corporate general and administrative expenses to each segment based on segment
allocated capital as described in Note 2(w).

Items of revenue and expense resulting from charges between segments are
eliminated on consolidation of the segments. During the years ended December 31,
2005 and 2004 and period from May 23, 2003 to December 31, 2003, the technical
services segment charged the underwriting segments $3.2 million, $2.3 million
and $0.6 million for technical services and information management services
rendered.

The Company's specialty insurance segment writes business both on a direct
basis with insured clients or by assuming reinsurance of underlying policies
that are issued on its behalf by third party insurers and reinsurers.

F-25

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS, OR AS
OTHERWISE STATED)

The following tables summarize the Company's gross premiums written by
geographic location for the years ended December 31, 2005 and 2004 and for the
period from May 23, 2003 (date of incorporation) to December 31, 2003. The
geographical segments represent the aggregation of legal entity locations where
revenues, expenses, assets and liabilities are recorded.

2005 2004 2003
-------- -------- -------
United States............ $359,474 $259,378 $ 7,469
Bermuda.................. 155,758 230,887 $12,996
Europe................... 93,703 4,147 --
-------- -------- -------
Total.................... $608,935 $494,412 $20,465
======== ======== =======

4. BUSINESS ACQUISITIONS

The Company accounts for business acquisitions using the purchase method of
accounting in accordance with SFAS 141. For each business acquisition, the
purchase price is allocated to the assets acquired and liabilities assumed based
on their estimated fair values at the acquisition date. Any excess of the
purchase price over the estimated fair values of the identifiable net assets
acquired, including identifiable intangible assets, is recorded as goodwill.

On September 3, 2003, the Company acquired all of the outstanding common
stock of ESC in exchange for an initial cash consideration of $18.9 million,
including certain acquisition expenses. As further described in Note 13(e),
under the terms of the ESC purchase agreement, the Company is required to pay,
and has accrued for, as of December 31, 2005, an additional $5.0 million
earn-out payment that was contingent upon ESC achieving specified earnings
targets during the two year period ended December 31, 2005. The additional $5.0
million payment is an adjustment to the initial purchase price of ESC and
results in the goodwill arising on acquisition increasing from $7.6 million to
$12.6 million. The initial estimate of the fair values of the assets and
liabilities acquired as of September 3, 2003, including goodwill, the additional
$5.0 million contingent consideration based on ESC's earnings and the revised
estimate of the fair value of the assets and liabilities acquired are summarized
in thousands as follows:

INITIAL REVISED
FAIR FAIR
VALUES EARN-OUT VALUES
------- -------- -------
Cash and cash equivalents..... $ 413 $ -- $ 413
Accounts receivable........... 9,934 -- 9,934
Prepaid expenses.............. 367 -- 367
Property and equipment, net... 431 -- 431
Goodwill...................... 7,556 5,000 12,556
Intangible assets............. 4,970 -- 4,970
Other assets.................. 104 -- 104
Accounts payable.............. (3,361) -- (3,361)
Accrued expenses.............. (1,326) -- (1,326)
Deferred income............... (163) -- (163)
Other liabilities ............ (27) -- (27)
------- ------ -------
Cash consideration $18,898 $5,000 $23,898
======= ====== =======

The operating results of ESC are included in the Company's consolidated
results of operations for the period from September 3, 2003 (date of
acquisition) to December 31, 2003.

The $12.6 million and $7.6 million of goodwill as of December 31, 2005 and
2004 has been allocated to the Company's technical services segment and is fully
deductible for U.S. tax purposes. Intangible assets acquired include $4.4
million attributable to customer relationships and licenses that are being
amortized

F-26

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS, OR AS
OTHERWISE STATED)

ratably over 8 years, and $0.6 million attributable to non-compete agreements
that are being amortized ratably over three years.

On October 28, 2003, the Company acquired all of the outstanding capital
stock of Quanta Specialty Lines. The Company paid a cash purchase price of $26.1
million that represented the fair value of licenses and cash assets acquired at
the acquisition date. Of the $26.1 million, $25.8 million was allocated to cash
and cash equivalents acquired, with the remainder of $0.25 million being
assigned to an indefinite lived non-amortizable intangible asset representing
the fair value of the insurance licenses acquired. Quanta Specialty Lines had
not engaged in business prior to the acquisition date.

On December 19, 2003, the Company acquired all of the outstanding capital
stock of Quanta Indemnity for a cash purchase price of $22.6 million. In
conjunction with the acquisition, and under the terms of a transfer and
assumption agreement, the seller agreed to assume from Quanta Indemnity all of
its underwriting contracts and their associated liabilities in effect at the
time of acquisition, except those agreements for which regulatory approval of
the transfer and assumption had yet to be obtained. For those contracts that
were pending regulatory approval, the seller reinsured Quanta Indemnity for 100%
of their associated liabilities and assumed these reinsured contracts when it
obtained regulatory approval. During the year ended December 31, 2004, the
seller received its regulatory approvals and assumed all of its remaining
underwriting contracts and their associated liabilities.

The total purchase price paid to acquire the outstanding capital stock of
Quanta Indemnity was allocated to the fair value of (a) statutory deposits
acquired of approximately $13.8 million, (b) accrued investment income of $0.2
million, (c) unearned premiums of $1.6 million and loss and loss expense
reserves of $3.5 million associated with retained underwriting contracts that
were not assumed by the seller, (d) the corresponding reinsurance assets
relating to the reinsurance of retained underwriting contracts provided by the
seller, and (e) indefinite lived intangible assets that are not subject to
amortization of $8.6 million, representing the fair value of the insurance
licenses acquired.

5. LOSS PER SHARE

The following table sets forth the computation of basic and diluted loss
per share.

2005 2004 2003
----------- ----------- -----------

BASIC LOSS PER SHARE
Net loss .............................................. $ (105,952) $ (54,581) $ (38,477)

Weighted average common shares outstanding - basic .... 57,205,342 56,798,218 31,369,001
----------- ----------- -----------
Basic loss per share .................................. $ (1.85) $ (0.96) $ (1.23)
----------- ----------- -----------
DILUTED LOSS PER SHARE
Net loss .............................................. $ (105,952) $ (54,581) $ (38,477)

Weighted average common shares outstanding ............ 57,205,342 56,798,218 31,369,001
Weighted average common share equivalents
Options ............................................ -- -- --
Warrants ........................................... -- -- --
Weighted average common shares outstanding - diluted .. 57,205,342 56,798,218 31,369,001
----------- ----------- -----------
Diluted loss per share ................................ $ (1.85) $ (0.96) $ (1.23)
----------- ----------- -----------

Due to a net loss for all periods presented, the assumed net exercise of
options and warrants under

F-27

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS, OR AS
OTHERWISE STATED)

the treasury stock method has been excluded, as the effect would have been
anti-dilutive. Accordingly, for the year ended December 31, 2005, the
calculation of weighted average common shares outstanding on a diluted basis
excludes 3,402,194 options and 2,542,813 warrants. For the year ended December
31, 2004, the calculation of weighted average common shares outstanding on a
diluted basis excludes 3,052,400 options and 2,542,813 warrants. For the period
from May 23, 2003 (date of incorporation) to December 31, 2003, the calculation
of weighted average common shares outstanding on a diluted basis excludes
2,892,900 options and 2,542,813 warrants.

The predecessor's basic net income per share is $1.28 for the period
January 1, 2003 to September 3, 2003. The predecessor's diluted net income per
share is $1.28 for the period January 1, 2003 to September 3, 2003.

6. INVESTMENTS

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

DECEMBER 31, 2005

GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST OR COST GAINS LOSSES FAIR VALUE
------------ ---------- ---------- ----------

Available-for-sale:
Fixed maturities:
U.S. government and government agencies .. $201,272 $ 79 $ -- $201,351
Foreign governments ...................... 8,503 176 -- 8,679
Tax-exempt municipal ..................... 4,659 -- -- 4,659
Corporate ................................ 159,665 111 -- 159,776
Asset-backed securities .................. 32,824 7 -- 32,831
Mortgage-backed securities ............... 255,124 113 -- 255,237
-------- ------ ----- --------
Total fixed maturities ................ $662,047 $ 486 $ -- $662,533

Short-term investments ...................... 36,581 7 -- 36,588
-------- ------ ----- --------
Total available-for-sale investments ........... $698,628 $ 493 $ -- $699,121

Trading:
Fixed maturities:
U.S. government and government agencies .. $ 896 $ -- $ (5) $ 891
Corporate ................................ 24,558 1,226 (589) 25,195
Asset-backed securities .................. 4,602 28 (21) 4,609
Mortgage-backed securities ............... 7,359 4 (124) 7,239
-------- ------ ----- --------
Total fixed maturities ................ $ 37,415 $1,258 $(739) $ 37,934

Short-term investments ...................... 382 -- -- 382
-------- ------ ----- --------
Total trading investments ...................... $ 37,797 $1,258 $(739) $ 38,316
-------- ------ ----- --------
Total investments .............................. $736,425 $1,751 $(739) $737,437
======== ====== ===== ========

DECEMBER 31, 2004

GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST OR COST GAINS LOSSES FAIR VALUE
------------ ---------- ---------- ----------

Available-for-sale:
Fixed maturities:
U.S. government and government agencies .. $227,024 $ 641 $ (860) $226,805
Foreign governments ...................... 16,704 735 (10) 17,429
Tax-exempt municipal ..................... 4,116 121 (3) 4,234
Corporate ................................ 134,221 833 (1,152) 133,902
Asset-backed securities .................. 20,315 6 (170) 20,151
Mortgage-backed securities ............... 152,727 399 (618) 152,508
-------- ------ ------- --------
Total fixed maturities ................ $555,107 $2,735 $(2,813) $555,029

F-28

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS, OR AS
OTHERWISE STATED)

Short-term investments ...................... 4,562 115 (276) 4,401
-------- ------ ------- --------
Total available-for-sale investments ........... $559,669 $2,850 $(3,089) $559,430

Trading:
Fixed maturities:
Tax-exempt municipal ..................... $ 538 $ -- $ -- $ 538
Corporate ................................ 31,309 -- -- 31,309
Asset-backed securities .................. 1,382 -- -- 1,382
Mortgage-backed securities ............... 6,759 -- -- 6,759
-------- ------ ------- --------
Total fixed maturities ................ $ 39,988 $ -- $ -- $ 39,988

Short-term investments ...................... 504 -- -- 504
-------- ------ ------- --------
Total trading investments ...................... $ 40,492 $ -- $ -- $ 40,492
-------- ------ ------- --------
Total investments .............................. $600,161 $2,850 $(3,089) $599,922
======== ====== ======= ========

As of December 31, 2004, the Company held, as part of its self-managed
available-for-sale fixed maturity portfolio, $20.0 million of par value
principal-at-risk insurance linked securities issued by a single issuer. The
investment in the insurance linked security was subject to loss of principal in
the event of the occurrence of certain predefined changes in mortality. As of
December 31, 2004, the fair value of the security was $20.1 million and
represented approximately 3% of the Company's total cash and invested assets.
This investment was sold during 2005.

Those available for sale securities with unrealized losses and the duration
such conditions existed as of December 31, 2005, and their fair values are
summarized as follows:

DECEMBER 31, 2005

UNREALIZED LOSSES
-------------------------------------
TOTAL
LESS THAN GREATER THAN UNREALIZED
FAIR VALUE 12 MONTHS 12 MONTHS LOSSES
---------- --------- ------------ ----------

Fixed maturities:
U.S. government and government agencies ..... $-- $-- $-- $--
Foreign governments ......................... -- -- -- --
Tax-exempt municipal ........................ -- -- -- --
Corporate ................................... -- -- -- --
Asset-backed securities ..................... -- -- -- --
Mortgage-backed securities .................. -- -- -- --
--- --- --- ---
Total fixed maturities ................... $-- $-- $-- $--

Short-term investments ......................... -- -- -- --
--- --- --- ---
Total temporarily impaired securities .......... $-- $-- $-- $--
=== === === ===

As a result of the matters described in Note 23, due to the general
uncertainty surrounding the Company resulting from A.M. Best's downgrade of the
Company's financial strength ratings and decision to explore strategic
alternatives, the Company has concluded that it may no longer be able to hold
its securities for a sufficient period of time to allow recovery.
Accordingly, during the fourth quarter of 2005, the Company recorded $10.2
million in other than temporary impairment losses.

Those fixed maturity investments with unrealized losses and the duration
such conditions existed as of December 31, 2004, and their fair values are
summarized as follows:

DECEMBER 31, 2004

UNREALIZED LOSSES
-------------------------------------
TOTAL
LESS THAN GREATER THAN UNREALIZED
FAIR VALUE 12 MONTHS 12 MONTHS LOSSES
---------- --------- ------------ ----------

Fixed maturities:
U.S. government and government agencies ..... $ 127,787 $ (860) $-- $ (860)
Foreign governments ......................... 1,446 (10) -- (10)
Tax-exempt municipal ........................ 102 (3) -- (3)

F-29

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS, OR AS
OTHERWISE STATED)

Corporate ................................... 103,710 (1,152) -- (1,152)
Asset-backed securities ..................... 16,818 (170) -- (170)
Mortgage-backed securities .................. 109,679 (618) -- (618)
--------- ------- --- -------
Total fixed maturities ................... $ 359,542 $(2,813) $-- $(2,813)

Short-term investments ......................... (260) (276) -- (276)
--------- ------- --- -------
Total temporarily impared securities ........... $ 359,282 $(3,089) $-- $(3,089)
========= ======= === =======

As of December 31, 2004, there were approximately 314 securities in an
unrealized loss position. Of these securities, there were no securities that had
been in an unrealized loss position for twelve months or greater.

Due to fluctuations in interest rates, it is likely that during the time
over which a fixed maturity security is owned there will be periods when the
security's fair value is less than its amortized cost resulting in unrealized
losses. Substantially all of the unrealized losses on the Company's fixed
maturity securities as at December 31, 2004 were caused by interest rate
increases during 2004. Because the unrealized losses were primarily attributable
to changes in interest rates and not changes in credit quality and because the
Company had the ability and intent to hold these investments until a recovery of
fair value, which may be maturity, the Company did not consider these
investments to be other-than-temporarily impaired at December 31, 2004. For the
year ended December 31, 2004, the Company did not identify any securities with
declines in value that were considered to be other-than-temporary.

Contractual maturities of the Company's available for sale fixed maturities
as of December 31, 2005 are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.

DECEMBER 31, 2005

AMORTIZED
COST OR COST FAIR VALUE
------------ ----------
Fixed maturities:
Due in one year or less ................ $102,631 $102,588
Due after one year through five years .. 237,122 237,166
Due after five years through 10 years .. 53,362 53,576
Due after 10 years ..................... 17,565 17,722
-------- --------
Total fixed maturities .............. $410,680 $411,052

Mortgage and asset-backed securities ...... 287,948 288,069
-------- --------
Total ..................................... $698,628 $699,121
======== ========

Credit ratings of the Company's fixed maturities as of December 31, 2005
and 2004 are shown below.

DECEMBER 31, 2005 DECEMBER 31, 2004
------------------------- -------------------------
AMORTIZED AMORTIZED
RATINGS * COST OR COST PERCENTAGE COST OR COST PERCENTAGE
--------- ------------ ---------- ------------ ----------

AAA........................................ $528,827 71.8% $425,209 70.8%
AA......................................... 32,191 4.4% 17,793 3.0%
A.......................................... 145,224 19.7% 78,743 13.1%
BBB........................................ 30,183 4.1% 78,416 13.1%
-------- ----- -------- -----
Total...................................... $736,425 100.0% $600,161 100.0%
-------- ----- -------- -----

* - ratings as assigned by Standard & Poor's Corporation

The components of net investment income for the years ended December 31,
2005 and 2004 and for the period from May 23, 2003 (date of incorporation) to
December 31, 2003 were derived from the following sources:

F-30

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS, OR AS
OTHERWISE STATED)
x

2005 2004 2003
------- ------- ------

Fixed maturities .................................... $26,879 $16,862 $2,408
Cash, cash equivalents and short-term investments ... 1,909 1,494 780
------- ------- ------
Gross investment income ............................. 28,788 18,356 3,188
Net amortization of discount / premium .............. (157) (2,949) (669)
Investment expenses ................................. (1,450) (1,100) (229)
------- ------- ------
Net investment income ............................... $27,181 $14,307 $2,290
======= ======= ======

Gross realized pre tax investment gains and losses for the year ended
December 31, 2005 were approximately $4.4 million and $17.4 million. Gross
realized pre tax investment gains and losses for the year ended December 31,
2004 were approximately $3.4 million and $3.2 million. Gross realized pre tax
investment gains and losses for the period from May 23, 2003 (date of
incorporation) to December 31, 2003, were approximately $0.7 million and $0.6
million. All gains and losses were realized from the sale of fixed maturity
investments, except for $10.2 million of realized losses relating to other than
temporary impairment charges and $1.5 million of realized gains recognized on
derivative investments during the year ended December 31, 2005.

7. FUNDS AT LLOYD'S

On December 9, 2004, Quanta 4000 Holdings, Ltd. deposited with Lloyd's cash
and investments having on the date of deposit a market value of (pound)57.5
million, or $107.9 million, to support its underwriting activities. The Company
is required to maintain Funds at Lloyd's for each underwriting year in which it
writes business. The cash and investments are held by Lloyd's in its capacity as
trustee of a Lloyd's Deposit Trust Deed (Third Party Deposit) dated December 23,
2004 and made between Quanta 4000 Holdings, Ltd., Quanta 4000, and Lloyd's, as
security for the underwriting obligations of Quanta 4000 (including certain
obligations arising under Lloyd's byelaws and other rules). At the request of
Quanta 4000 Holdings, Ltd. and Quanta 4000, Lloyd's has appointed a custodian to
hold the cash and investments on its behalf and an investment manager to manage
the cash and investments in accordance within certain investment objectives and
restrictions agreed between Quanta 4000 Holdings, Ltd., Quanta 4000 and Lloyd's
and in accordance with investment criteria and within restrictions specified by
Lloyd's. As of December 31, 2005 and 2004, cash and investments with a market
value of $114.6 million and $109.4 million are held by Lloyd's as trustee, which
includes $6.3 million of investments deposited to support the Company's 2006
underwriting year. The cash and investments held by Lloyd's are included within
Notes 6 and 13(c) and may not be withdrawn until each underwriting year is
closed, which generally takes three years. Also, see Note 23 for recent
developments.

Quanta 4000 underwrites insurance business through, and as the sole member,
of Syndicate 4000, in respect of which business further cash and investments
will from time to time be held under Premium Trust Funds for the payment and
discharge of certain permitted trust outgoings and, thereafter, for Quanta 4000.

The release from these trusts to Quanta 4000, and therefore the
availability for purposes of dividend payment by Quanta 4000 to its direct and
indirect corporate parents, of profits earned on the Lloyd's business of Quanta
4000 is restricted by Lloyd's byelaws and other rules which generally provide,
among other things, that only those funds are released for which the
underwriting year has been closed, a process which routinely takes three years.
At December 31, 2005, in addition to its Funds at Lloyd's, the Company had cash
and investments of $15.1 million that was held under Premium Trust Funds for
payments and discharge of certain trust outgoings, and a further $13.5 million
held on deposit pursuant to regulatory requirements. At December 31, 2004, the
Company did not have any amounts of further cash and investments held under
Premium Trust Funds for payments and discharge of certain trust outgoings.

8. DERIVATIVE INSTRUMENTS

The Company is exposed to potential loss on its derivative activities from
various market risks, and manages these market risks based on guidelines
established by management. Derivative instruments are carried at fair value with
the resulting realized and unrealized gains and losses recognized in the
consolidated statement of operations and comprehensive (loss) income in the
period in which they occur. The change in fair value is included in other income
in the consolidated statement of operations.

F-31

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

The following table summarizes these instruments and the effect on net loss
and comprehensive loss for the years ended December 31, 2005 and 2004 and period
from May 23, 2003 (date of incorporation) to December 31, 2003. The predecessor
did not engage in derivative activities:

2005 2004 2003
--------------------- --------------------- ---------------------
NET NET NET
CHANGE IN NET CHANGE IN NET CHANGE IN NET
UNREALIZED REALIZED UNREALIZED REALIZED UNREALIZED REALIZED
GAINS GAINS LOSSES LOSSES GAINS GAINS
---------- -------- ---------- -------- ---------- --------

Investment derivatives.................. $108 $1,492 $(185) $(323) $207 $--
Mortality linked embedded derivatives... 216 42 (216) -- -- --
---- ------ ----- ----- ---- ---
Net realized and unrealized gains
(losses) on derivatives............ $324 $1,534 $(401) $(323) $207 $--
==== ====== ===== ===== ==== ===

A) INVESTMENT DERIVATIVES

The Company uses foreign currency forward contracts to manage its exposure
to the effects of fluctuating foreign currencies on the value of certain of its
foreign currency denominated fixed maturity investments. These forward currency
contracts are not designated as specific hedges for financial reporting purposes
and, therefore, realized and unrealized gains and losses on these contracts are
recorded in the consolidated statement of operations and comprehensive (loss)
income in the period in which they occur. These contracts generally have
maturities of three months or less. As of December 31, 2005 and 2004, the net
notional amount of foreign currency forward contracts was zero, with a net fair
market value of zero and $(0.3) million and net unrealized losses of zero and
$(0.3) million. For the years ended December 31, 2005 and 2004, net realized
gains (losses) on settled foreign currency forward contracts totaled
approximately $1.4 million and $(0.4) million. During the period from May 23,
2003 (date of incorporation) to December 31, 2003, the Company did not have a
realized gain or loss associated with settled foreign currency forward
contracts.

During the years ended December 31, 2005 and 2004, the Company utilized
other derivative instruments such as swaps and options to manage total
investment returns in accordance with its investment guidelines and recognized
net realized gains on these instruments of $0.1 million and $0.1 million. As of
December 31, 2005, the fair market value of other derivative instruments was
negligible and net unrealized gains of other derivative instruments was $0.1
million. As of December 31, 2004, the fair market value of other derivative
instruments was negligible and net unrealized gains were $0.1 million. During
the period from May 23, 2003 (date of incorporation) to December 31, 2003, the
Company did not have a realized gain or loss associated with swaps and options.

B) MORTALITY LINKED EMBEDDED DERIVATIVE

During the year ended December 31, 2005, the Company sold the
mortality-risk-linked security that it had held since the fourth quarter of
2003. Simultaneously, it entered into a derivative total return swap agreement
with an unrelated third party financial institution with reference to the same
asset. The Company also entered into another derivative total return swap
agreement with the same financial institution with reference to a similar
mortality-risk-linked security. As a result, the Company retains all the risks
and rewards of these two securities without having ownership of them. Income
received from the total return swaps and any fair value adjustments are included
in other income in the consolidated statement of operations. The Company records
total return swaps at fair value, based on quoted market prices. Where such
valuations are not available, the Company uses internal valuation models to
estimate fair value. During the years ended December 31, 2005 and 2004 the
Company recorded $0.1 million and zero in unrealized gains associated with the
change in fair value of these derivatives.

9. REINSURANCE

The Company utilizes reinsurance and retrocessional agreements principally
to increase aggregate

F-32

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

capacity and to limit net exposures to losses arising on business assumed. The
Company's reinsurance agreements provide for the recovery of a portion of losses
and loss expenses from reinsurers.

Reinsurance assets due from our reinsurers include losses and loss
adjustment expenses recoverable and deferred reinsurance premiums. The Company
is subject to credit risk with respect to reinsurance ceded because the ceding
of risk does not relieve the Company from its primary obligations to its
policyholders. It is expected that the companies to which insurance has been
ceded will honor their obligations. Failure of the Company's reinsurers to honor
their obligations could result in credit losses.

The average credit rating of the Company's reinsurers as of December 31,
2005 is A (Excellent) by A.M. Best. As of December 31, 2005, the losses and loss
adjustment expenses recoverable from reinsurers balance in the consolidated
balance sheet included approximately 22% due from Everest Reinsurance Ltd., a
reinsurer rated A+ (Superior) by A.M. Best, and approximately 17% due from
various Lloyd's syndicates, which are rated A (Excellent) by A.M. Best. No other
reinsurers accounted for more than 10% of the losses and loss adjustment expense
recoverable balance as of December 31, 2005.

As of December 31, 2004, the losses and loss adjustment expenses
recoverable balance in the consolidated balance sheet included approximately
48%, 16% and 11% recoverable from three reinsurers rated A+ by A.M. Best
Company, Inc. ("A.M. Best") and approximately 10% from one reinsurer rated A++
by A.M. Best.

The Company has recorded a provision for credit losses relating to losses
and loss adjustment expenses recoverable of $0.6 million during the year ended
December 31, 2005, as described in Note 2(e). The Company did not record any
credit losses for the year ended December 31, 2004 or for the period from May
23, 2003 (date of incorporation) to December 31, 2003.

The effect of reinsurance activity on premiums written, premiums earned and
losses and loss expenses incurred for the years ended December 31, 2005 and 2004
and for the period from May 23, 2003 (date of incorporation) to December 31,
2003 is shown below.

YEAR ENDED PREMIUMS PREMIUMS LOSSES AND
DECEMBER 31, 2005 WRITTEN EARNED LOSS EXPENSES
--------------------------- --------- --------- -------------
Direct insurance........... $ 367,890 $ 246,955 $ 226,547
Reinsurance assumed........ 241,045 270,537 297,336
--------- --------- ---------
Gross...................... 608,935 517,492 523,883
Ceded reinsurance.......... (218,894) (153,417) (199,799)
--------- --------- ---------
Net........................ $ 390,041 $ 364,075 $ 324,084
========= ========= =========

YEAR ENDED PREMIUMS PREMIUMS LOSSES AND
DECEMBER 31, 2004 WRITTEN EARNED LOSS EXPENSES
--------------------------- --------- --------- -------------
Direct insurance........... $136,600 $ 39,937 $ 27,397
Reinsurance assumed........ 357,812 225,136 185,001
-------- -------- --------
Gross...................... 494,412 265,073 212,398
Ceded reinsurance.......... (74,871) (27,933) (13,482)
-------- -------- --------
Net........................ $419,541 $237,140 $198,916
======== ======== ========

F-33

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

PERIOD FROM MAY 23, 2003 TO PREMIUMS PREMIUMS LOSSES AND
DECEMBER 31, 2003 WRITTEN EARNED LOSS EXPENSES
--------------------------- --------- --------- -------------
Direct insurance........... $ 7,469 $ 399 $ 219
Reinsurance assumed........ 12,996 1,601 1,008
------- ------ ------
Gross...................... 20,465 2,000 1,227
Ceded reinsurance.......... (405) (60) (36)
------- ------ ------
Net........................ $20,060 $1,940 $1,191
======= ====== ======

10. GOODWILL AND OTHER INTANGIBLE ASSETS

The Company accounts for its goodwill and other intangible assets in
accordance with SFAS 142. Under the provisions of SFAS 142, goodwill and
identified intangible assets with indefinite useful lives are not subject to
amortization. Rather they are subject to impairment testing on an annual basis,
or more often if events or circumstances indicate that there may be impairment.
Identified intangible assets that have a finite useful life are amortized over
that life in a manner that reflects the estimated decline in the economic value
of the identified intangible asset and are reviewed for impairment when events
or circumstances indicate that there may be impairment. The Company's impairment
evaluations as of December 31, 2005 and 2004 indicated that none of its goodwill
or other intangible assets was impaired.

The carrying amount of goodwill, which primarily relates to the Company's
technical services segment and is not subject to amortization, was $12.6 million
and $7.6 million as of December 31, 2005 and 2004.

The carrying amount of intangible assets that are not subject to
amortization, which represent the Company's U.S. insurance licenses, was $9.1
million as of December 31, 2005 and 2004.

The gross carrying amount and accumulated amortization for each of the
Company's classes of intangible assets that are subject to amortization as of
December 31, 2005 and 2004 are summarized in the following table:

2005 2004
----------------------------- -----------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------ -------------- ------------

Customer relationships... $4,400 $1,286 $4,400 $734
Non-compete agreements... 570 443 570 255
------ ------ ------ ----
Total................. $4,970 $1,729 $4,970 $989
====== ====== ====== ====

The amortization expense of intangible assets subject to amortization was
$0.7 million and $0.7 million for the years ended December 31, 2005 and 2004.
The estimated amortization expense in each of the five years subsequent to
December 31, 2005, is as follows: 2006, $0.7 million; 2007, $0.6 million; 2008,
$0.6 million; 2009, $0.5 million; and 2010, $0.5 million.

11. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

The Company's estimation of future ultimate loss liabilities is inherently
subject to significant uncertainties. These uncertainties are driven by many
variables that are difficult to quantify. These uncertainties include, for
example, the period of time between the occurrence of an insured loss and actual
settlement, fluctuations in inflation, prevailing economic, social and judicial
trends, legislative changes, internal and third party claims handling
procedures, and the lack of complete historical data on which to base loss
expectations.

The estimation of unpaid loss liabilities will be affected by the type or
structure of the policies the Company has written. For specialty insurance
business, the Company often assumes risks for which claims

F-34

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS, OR AS
OTHERWISE STATED)

experience will tend to be frequency driven. As a result, historical loss
development data may be available and traditional actuarial methods of loss
estimation may be used. Conversely, the available amount of relevant loss
experience used to quantify the emergence, severity and payout characteristics
of loss liabilities is limited for policies written where the Company expects
that potential losses will be characterized by lower frequency but higher
severity claims.

The estimation of unpaid loss liabilities will also vary in subjectivity
depending on the lines or class of business involved. Short-tail business
describes lines of business for which losses become known and paid in a
relatively short period of time after the loss actually occurs. Typically, there
will be less variability in the ultimate amount of losses from claims incurred
in the short-tail lines that the Company writes such as property, marine, and
aviation. Long-tail business describes lines of business for which actual losses
may not be known for some time or for which the actual amount of loss may take a
significantly longer period of time to emerge or develop. The Company writes
casualty, professional and environmental lines of business that are generally
considered longer tail in nature. Because loss emergence and settlement periods
can be many years in duration, these lines of business will have more
variability in the estimates of their loss and loss expense reserves.

The following table represents the activity in the reserve for losses and
loss adjustment expenses for the years ended December 31, 2005 and 2004 and for
the period from May 23, 2003 (date of incorporation) to December 31, 2003:

2005 2004 2003
-------- -------- -------

Reserve for losses and loss adjustment expenses at
beginning of period.................................... $159,794 $ 4,454 $ --
Losses and loss adjustment expenses recoverable........... 13,519 3,263 --
-------- -------- -------
Net reserve for losses and loss adjustment expenses at
beginning of period.................................... 146,275 1,191 --
Reserve for losses and loss adjustment expenses of
Quanta Indemnity at date of acquisition................ -- -- 3,472
Less losses and loss adjustment expenses recoverable...... -- -- (3,472)
-------- -------- -------
Net reserve for losses and loss adjustment expenses of
Quanta Indemnity at date of acquisition................ -- -- --
Net losses and loss adjustment expenses incurred
related to losses occurring in:
Current year........................................... 320,062 198,923 1,191
Prior years............................................ 4,022 (7) --
-------- -------- -------
Total net incurred losses and loss adjustment expenses.... 324,084 198,916 1,191
Net losses and loss adjustment expenses paid related to
losses occurring in:
Current year........................................... 72,412 54,051 --
Prior years............................................ 53,310 -- --
-------- -------- -------
Total net paid losses and loss adjustment expenses........ 125,722 54,051 --
Foreign exchange (gain) loss.............................. (1,007) 219 --
Net reserve for losses and loss adjustment expenses at
end of period.......................................... 343,630 146,275 1,191
Losses and loss adjustment expenses recoverable........... 190,353 13,519 3,263
-------- -------- -------
Reserve for losses and loss adjustment expenses at
end of period.......................................... $533,983 $159,794 $ 4,454
======== ======== =======

During the year ended December 31, 2005, the Company incurred estimated
ultimate net losses and loss adjustment expenses of $83.3 million related to
Hurricanes Katrina, Rita and Wilma ("2005 Hurricanes"), which represents the
Company's best estimate of losses based upon information currently available.
The Company's preliminary estimate of ultimate losses from these events is
primarily based on claims received to date, industry loss estimates, a review of
affected contracts and discussion with cedants and brokers. While the Company
believes that its reserves for the 2005 Hurricanes are adequate, the exact
losses will be unknown for some time given the uncertainty around the industry
loss estimates, the size and complexity of the 2005 Hurricanes, limited claims
data and potential legal and regulatory developments related to potential

F-35

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS, OR AS
OTHERWISE STATED)

losses. As a result, the Company's losses may vary significantly from the
recorded estimates.

Other than losses incurred from the 2005 Hurricanes and from hurricanes
Charley, Frances, Ivan and Jeanne ("2004 Hurricanes") during the year ended
December 31, 2004, the Company has received a limited number of other reported
losses. As of December 31, 2005, the Company completed its review of loss
reserves and losses incurred in each of its lines of business. As a result of
this review the Company refined its expected ultimate loss ratios for certain
lines of business. The adverse development on prior year loss reserves was $4.0
million, including $5.9 million of adverse development on the 2004 Hurricanes in
our property reinsurance and marine, technical risk and aviation product lines
and was partially offset by favorable development on our other product lines.

For the year ended December 31, 2004, other than claims notifications
received relating to the 2004 Hurricanes, for which the Company estimated
ultimate net losses and loss adjustment expenses of $61.3 million, the Company
had received a limited amount of other reported losses. As of December 31, 2004,
the Company completed its review of loss reserves and losses incurred in each of
its lines of business. As a result of this review the Company refined its
expected ultimate loss ratios for certain lines of business. This review and
refinement had a negligible impact on prior year loss reserves.

Management believes that the assumptions used represent a realistic and
appropriate basis for estimating the reserve for losses and loss adjustment
expense as of December 31, 2005 and 2004. However, these assumptions are subject
to change and the Company continually reviews and adjusts its reserve estimates
and reserving methodologies taking into account all currently known information
and updated assumptions related to unknown information. While management
believes it has made a reasonable estimate of loss expenses occurring up to the
consolidated balance sheet date, the ultimate costs of claims incurred could
exceed the Company's reserves and have a materially adverse effect on its future
results of operations and financial condition.

As of December 31, 2003, both the reserve for losses and loss adjustment
expenses and the loss expense recoverable asset included $3.2 million related to
the acquisition of Quanta Indemnity and the reinsurance provided by the seller
of Quanta Indemnity (see Note 4).

12. JUNIOR SUBORDINATED DEBENTURES

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

Quanta Trust II used the proceeds from the sale of the Trust Preferred
Securities and the issuance of its common securities to purchase $20.6 million
junior subordinated debt securities, due June 15, 2035, in the principal amount
of $20.6 million issued by the Company (the "Debentures"). The net proceeds of
$19.6 million from the sale of the debentures to Quanta Trust II, after the
deduction of approximately $0.4 million of commissions paid to the placement
agents in the transaction and approximately $0.6 million representing the
Company's investment in Quanta Trust II, will be used by the Company to grow its
specialty lines businesses and for working capital purposes.

On December 21, 2004, the Company participated in a private placement of
$40.0 million of floating rate capital securities (the "Trust Preferred
Securities") issued by Quanta Trust. The Trust Preferred Securities mature on
March 15, 2035, are redeemable at the Company's option at par beginning March
15, 2010, and require quarterly distributions of interest by Quanta Trust to the
holder of the Trust Preferred Securities. Distributions will be payable at a
variable per annum rate of interest, reset quarterly, equal to the London

F-36

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS, OR AS
OTHERWISE STATED)

Interbank Offered Rate ("LIBOR") plus 385 basis points, which equated to an
interest rate of 6.37% at December 31, 2004. Quanta Trust simultaneously issued
1,238 of its common securities to the Company for a purchase price of $1.2
million, which constitutes all of the issued and outstanding common securities
of Quanta Trust. The Company's investment of $1.2 million in the common shares
of Quanta Trust is recorded in other assets in the consolidated balance sheet.

Quanta Trust used the proceeds from the sale of the Trust Preferred
Securities and the issuance of its common securities to purchase $41.2 million
junior subordinated debt securities, due March 15, 2035, in the principal amount
of $41.2 million issued by the Company (the "Debentures"). The net proceeds of
$38.8 million, after the deduction of approximately $1.2 million of commissions
paid to the placement agents in the transaction and approximately $1.2 million
representing the Company's investment in Quanta Trust, to the Company from the
sale of the Debentures to Quanta Trust was used by the Company to grow its
specialty lines businesses and for working capital purposes.

The Debentures were issued pursuant to an Indenture (the "Indenture"),
dated December 21, 2004 in respect of Quanta Trust and dated February 24, 2005
in respect of Quanta Trust II, by and between the Company and JPMorgan Chase
Bank, N.A., as trustee. The terms of the Debentures are substantially the same
as the terms of the Trust Preferred Securities. The interest payments on the
Debentures paid by the Company will be used by Quanta Trust and Quanta Trust II
to pay the quarterly distributions to the holders of the Trust Preferred
Securities. The Indenture permits the Company to redeem the Debentures (and thus
a like amount of the Trust Preferred Securities) on or after March 15, 2010 in
respect of Quanta Trust and June 10, 2010 in respect of Quanta Trust II. If the
Company redeems any amount of the Debentures, Quanta Trust and Quanta Trust II
must redeem a like amount of the Trust Preferred Securities.

Pursuant to a Guarantee Agreement (the "Guarantee Agreement"), dated
December 21, 2004 in respect of Quanta Trust and dated February 24, 2005 in
respect of Quanta Trust II, by and between the Company and JPMorgan Chase Bank,
N.A., as trustee, the Company has agreed to guarantee the payment of
distributions and payments on liquidation or redemption of the Trust Preferred
Securities, but only in each case to the extent of funds held by Quanta Trust
and Quanta Trust II. The obligations of the Company under the Guarantee
Agreement and the Trust Preferred Securities are subordinate to all of the
Company's debt.

The issuance costs incurred related to Quanta Trust and Quanta Trust II
have been capitalized and are included in other assets in the consolidated
balance sheet. Issuance costs are being amortized over the term of the
Debentures as a component of interest expense.

Quanta Trust and Quanta Trust II are determined to be Variable Interest
Entities ("VIE") under FIN46R. The Company was not determined to be the primary
beneficiary of Quanta Trust and Quanta Trust II and in accordance with FIN46R
has not consolidated Quanta Trust and Quanta Trust II in the consolidated
financial statements. The earnings of Quanta Trust and Quanta Trust II are
included in the consolidated statement of operations and comprehensive (loss)
income.

13. COMMITMENTS AND CONTINGENCIES

A) CONCENTRATIONS OF CREDIT RISK

As of December 31, 2005, substantially all of the Company's cash and cash
equivalents, and investments were held by three custodians, and two custodians
as of December 31, 2004. Management believes these custodians to be of high
credit quality. The Company's investment portfolio is managed by external
investment advisors in accordance with the Company's investment guidelines. The
Company's investment guidelines require that the average credit quality of the
investment portfolio is typically Aa3/AA- and that no more than 5% of the
investment portfolio's market value shall be invested in securities rated below
Baa3/BBB-. The Company also limits its exposure to any single issuer to 5% or
less of the total portfolio's market value at the time of purchase, with the
exception of U.S. government and agency securities. As of December 31, 2005 and
2004, the largest single non-U.S. government and government agencies issuer
accounted for less than 2% of the aggregate market value of the externally
managed portfolios.

F-37

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS, OR AS
OTHERWISE STATED)

Other accounts receivable as of December 31, 2005 and 2004 consist
principally of amounts relating to technical services engagements and include
$7.0 million and $7.3 million in billed accounts receivable and $2.5 million and
$2.3 million in unbilled amounts for work in progress. As of December 31, 2005,
two customers accounted for approximately 24% and 16% of the technical services
other accounts receivable balance. As of December 31, 2004, one customer
accounted for approximately 37% of the technical services other accounts
receivable balance. No other customers accounted for more than 10% of the
technical services other accounts receivable balance as of December 31, 2005 and
2004. The Company extends credit to its customers in the normal course of
business and monitors the balances of individual accounts to assess any
collectibility issues. The Company, and its predecessor, have not experienced
significant losses related to receivables in its technical services business in
the past.

The premiums receivable balances of $146.8 million and $146.8 million as of
December 31, 2005 and 2004 include approximately $20.3 million, or 13.8%, and
approximately $30.2 million, or 20.6%, from one third party agent that sources
the residential builders' and contractors' program that provides new home
contractors throughout the U.S. with general liability, builders' risk and
excess liability insurance coverages as well as reinsurance for warranty
coverage (known as the "HBW program") The Company has not experienced any losses
related to premiums receivables from this third party agent to date and monitors
the aged premiums receivable balances on a monthly basis.

Concentrations related to losses and loss adjustment expenses recoverable
from reinsurers are discussed further in Note 9.

B) CONCENTRATIONS OF PREMIUM PRODUCTION

The Company generates its business primarily through brokers and to a much
lesser extent direct relationships with insurance companies. During the year
ended December 31, 2005, one broker accounted for approximately 10% of the
specialty insurance segment's gross premiums written and three brokers accounted
for approximately 42%, 25% and 11% of the specialty reinsurance segment's gross
premiums written. No other brokers accounted for more than 10% of the specialty
insurance or the specialty reinsurance segments' gross written premium for the
year ended December 31, 2005.

During the year ended December 31, 2004, one broker accounted for
approximately 11% of the specialty insurance segment's gross premiums written
and four brokers accounted for approximately 31%, 21%, 16% and 11% of the
specialty reinsurance segment's gross premiums written. No other brokers
accounted for more than 10% of the underwriting segments' gross written premium
for the year ended December 31, 2004.

During the period from May 23, 2003 to December 31, 2003, two brokers
accounted for approximately 52% and 23% of the specialty insurance segment's
gross premiums written and four brokers accounted for approximately 41%, 22%,
20% and 15% of the specialty reinsurance segment's gross premiums written. No
other brokers accounted for more than 10% of the underwriting segments' gross
written premium for the period from May 23, 2003 to December 31, 2003. The
Company's relationship with its brokers is discussed further in Note 23.

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

During the years ended December 31, 2005 and 2004, the HBW program
accounted for approximately $165.9 million, or 42.3% and $150.6 million, or
57.7%, of the specialty insurance segment gross written premiums for the years
ended December 31, 2005 and 2004. The Company did not write the HBW program
during the period from May 23, 2003 to December 31, 2003. Policies underwritten
in this program are sourced by one third party agent that the Company believes
is a large and established specialist in this class of business.

C) RESTRICTED ASSETS

The Company is required to maintain assets on deposit with various
regulatory authorities to support

F-38

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS, OR AS
OTHERWISE STATED)

its insurance and reinsurance operations. These requirements are generally
promulgated by the regulations of the individual locations within which the
Company operates. These funds on deposit are available to settle insurance and
reinsurance liabilities.

The Company participates in the Lloyd's of London market through Syndicate
4000 at Lloyd's and has dedicated a significant amount of its capital to the
Lloyd's business. The regulations of the Council of Lloyd's determine the amount
of premium that may be written, also known as stamp capacity, based on the
Company's funds at Lloyd's. The Company will maintain funds at Lloyd's for every
underwriting year in which it has business through Syndicate 4000 at Lloyd's.
These funds may not be withdrawn until each underwriting year is closed which
currently takes three years. Traditionally, three years have been necessary to
report substantially all premiums associated with an underwriting year and to
report most related claims, although claims may remain unsettled after the
underwriting year is closed. A Lloyd's syndicate typically closes an
underwriting year by reinsuring outstanding claims on that underwriting year
with the participants of the next underwriting year. As of December 31, 2005 and
2004, cash and investments with a market value of $143.2 million and $109.4
million are held as security in relation to the Company's underwriting at
Lloyd's.

The Company has also issued letters of credit ("LOC") under its Credit
Agreement described in Note 18, for which cash and cash equivalents and
investments are pledged as security, in favor of certain ceding companies to
collateralize its obligations under contracts of insurance and reinsurance and
in favor of a landlord relating to a lease agreement for office space.

The Company also utilizes trust funds in certain large transactions where
the trust funds are set up for the benefit of the ceding companies, and
generally take the place of letter of credit requirements. In addition, the
Company holds cash and cash equivalents and investments in trust to fund the
Company's obligations associated with the assumption of environmental
remediation liability.

The fair values of these restricted assets by category at December 31, 2005
and 2004 are as follows:

2005 2004
--------------------------- ---------------------------
CASH AND CASH CASH AND CASH
EQUIVALENTS INVESTMENTS EQUIVALENTS INVESTMENTS
------------- ----------- ------------- -----------

Deposits with U.S. regulatory authorities.. $ 422 $ 29,328 $ 100 $ 29,356
Funds deposited with Lloyd's............... 35,472 107,759 20,018 89,343
LOC pledged assets......................... 17,865 199,342 3,000 138,553
Trust funds................................ 15,544 118,686 17,662 84,403
Amounts held in trust funds related to
deposit liabilities..................... 13,540 38,316 1,702 40,492
------- -------- ------- --------
Total................................... $82,843 $493,431 $42,482 $382,147
======= ======== ======= ========

D) LEASE COMMITMENTS

The Company leases office space and furniture and equipment under operating
lease agreements. Certain office space leases include an escalation clause that
calls for annual increases to the base rental payments. Rent expenses are being
recognized on a straight-line basis over the respective lease terms. Future
annual minimum payments under non-cancelable operating leases as of December 31,
2005, are as follows:

F-39

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

YEAR ENDING DECEMBER 31,
------------------------
2006.................................................................. $ 5,588
2007.................................................................. 5,142
2008.................................................................. 3,480
2009.................................................................. 3,392
2010.................................................................. 3,133
2011 and thereafter................................................... 21,896
-------
Total................................................................. $42,631
=======

Total rent expense under operating leases for the years ended December 31,
2005 and 2004 and for the period from May 23, 2003 (date of incorporation) to
December 31, 2003, was approximately $5.3 million, $4.4 million and $1.4
million.

E) BUSINESS ACQUISITIONS

As discussed in Note 4, under the terms of the ESC purchase agreement, the
former shareholders of ESC, including certain officers and employees of the
Company, have a right to receive an earn-out payment that is contingent upon ESC
achieving specified earnings targets as defined in the purchase agreement. Under
the earn-out arrangements, if ESC's net income before interest, taxes,
depreciation and amortization ("EBITDA") for the two-year period ending December
31, 2005, is $7.5 million or greater, the Company is obligated to pay an
additional $5.0 million to ESC's previous shareholders. If EBITDA is greater
than $7.0 million and less than $7.5 million for the two-year period ending
December 31, 2005 then the Company is required to pay a pro rata portion of the
$5.0 million. For the purposes of the earn-out computation, EBITDA excludes (i)
the effect of the purchase method of accounting adjustments relating to the ESC
acquisition, (ii) bonuses inconsistent with ESC's past practice paid to any of
ESC's prior shareholders who remain employees of ESC, and (iii) charges or
allocations from the Company to ESC for any management or overhead where the
Company provides no services to ESC.

An accrual for an additional earn-out distribution to ESC's previous
shareholders of $5.0 million as of December 31, 2005 has been recorded as an
adjustment to the purchase price of ESC given ESC has achieved these EBITDA
targets for the two-year period ended December 31, 2005.

F) TAXATION

Quanta Holdings is a Bermuda corporation and, except as described in Note
14 below, neither it nor its non-U.S. subsidiaries have paid or provided for
U.S. income taxes on the basis that they are not engaged in a U.S. trade or
business or otherwise subject to taxation in the U.S. However, because
definitive identification of activities which constitute being engaged in a
trade or business in the U.S. is not provided by the Internal Revenue Code of
1986, regulations or court decisions, there can be no assurance that the
Internal Revenue Service will not contend that the Company or its non-U.S.
subsidiaries are engaged in a U.S. trade or business or otherwise subject to
taxation. If the Company or its non-U.S. subsidiaries were considered to be
engaged in a trade or business in the U.S., the Company or such subsidiaries
could be subject to U.S. tax at regular corporate tax rates on its taxable
income, if any, that is effectively connected with such U.S. trade or business
plus an additional 30% "branch profits" tax on such income remaining, if any,
after the regular corporate taxes, in which case there could be a significant
adverse effect on the Company's results of operations and its financial
condition.

G) EMPLOYMENT AND RETENTION AGREEMENTS

The Company has entered into employment and retention agreements with
certain officers and key employees that provide for severance payments and
benefits under certain circumstances.

14. TAXATION

F-40

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

Under current Bermuda law, the Company and its Bermuda subsidiaries are not
required to pay any taxes in Bermuda on its income or realized capital gains.
The Company has received an undertaking from the Minister of Finance of Bermuda
that, in the event of any taxes being imposed, the Company will be exempt from
taxation in Bermuda until March 2016.

Quanta U.S. Holdings and its operating subsidiaries are subject to income
taxes imposed by U.S. authorities. The Company's operating units in the United
Kingdom and Ireland are subject to the relevant income taxes imposed by those
jurisdictions.

Effective August 15, 2003, Quanta U.S. Re made an election under Section
953(d) of the Internal Revenue Code of 1986 ("IRC"), as amended, to be treated
as a domestic corporation for United States federal income tax purposes. As a
result of the "domestic election", Quanta U.S. Re is subject to U.S taxation on
its worldwide income as if it were a U.S. corporation.

Quanta U.S. Holdings together with its operating subsidiaries have elected
to file a consolidated U.S. tax return. Under IRC Section 953(d), net operating
losses generated by Quanta U.S. Re may only be carried back two years and
forward twenty years and offset past or future U.S. federal taxable income that
is generated by Quanta U.S. Re.

The Company is not subject to taxation other than as stated above. There
can be no assurance that there will not be changes in applicable laws,
regulations or treaties, which might require the Company to become subject to
additional taxation (see Note 13(f)).

The consolidated income tax provisions for the years ended December 31,
2005 and 2004 and for the period from May 23, 2003 (date of incorporation) to
December 31, 2003, are as follows and were allocated wholly to income from
continuing operations:

2005 2004 2003
-------- ------- --------
Current tax expense (benefit) .................. $ -- $ -- $ --
U.S. Federal ................................ -- -- --
U.S. State .................................. 244 -- --
Non-U.S ..................................... -- -- --
-------- ------- -------
Total current expense (benefit) .......... 244 -- --
-------- ------- -------
Deferred tax expense (benefit)
U.S. Federal ................................ (11,447) (7,318) (6,030)
U.S. State .................................. -- -- --
Non-U.S ..................................... -- -- --
Change in valuation allowance ............... 11,447 7,318 6,030
Total deferred expense (benefit) ......... -- -- --
-------- ------- -------
Total income tax expense (benefit) ............. $ 244 $ -- $ --
======== ======= =======

No current U.S. Federal or foreign income taxes were paid or payable during
the years ended December 31, 2005 and 2004 or the period from May 23, 2003 (date
of incorporation) to December 31, 2003.

Income tax benefit attributable to income from continuing operations for
the years ended December 31, 2005 and 2004 differed from amounts computed by
applying the U.S. federal income tax rate of 35% to income before taxation as a
result of the following:

2005 2004
-------- --------
Computed expected tax benefit ........................... $(37,083) $(19,103)
Foreign loss not subject to U.S. tax .................... 24,637 11,453
Income subject to tax at foreign rates .................. 653 133
Other ................................................... 346 199
Effect of valuation allowance ........................... 11,447 7,318
-------- --------
Actual income tax expense (benefit) ..................... $ -- $ --
======== ========

F-41

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

Deferred income taxes reflect the tax impact of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and those for income tax purposes. The significant components of the
net deferred tax assets and liabilities as of December 31, 2005 and 2004 are as
follows:

2005 2004
-------- --------
Deferred tax assets:
Bonus provisions ..................................... $ 2,374 $ 584
Reserves for losses and loss adjustment expenses ..... 3,879 1,197
Unearned premiums .................................... 4,097 3,031
Deferred income ...................................... 380 112
Net unrealized investment losses ..................... -- 240
Net operating loss carry forwards .................... 17,500 13,502
Other ................................................ 12 4
-------- --------
Total deferred tax assets ......................... 28,242 18,670

Deferred tax liabilities:
Deferred acquisition costs ........................... (1,701) (1,129)
Net unrealized investment gains ...................... -- --
Amortization of intangible assets .................... (759) (411)
Prepaid expenses ..................................... (98) (2,728)
Depreciation of property and equipment ............... (727) (1,020)
Other ................................................ (162) (34)
-------- --------
Total deferred tax liabilities .................... (3,447) (5,322)
Valuation allowance ..................................... (24,795) (13,348)
-------- --------
Net deferred tax liability .............................. $ -- $ --
======== ========

As of December 31, 2005 and 2004, the Company has a net deferred tax asset
relating to net operating loss carry forwards for U.S. federal income tax
purposes of approximately $51.8 million and $38.4 million, which are available
to offset future U.S. federal taxable income through 2023. As of December 31,
2005 and 2004, approximately $9.8 million and $2.3 million of the net operating
loss carry forwards are dual consolidation losses generated by Quanta U.S. Re
and can only be used to offset future taxable income earned by Quanta U.S. Re.

As a new company with limited operating history, the realization of
deferred tax assets from future taxable income and future reversals of existing
taxable temporary differences is currently neither assured nor accurately
determinable. Accordingly, the Company has recorded a full valuation against
100% of its net deferred tax assets as of December 31, 2005 and 2004.

15. SHAREHOLDERS' EQUITY

A) AUTHORIZED SHARES

The authorized ordinary share capital of the Company consists of
200,000,000 common shares of par value $0.01 each. The following table is a
summary of common shares issued and outstanding for the years ended December 31,
2005 and 2004:

2005 2004
---------- ----------
Issued and outstanding common shares, beginning of
period............................................. 56,798,218 56,798,218
Shares issued ........................................ 13,148,643 --
---------- ----------
Issued and outstanding common shares, end of
period ............................................ 69,946,861 56,798,218
========== ==========

See Note 1 for a further discussion of 13,136,841 common shares issued
during the year ended December 31, 2005. In addition, 11,802 common shares were
issued to two directors in lieu of their directors

F-42

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

fees of $72 during the year ended December 31, 2005.

B) FOUNDERS WARRANTS AND OPTIONS

In connection with the closing of the Private Offering, the Company issued
(a) to entities controlled by the Founders, warrants to purchase up to 4.5% of
the aggregate number of outstanding common shares as of September 3, 2003, or
2,542,813 common shares and (b) to certain of its officers, options to purchase
up to 2.15% of the aggregate number of outstanding common shares as of September
3, 2003, or 1,214,900 common shares.

The warrants and options issued are exercisable at a price of $10.00 per
share. The warrants were immediately and fully exercisable at the time of
issuance and the options become exercisable in four equal annual increments
during a four year period commencing on the first anniversary date of the grant
and become fully exercisable on the fourth anniversary of the grant date.

Included in the general and administrative expenses in the consolidated
statement of operations and comprehensive (loss) income for the period from May
23, 2003 (date of incorporation) to December 31, 2003 is $16.7 million of
non-cash stock compensation expense relating to (a) common shares issued to the
Founders in connection with the initial capitalization of the Company, resulting
in a total expense of $15.0 million that represented the aggregate difference
between the Founders' cost per share of $0.01 and the Private Offering price per
share of $10.00 and (b) common shares issued to certain directors and officers
of the Company, resulting in a total expense of $1.7 million that represented
the difference between a cost per share to those directors and officers of $9.30
and the Private Offering price per share of $10.00.

16. MANDATORILY REDEEMABLE PREFERRED SHARES

The authorized preference share capital of the Company consists of
25,000,000 preferred shares of a par value of $0.01 each.

On December 20, 2005, the Company issued 3,000,000 10.25% Series A
Preferred Shares at $25 per share, par value $0.01 per share for cash. Upon
liquidation, dissolution or winding-up, the holders of the series A preferred
shares will be entitled to receive from our assets legally available for
distribution to shareholders a liquidation preference of $25 per share, plus
declared but unpaid dividends and additional amounts, if any, to the date fixed
for distribution. Dividends on the Series A Preferred Shares will be payable on
a non-cumulative basis only when, as and if declared by our board of directors,
quarterly in arrears on the fifteenth day of March, June, September and December
of each year, commencing on March 15, 2006. Dividends declared on the Series A
Preferred Shares will be payable at a rate equal to 10.25% of the liquidation
preference per annum (equivalent to $2.5625 per share).

On and after December 15, 2010, we may redeem the Series A Preferred
Shares, in whole or in part, at any time, at the redemption price as described
in the table below, plus declared but unpaid dividends and additional amounts,
if any, to the date of redemption. We may not redeem the Series A Preferred
Shares before December 15, 2010 except that we may redeem the Series A Preferred
Shares before that date pursuant to certain tax redemption provisions as
described in this prospectus supplement. If we experience a change of control,
we may be required to make offers to redeem the series A preferred shares at a
price of $25.25 per share, plus declared but unpaid dividends and additional
amounts, if any, to the date of redemption. The Series A Preferred Shares have
no stated maturity and will not be subject to any sinking fund and will not be
convertible into any of our other securities or property. The proceeds are being
used for general corporate purposes.

F-43

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

Per Share
Year Redemption Price
---------------------- ----------------
2010.................. $28.00
2011.................. $27.40
2012.................. $26.80
2013.................. $26.20
2014.................. $25.60
2015 and thereafter... $25.00

17. EMPLOYEE BENEFIT PLANS

A) PENSION PLANS

The Company provides pension benefits to eligible employees through various
defined contribution plans, including 401(k) plans, sponsored by the Company.
Under these plans, employee contributions may be supplemented by the Company
matching donations based on the level of employee contribution up to certain
maximum amounts. Expenses incurred relating to these plans during the years
ended December 31, 2005 and 2004 and for the period from May 23, 2003 (date of
incorporation) to December 31, 2003, totaled $1.3 million, $0.9 million and $0.1
million.

B) OPTIONS AND STOCK BASED COMPENSATION

In July 2003, the shareholders of the Company approved the long-term
incentive plan (the "Incentive Plan"). The Incentive Plan provides for the grant
to eligible employees, directors and consultants of stock options, stock
appreciation rights, restricted shares, restricted share units, performance
awards, dividend equivalents and other share-based awards. The Incentive Plan is
administered by the Company and the Compensation Committee of the Board of
Directors. The Compensation Committee determines the dates, amounts, exercise
prices, vesting periods and other relevant terms of the awards. Recipients of
awards may exercise at any time after they vest and before they expire, except
that no awards may be exercised after ten years from the date of grant.

As of December 31, 2005 and 2004, the maximum number of shares available
for award and issuance under the Incentive Plan was 9,350,000 and 5,850,000.

I) OPTIONS

In accordance with SFAS 123, the fair value of options granted is estimated
on the date of the grant using the Black-Scholes option pricing model with the
following weighted average assumptions for the year ended December 31, 2005: a
dividend yield of 0%; expected volatility of 24.0%; a risk-free interest rate of
4.14% and an expected life of the options of approximately 7 years. Weighted
average assumptions for the year ended December 31, 2004 were: a dividend yield
of 0%; expected volatility of 24.0%; a risk-free interest rate of 4.02% and an
expected life of the options of approximately 7 years.Weighted average
assumptions for the period from May 23, 2003 (date of incorporation) to December
31, 2003 were: a dividend yield of 0%; expected volatility of 24.0%; a risk-free
interest rate of 3.75% and an expected life of the options of approximately 7
years.

The following is a summary of stock options and related activity:

F-44

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

PERIOD FROM MAY 23,
YEAR ENDED DECEMBER YEAR ENDED DECEMBER 2003 TO DECEMBER
31, 2005 31, 2004 31, 2003
--------------------- -------------------- ---------------------
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- --------- -------- --------- ---------

Outstanding - beginning
of period........... 3,052,400 $ 9.99 2,892,900 $ 10.01 -- $ --
Granted................ 1,144,608 8.66 237,000 9.62 2,892,900 10.01
Exercised.............. -- -- -- -- -- --
Forfeited.............. (794,814) (9.83) (77,500) (10.02) -- --
--------- ------ --------- ------- --------- ------
Outstanding - end of
period.............. 3,402,194 $ 9.55 3,052,400 $ 9.99 2,892,900 $10.01
========= ====== ========= ======= ========= ======

The following table summarizes information about the Company's stock
options for options outstanding as of December 31, 2005:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- --------------------
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE REMAINING NUMBER OF EXERCISE
RANGE OF EXERCISE PRICES OPTIONS PRICE CONTRACTUAL LIFE OPTIONS PRICE
------------------------ --------- -------- ---------------- --------- --------

$4.59................... 16,666 $ 4.59 6.94 years -- $ --
$6.39................... 10,000 $ 6.39 6.69 years -- $ --
$7.85................... 182,000 $ 7.85 6.33 years -- $ --
$8.55 - $9.00........... 990,378 $ 8.88 6.70 years 42,125 $ 8.68
$10.00 - $10.50......... 2,155,150 $10.00 7.69 years 1,398,615 $10.00
$11.50 - $12.00......... 26,000 $11.58 8.09 years 6,500 $11.58
$12.50.................. 22,000 $12.50 8.33 years 5,500 $12.50

The Company did not incur any compensation expense relating to the grant of
option awards during the years ended December 31, 2005 and 2004 and the period
from May 23, 2003 (date of incorporation) to December 31, 2003 because all
options granted had an exercise price that equaled the fair market value of the
underlying common stock of the Company on the date of the grant.

II) PERFORMANCE SHARE UNITS

During the year ended December 31, 2005, Performance Share Units were
awarded to various employees pursuant to the Company's 2003 Long Term Incentive
Plan. The number of shares of common stock to be received under these awards at
the end of the performance period will depend on the attainment of performance
objectives based on the Company's GAAP average return on shareholders' equity
over the three year period ending December 31, 2007. The grantees will receive
shares of common stock in an amount ranging from zero to 300% percent of the
share award (as such amount is defined in the grant).

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

During the year ended December 31, 2005, awards for 162,223 Performance
Share Units were granted at a weighted average grant date fair value of $7.43.
During the year ended December 31, 2004 and period from May 23 (date of
incorporation) to December 31, 2003, no awards for Performance Share Units were
granted.

18. CREDIT AGREEMENT

On July 11, 2005, Quanta Holdings and certain designated insurance
subsidiaries entered into an amended and restated credit agreement dated July
11, 2005, providing for a secured bank letter of credit

F-45

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

facility and a revolving credit facility with a syndicate of lenders in the
amount of $250 million. Up to $25 million may be borrowed under the facility on
a revolving basis for general corporate purposes and working capital
requirements. The facility is secured by specified investments of the insurance
subsidiaries that use the facility to issue letters of credit. The availability
for issuances of letters of credit and borrowings is based on the amount of
eligible investments pledged and the absence of material adverse change
provisions. Regulatory restrictions will also limit the amount of investments
that may be pledged by our U.S. insurance borrowers and, consequently, the
amount available for letters of credit and borrowings under the facility to
those borrowers. The facility terminates on July 11, 2008. The credit agreement
has certain financial covenants, including maximum leverage ratio, minimum
consolidated net worth provisions and maintenance of the Company's insurance
ratings. In addition, the credit agreement contains certain covenants
restricting the activities of Quanta Holdings and its subsidiaries, such as the
incurrence of additional indebtedness, liens and dividends and other payments to
Quanta Holdings. Quanta Holdings has also unconditionally and irrevocably
guaranteed all of the obligations of its subsidiaries to the lenders. The
Company uses the letter of credit facility primarily to provide security to its
insured or reinsured clients under the terms of its insurance and reinsurance
contracts. The Company was in compliance with all covenants at December 31,
2005. However, as discussed in Note 23, a further downgrade in our B++ rating
from A.M. Best would be an event of default that may require the Company to cash
collateralize a portion or all of the outstanding letters of credit issued under
the facility, which may be accomplished through the substitution or liquidation
of collateral.

19. RELATED PARTY TRANSACTIONS

A) FBR

The Company entered into an advisory agreement in December 2005 with FBR.
Under this agreement, FBR may from time to time provide financial advisory
advice and assistance to the Company in connection with certain mergers and
acquisitions. The agreement is effective until December, 2006. Under the terms
of the agreement, FBR's compensation for services provided shall be agreed
between the Company and FBR on an arms-length basis.

In connection with the Company's issuance of 13,136,841 common shares and
3,000,000 preferred shares during the year ended December 31, 2005, as discussed
in Notes 1, 15 and 16, FBR received $3.4 million and $2.4 million for
underwriting fees.

In connection with the issuance by Quanta Trust and Quanta Trust II of the
Trust Preferred Securities, FBR indirectly received a portion of the $1.2
million and $0.4 million of issuance costs from the placement agents for
providing financial advisory services.

In connection with the Private Offering, FBR received a placement fee equal
to 7.0% of the gross proceeds received by the Company from the sale of a portion
of the securities sold in the offering. This fee was approximately $33.8
million, and was recorded as offering costs as a reduction to additional paid-in
capital.

B) ESC

ESC has a contractual agreement with Industrial Recovery Capital Holdings
Company ("IRCC") to perform environmental remediation services for IRCC. IRCC is
owned by certain shareholders and officers of the Company. As of December 31,
2005 and 2004, receivables due to ESC from IRCC were negligible. For the years
ended December 31, 2005 and 2004 and for the period from May 23, 2003 (date of
incorporation) to December 31, 2003, revenues related to services provided to
IRCC totaled $0.1 million, $0.2 million and $0.3 million. In addition ESC
performs incidental administrative services on behalf of IRCC for no fee
pursuant to an agreement entered into in connection with the acquisition of ESC.

As described in Notes 4 and 13(e), under the terms of the ESC purchase
agreement, the Company has accrued an additional $5.0 million earn-out payment
that is recorded as a payable at December 31, 2005 to ESC's former shareholders,
including a director, certain officers and employees of the Company.

F-46

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

20. LITIGATION

During the years ended December 31, 2005 and 2004, the Company became
involved in various claims and legal proceedings in the normal course of its
business which it believes will not be material to its financial condition, or
results of operations or cash flows.

21. STATUTORY FINANCIAL INFORMATION AND DIVIDEND RESTRICTIONS

The Company is subject to a 30% withholding tax on certain dividends and
interest received from its U.S. subsidiaries.

The Company's insurance and reinsurance subsidiaries are subject to
insurance laws and regulations in the jurisdictions in which they operate, which
are Bermuda, the United States, Ireland and the United Kingdom. The regulations
in Bermuda, the United States and Ireland include restrictions that limit the
amount of dividends or other distributions available to shareholders without
prior approval of the insurance regulatory authorities. Typically, these
restrictions relate to minimum levels of solvency, capital and liquidity as
defined by the relevant insurance laws and regulations. Statutory capital and
surplus as reported to the relevant regulatory authorities for the principal
operating subsidiaries of the Company in these jurisdictions as of December 31,
2005 was:

BERMUDA UNITED STATES IRELAND
------------------- ----------------- -----------------
2005 2004 2005 2004 2005 2004
-------- -------- ------- ------- ------- -------

Required statutory capital
and surplus............... $122,313 $101,250 $53,539 $32,992 $ 3,555 $ 4,066
Actual statutory capital
and surplus............... 410,749 381,213 95,382 63,934 27,724 30,030

The differences between statutory financial statements and statements
prepared in accordance with US GAAP vary by jurisdiction. However, in general
the primary differences are that statutory financial statements do not reflect
certain non-admitted assets, which may include deferred acquisition costs,
intangible assets, and the unrealized appreciation on investments.

The Company's U.S. operations required statutory capital and surplus is
determined using risk based capital tests, which is the threshold that
constitutes the authorized control level. If a Company falls below the control
level, the commissioner is authorized to take whatever regulatory actions
considered necessary to protect policyholders and creditors.

As at December 31, 2005, there are no statutory restrictions on the
payment of dividends from retained earnings by the Company's subsidiaries in
Bermuda as the minimum statutory capital and surplus requirements were satisfied
by the share capital and additional paid in capital of these Companies in all
jurisdictions in which it operates. In Bermuda, certain dividend payments from
retained earnings require an affidavit signed by two directors and the Principal
Representative stating that the Company's minimum statutory capital and surplus
requirements are still met after the dividend. In the U.S. and Ireland, any
dividend payments from retained earnings require prior approval from the
insurance regulatory authorities. The Company believes that such approval is
unlikely for its U.S. subsidiaries as these companies currently have accumulated
losses. Further, because Quanta U.S. Re, a Bermuda company, is a subsidiary of
Quanta Indemnity, any dividends it pays to Quanta Indemnity would also be
subject to the above restrictions relating to U.S. subsidiaries. At December 31,
2005, the minimum levels of solvency and liquidity were met in all jurisdictions
in which the Company operates. Restrictions relating to distributions by Quanta
4000 and Quanta 4000 Holdings, Ltd. are described in Note 7. See also Note 23.

22. SIGNIFICANT TRANSACTIONS

Following shortly after Hurricanes Katrina and Rita, we discontinued
writing any new and most renewal property business in our property reinsurance
and technical risk property business, except for our HBW program and other
program business. In addition, we have retroceded substantially all the in-force
business, as of October 1, 2005, in these lines (other than our program
business) by a portfolio transfer to a third party reinsurer, which we refer to
as the Property Transaction. The Property Transaction limits our property
reinsurance and technical risk property losses to those relating to Hurricane
Wilma and those we

F-47

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

have incurred through September 30, 2005 (including incurred but not reported
losses), which includes losses relating to Hurricanes Katrina and Rita. Under
the Property Transaction, we also transferred all future premiums to be earned
for that business and loss and acquisition expenses incurred from and after
October 1, 2005 to the third party reinsurer.

The impact of the transfer of the property reinsurance business subject to
the Property Transaction, as recorded in our results of operations in the fourth
quarter of 2005, is a net expense of approximately $1.7 million. This results
from ceding approximately $30.5 million of net unearned premium reserves as of
October 1, 2005 at a price of approximately $31.6 million, reflecting the agreed
value of the business, and ceding two assumed property reinsurance contracts
100% from their inceptions to the third party reinsurer, which eliminates
approximately $0.6 million of previously recorded net income as of October 1,
2005. In addition, during the period from October 1, 2005 to December 31, 2005,
as additional risks have attached, the Company has ceded a further approximately
$16.2 million of net unearned premium reserves at a price of approximately $16.2
million.

With respect to the transfer of the technical property risk business
subject to the Property Transaction, the Company ceded approximately $10.1
million of net unearned premiums, which included additional premiums charged by
the reinsurer of approximately $2.0 million, which will be expensed over the
term of the retrocession agreement (October 1, 2005 to December 31, 2006) in
proportion to the amount of protection provided by the retrocession agreement.
Additionally, reinsurance protections associated with the technical risk
property business subject to the Property Transaction that were in-force as of
October 1, 2005 will inure to the benefit of the third party reinsurer. To the
extent these reinsurance agreements expire during the term of the retrocession
agreement, we will be required to purchase additional reinsurance from the third
party reinsurer on August 1, 2006 for a premium of $0.8 million and may be
required to purchase additional new reinsurance protections. In addition, during
the period from October 1, 2005 to December 31, 2005, the Company ceded a
further $0.5 million approximately of net unearned premium reserves, which
included a further $0.1 million of additional premiums charged by the reinsurer.

During the fourth quarter of 2005, we also commuted two of our casualty
reinsurance treaties back to the cedant, which we refer to as the Casualty
Reinsurance Transaction. The impact of the Casualty Reinsurance Transaction
which was recorded in our results of operations in the fourth quarter of 2005,
is a net expense of approximately $1.2 million. This results from the Company
returning approximately $17.0 million of net unearned premium to the cedant as
well as the settlement of loss and loss expense reserves of approximately $25.5
million related to the applicable treaties based on the final settlement. In
addition to settling all of our existing loss and loss expense reserves with
respect to the treaties subject to the Casualty Reinsurance Transaction as of
September 30, 2005, we have been released from all future obligations associated
with the underlying reinsurance treaties.

23. SUBSEQUENT EVENTS

On January 11, 2006, the Underwriters purchased an additional 130,525
10.25% Series A Preferred Shares at the offering price of $25.00 per share,
following the partial exercise of the over-allotment option. The 10.25% Series A
Preferred Shares carry a liquidation preference of $25.00 per share.

A downgrade in the Company's rating below "B++" (very good) will cause a
default in the credit facility. The Company's obligations under the credit
facility are currently fully secured by investments and cash. If a default
occurs under the credit facility, the Company's lenders may require the Company
to cash collateralize a portion or all of the outstanding letters of credit
issued under the facility, which may be

F-48

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS,
OR AS OTHERWISE STATED)

accomplished through the substitution or liquidation of collateral. The lenders
would also have the right, among other things, to cancel outstanding letters of
credit issued under the facility. Further, a downgrade in the Company's rating
below "B++" (very good) will trigger termination provisions or require the
posting of additional security in certain of the Company's other insurance and
reinsurance contracts. As a result, the Company may be required to post
additional security either through the issuance of letters of credit or the
placement of securities in trust under the terms of those insurance or
reinsurance contracts.

As of March 24, 2006, the Company is not writing new business in its
professional liability, environmental, and marine and aviation insurance product
lines or in its reinsurance and structured product lines and it has determined
to run-off the surety line. Certain of the Company's insurance and many of its
reinsurance contracts contain termination rights triggered by the A.M. Best
rating downgrade. Additionally, many of the Company's other insurance contracts
and certain of its reinsurance contracts provide for cancellation at the option
of the policyholder regardless of the Company's financial strength rating,
including the contract with its program manager of the HBW program. As of March
24, 2006, the Company had received notice of cancellation on approximately 2.3%
of its in-force policies, calculated using gross premiums written as a
percentage of total gross written premiums during 2005. Based on discussions
with the program manager of the HBW program, the Company understands that the
program manager will divert a substantial portion of the HBW program business to
other carriers. As a result, the Company estimates that the gross premiums
written under the HBW program during 2006 will be less than 25% of the gross
premiums written during 2005. Further, the Company has also been notified by
several significant clients in its insurance and reinsurance product lines that
they do not intend to renew their contracts with the Company. The Company has
also been removed from the approved listing of several of its important brokers,
including Aon Corporation and Marsh Inc. The downgrade of the Company's
financial rating or the continued qualification of the Company's current rating
continues to cause concern about its viability among brokers and other marketing
sources, resulting in a movement of business away from the Company to other
stronger or more highly rated carriers. The Company believes the recent
downgrade of its financial rating is adversely affecting its Lloyd's operations.

As a result of the above, the Company is working to preserve shareholder
value and respond to the rating actions taken by A.M. Best. A special committee
of the Company's Board of Directors has engaged FBR and J.P. Morgan Securities
Inc. as financial advisors, to assist the Company in evaluating strategic
alternatives, including the potential sale of some or all of its businesses, the
run off of certain product lines or the business or a combination of
alternatives.

At December 31, 2005, Quanta Bermuda's and Quanta U.S. Re's solvency and
liquidity margins and statutory capital and surplus were substantially in excess
of the minimum levels required by Bermuda insurance laws. At December 31, 2005,
Quanta Indemnity and Quanta Specialty Lines statutory capital and surplus
exceeded their calculated risk-based capital authorized control levels. At
December 31, 2005, Quanta Europe's actual statutory capital and surplus was
substantially in excess of the minimum levels required by Irish law. At December
31, 2005, Syndicate 4000 met the Financial Service Authority's capital resources
requirement, and its individual capital assessment for the year ending December
31, 2006 has been reviewed and approved by Lloyd's. However, as a result of the
Company's recent ratings downgrade by A.M. Best, Lloyd's has informed Syndicate
4000 that in order for it to continue underwriting in the Lloyd's of London
market during the 2007 underwriting year, Syndicate 4000 must diversify its
capital base with one or more third party capital source(s), which must be in
place by November 30, 2006. If Syndicate 4000 fails to meet Lloyd's capital
diversification requirements by November 30, 2006, it will no longer be able to
participate in the Lloyd's of London market in future underwriting years.

As of March 27, 2006, the Company has investment balances of approximately
$814.6 million and cash and cash equivalent balances of approximately $197.1
million, totaling $1,011.7 million. These investment and cash and cash
equivalent balances include approximately $260.5 million that is pledged as
collateral for letters of credit, approximately $169.5 million held in trust
funds for the benefit of ceding companies and to fund the Company's obligations
associated with the assumption of an environmental remediation liability, $156.4
million that is held by Lloyd's to support its underwriting activities, $52.7
million held in trust funds that are related to the Company's deposit
liabilities and $30.7 million that is on deposit with, or has been pledged to,
U.S. state insurance departments. After giving effect to these assets pledged or
placed in trust,

F-49

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS, OR AS
OTHERWISE STATED)

the Company presently has unrestricted net investment balances of $234.0 million
and unrestricted net cash and cash equivalent balances of approximately $107.9
million.

As of December 31, 2005, Quanta Holdings has cash and cash equivalent
balances of $14.4 million and is able to cause Quanta Bermuda to pay it up to
$99.8 million in dividends or to lend its cash as needed to meet interest,
dividend and expense requirements. However, a dividend or loan of this amount
would likely have negative rating implications. Management believes that Quanta
Holdings currently has sufficient assets to pay its liabilities as they become
due. However, Quanta Holdings' operating subsidiaries are subject to regulatory
requirements which may restrict, and in some cases prohibit, their ability to
pay dividends to Quanta Holdings.

24. UNAUDITED QUARTERLY FINANCIAL INFORMATION

The following is a summary of quarterly financial data for the years ended
December 31, 2005 and 2004, and for the period from May 23, 2003 (date of
incorporation) to December 31, 2003:

QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
DECEMBER SEPTEMBER JUNE MARCH
31, 2005 30, 2005 31, 2005 30, 2005
--------- --------- --------- ---------

Net premium earned ............................. $ 67,034 $ 100,546 $ 105,009 $ 91,486
Technical service revenues ..................... 15,750 16,019 8,233 7,263
Net investment income .......................... 8,778 6,991 6,187 5,225
Net realized (losses) gains on investments ..... (12,231) (1,168) 862 (483)
Net foreign exchange gains (loss) .............. 666 (311) 88 (112)
Other (loss) income ............................ (250) 1,945 2,011 1,573
--------- --------- --------- ---------
Total revenues .............................. 79,747 124,022 122,390 104,952
--------- --------- --------- ---------
Net loss and loss expenses incurred ............ (82,982) (121,087) (62,519) (57,496)
Acquisition costs .............................. (6,906) (22,998) (19,243) (20,477)
Direct technical service costs ................. (13,034) (13,133) (5,999) (4,861)
General and administrative expenses ............ (29,509) (23,574) (23,976) (20,871)
Interest expense ............................... (1,195) (1,200) (944) (826)
Depreciation of fixed assets and amortization
of intangible assets ........................ (1,109) (1,079) (959) (842)
--------- --------- --------- ---------
Total expenses .............................. (134,735) (183,071) (113,640) (105,373)
--------- --------- --------- ---------
(Loss) income before income taxes .............. (54,988) (59,049) 8,750 (421)
Income tax (benefit) expense ................... (234) 35 220 223
--------- --------- --------- ---------
Net (loss) income .............................. $ (54,754) $ (59,084) $ 8,530 $ (644)
--------- --------- --------- ---------
Basic loss (income) per share .................. $ (0.94) $ (1.04) $ 0.15 $ (0.01)
Diluted loss (income) per share ................ $ (0.94) $ (1.04) $ 0.15 $ (0.01)

QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
DECEMBER SEPTEMBER JUNE MARCH
31, 2004 30, 2004 30, 2004 31, 2004
--------- --------- -------- --------

Net premium earned ............................. $ 87,527 $ 65,523 $ 56,855 $ 27,235
Technical service revenues ..................... 9,905 7,727 8,346 6,507
Net investment income .......................... 4,496 3,258 3,318 3,235
Net realized (losses) gains on investments ..... (437) 297 (827) 1,195
Net foreign exchange gains (loss) .............. 893 (43) (96) 224
Other income ................................... 1,327 264 235 191
-------- -------- -------- --------
Total revenues .............................. 103,711 77,026 67,831 38,587
-------- -------- -------- --------
Net loss and loss expenses incurred ............ (72,733) (77,963) (32,325) (15,895)
Acquisition costs .............................. (18,117) (16,424) (12,837) (6,617)
Direct technical service costs ................. (7,740) (5,231) (5,827) (4,384)

F-50

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS, OR AS
OTHERWISE STATED)

General and administrative expenses ............ (18,692) (14,294) (14,577) (15,829)
Interest expense ............................... (71) -- -- --
Depreciation of fixed assets and amortization
of intangible assets ........................ (783) (560) (450) (387)
--------- --------- -------- --------
Total expenses .............................. (118,136) (114,472) (66,016) (43,112)
--------- --------- -------- --------
--------- --------- -------- --------
Net (loss) income .............................. $ (14,425) $ (37,446) $ 1,815 $ (4,525)
--------- --------- -------- --------
Basic loss per share ........................... $ (0.25) $ (0.66) $ 0.03 $ (0.08)
Diluted loss per share ......................... $ (0.25) $ (0.66) $ 0.03 $ (0.08)

PERIOD FROM
QUARTER QUARTER MAY 23,
ENDED ENDED 2003 TO
DECEMBER SEPTEMBER JUNE
31, 2003 30, 2003 30, 2003
-------- --------- -----------

Net premium earned ............................. $ 1,940 $ 3,790 $--
Technical service revenues ..................... 7,890 349 --
Net investment income .......................... 1,941 -- --
Net realized gains on investments .............. 109 -- --
Other income ................................... 126 -- --
-------- -------- ---
Total revenues .............................. 12,006 4,139 --
-------- -------- ---
Net loss and loss expenses incurred ............ (1,191) -- --
Acquisition costs .............................. (164) -- --
Direct technical service costs ................. (6,136) (2,501) --
General and administrative expenses ............ (19,330) (24,866) --
Depreciation of fixed assets and amortization
of intangible assets ........................ (333) (101) --
-------- -------- ---
Total revenues .............................. (27,154) (27,468) --
-------- -------- ---
-------- -------- ---
Net loss ....................................... $(15,148) $(23,329) $--
-------- -------- ---
Basic loss per share ........................... $ (0.27) $ (1.75) $--
Diluted loss per share ......................... $ (0.27) $ (1.75) $--

The following is a summary of the Predecessor's quarterly financial data
for the period from January 1, 2003 to September 2003:

PERIOD FROM
JULY 1, 2003 QUARTER ENDED QUARTER ENDED
TO SEPTEMBER JUNE MARCH
3, 2003 30, 2003 31, 2003
------------- ------------- -------------
(Predecessor) (Predecessor) (Predecessor)

Net premium earned ............................. $ -- $ -- $ --
Technical service revenues ..................... 7,120 6,959 6,271
Net investment income .......................... 2 4 8
Net realized gains (losses) on investments ..... -- -- --
Net foreign exchange gains (loss) .............. -- -- --
Other income ................................... -- -- --
------- ------- -------
Total revenues .............................. 7,122 6,963 6,279
------- ------- -------
Net loss and loss expenses incurred ............ -- -- --
Acquisition costs .............................. -- -- --
Direct technical service costs ................. (5,090) (4,229) (3,673)
General and administrative expenses ............ (1,541) (2,152) (2,129)
Depreciation of fixed assets and amortization
of intangible assets ........................ (39) (58) (53)
------- ------- -------
Total expenses .............................. (6,670) (6,439) 5,855
------- ------- -------

F-51

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS, OR
AS OTHERWISE STATED)

------- ------- -------
Net income ..................................... $ 452 $ 524 $ 424

Basic loss per share ........................... $ 0.41 $ 0.48 $ 0.39
Diluted loss per share ......................... $ 0.41 $ 0.48 $ 0.39

25. SUMMARIZED SUBSIDIARY FINANCIAL INFORMATION

Summarized unconsolidated financial data of Quanta Reinsurance Ltd. is as
follows:

FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2005 2004
------------ ------------
Gross premiums written...................... $272,216 $341,423
Net premiums written........................ 234,421 338,996
======== ========
Net premiums earned......................... 257,115 195,110
Net investment income....................... 9,189 9,970
Net realized (losses) gains on investments.. (3,454) 123
Net foreign exchange (losses) gains......... (1,167) 530
Other income (losses)....................... 829 (141)
-------- --------
Total revenues........................... 262,512 205,592
Net losses and loss expenses................ 237,735 172,311
Acquisition expenses........................ 59,474 42,870
General and administrative expenses......... 14,668 13,697
-------- --------
Total expenses........................... 311,877 228,878
-------- --------
Net loss.................................... $(49,365) $(23,286)
======== ========

AS OF AS OF
DECEMBER 31, DECEMBER 31,
2005 2004
------------ -----------
ASSETS
Investments at fair value......................... $ 221,160 $198,434
Investments in affiliates, at equity ............. 310,554 288,212
Cash and cash equivalents......................... 92,440 10,574
Accrued investment income......................... 1,848 1,620
Premiums receivable............................... 288,871 203,186
Losses and loss adjustment expenses recoverable... 35,390 30
Other accounts receivable......................... 754 --
Net receivable for investments sold............... 4,166 --
Loans to affiliates............................... 35,872 32,734
Deferred acquisition costs, net................... 23,991 38,072
Deferred reinsurance premiums..................... 12,461 2,070
Other assets...................................... 261 177
---------- --------
Total assets................................... $1,027,768 $775,109
========== ========
LIABILITIES
Reserve for losses and loss expenses.............. $ 283,145 $122,125
Unearned premiums................................. 147,182 159,851
Reinsurance balances payable...................... 9,962 1,832
Accounts payable and accrued expenses............. 6,958 4,745
Net payable for investments purchased............. -- 233
Deposit liabilities............................... 6,977 --
Deferred income and other liabilities............. 1,051 --
---------- --------

F-52

QUANTA CAPITAL HOLDINGS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT FOR SHARE AMOUNTS, OR
AS OTHERWISE STATED)

---------- --------
Total liabilities.............................. $ 455,275 $288,786
---------- --------
SHAREHOLDER'S EQUITY
Common shares..................................... $ 1,000 $ 1,000
Additional paid-in capital........................ 645,252 509,252
Accumulated deficit............................... (73,791) (24,426)
Accumulated other comprehensive (loss) income..... 32 497
---------- --------
Total shareholder's equity..................... $ 572,493 $486,323
---------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY..... $1,027,768 $775,109
========== ========

F-53

QUANTA CAPITAL HOLDINGS LTD.
FINANCIAL STATEMENT SCHEDULES
AS OF DECEMBER 31, 2005

I Summary of Investments Other Than Investments in Related Parties

II Condensed Financial Information of Registrant

III Supplementary Insurance Information

IV Reinsurance

V Valuation and Qualifying Accounts

VI Supplementary Information Concerning Property/Casualty Insurance Operations
- Not Required

S-1

QUANTA CAPITAL HOLDINGS LTD.
SCHEDULE I
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 2005
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

AMOUNT
AT WHICH
AMORTIZED FAIR SHOWN IN
COST OR COST VALUE BALANCE SHEET
------------ -------- -------------

AVAILABLE-FOR-SALE:
FIXED MATURITIES:
U.S. government and government agencies ..... $201,272 $201,351 $201,351
Foreign governments ......................... 8,503 8,679 8,679
Tax-exempt municipal ........................ 4,659 4,659 4,659
Corporate ................................... 159,665 159,776 159,776
Asset-backed securities ..................... 32,824 32,831 32,831
Mortgage-backed securities .................. 255,124 255,237 255,237
-------- -------- --------
Total fixed maturities ................... $662,047 $662,533 $662,533
SHORT-TERM INVESTMENTS ......................... $ 36,581 $ 36,588 $ 36,588
-------- -------- --------
TOTAL AVAILABLE-FOR-SALE INVESTMENTS .............. $698,628 $699,121 $699,121
-------- -------- --------

TRADING:
FIXED MATURITIES:
U.S. government and government agencies ..... $ 896 $ 891 $ 891
Corporate ................................... 24,558 25,195 25,195
Asset-backed securities ..................... 4,602 4,609 4,609
Mortgage-backed securities .................. 7,359 7,239 7,239
-------- -------- --------
Total fixed maturities ................... $ 37,415 $ 37,934 $ 37,934
SHORT-TERM INVESTMENTS ......................... $ 382 $ 382 $ 382
-------- -------- --------
TOTAL TRADING INVESTMENTS ......................... $ 37,797 $ 38,316 $ 38,316
-------- -------- --------
TOTAL INVESTMENTS ................................. $736,425 $737,437 $737,437
-------- -------- --------

S-2

QUANTA CAPITAL HOLDINGS LTD.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
PARENT COMPANY ONLY

(Expressed in thousands of U.S. dollars except for share amounts)

DECEMBER 31, DECEMBER 31,
2005 2004
------------ ------------

ASSETS
Investments in subsidiaries on equity basis ........................... $ 531,502 $477,318
Cash and cash equivalents ............................................. 14,424 29
Other accounts receivable ............................................. -- 2
Property and equipment, net of accumulated depreciation of $336
(December 31, 2004: $138) .......................................... 518 454
Due from subsidiaries ................................................. 26,551 5,810
Other assets .......................................................... 6,401 4,746
--------- --------
Total assets .................................................... $ 579,396 $488,359
========= ========
LIABILITIES
Accounts payable and accrued expenses ................................. 6,775 1,776
Due to subsidiaries ................................................... 54,762 14,436
Junior subordinated debentures ........................................ 61,857 41,238
--------- --------
Total liabilities ............................................... $ 123,394 $ 57,450
========= ========
REDEEMABLE PREFERRED SHARES
($0.01 par value; 25,000,000 shares authorized; 3,000,000 issued and
outstanding at December 31, 2005 and none issued and outstanding
at December 31, 2004) .............................................. $ 71,838 $ --

SHAREHOLDERS' EQUITY
Common shares
($0.01 par value; 200,000,000 shares authorized; 69,946,861 issued
and outstanding at December 31, 2005 and 56,798,218 at
December 31, 2004) ................................................. $ 699 $ 568
Additional paid-in capital ............................................ 581,929 523,771
Accumulated deficit ................................................... (199,010) (93,058)
Accumulated other comprehensive income ................................ 546 (372)
--------- --------
Total shareholders' equity ............................................ $ 384,164 $430,909
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................ $ 579,396 $488,359
========= ========

S-3

QUANTA CAPITAL HOLDINGS LTD.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
PARENT COMPANY ONLY
(Expressed in thousands of U.S. dollars)

FOR THE FOR THE FOR THE PERIOD
YEAR ENDED YEAR ENDED FROM MAY 23 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2003
------------ ------------ --------------

REVENUES
Net investment income................................................. 139 29 --
Net foreign exchange (losses) gains................................... (8) 4 --
-------- ------- -------
Total revenues.................................................. 131 33 --
-------- ------- -------
EXPENSES
Equity in net loss of subsidiaries.................................... 83,392 44,819 19,090
General and administrative expenses (2003: including non-cash stock
compensation expense of $16,725)................................... 22,471 9,660 19,384
Other expenses........................................................ 22 -- --
Depreciation of fixed assets.......................................... 198 135 3
-------- ------- -------
Total expenses.................................................. 106,083 54,614 38,477
-------- ------- -------
Loss before income taxes.............................................. (105,952) (54,581) (38,477)
Income tax expense................................................. -- -- --
-------- ------- -------
NET LOSS.............................................................. (105,952) (54,581) (38,477)
======== ======= =======
OTHER COMPREHENSIVE (LOSS) INCOME
Net unrealized investment (losses) gains arising during the period,
net of income taxes................................................ -- -- --
Foreign currency translation adjustments.............................. -- -- --
Reclassification of net realized losses (gains) on investments
included in net loss, net of income taxes.......................... -- -- --
-------- ------- -------
Other comprehensive (loss) income..................................... -- -- --
-------- ------- -------
COMPREHENSIVE LOSS.................................................... (105,952) (54,581) (38,477)
======== ======= =======

S-4

QUANTA CAPITAL HOLDINGS LTD.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
PARENT COMPANY ONLY
(Expressed in thousands of U.S. dollars)

FOR THE FOR THE YEAR FOR THE PERIOD
YEAR ENDED ENDED DECEMBER FROM MAY 23 TO
DECEMBER 31, 2005 31, 2004 DECEMBER 31, 2003
----------------- -------------- -----------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .............................................................. $(105,952) $(54,581) $ (38,477)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES
Depreciation of property and equipment ............................. 198 135 3
Equity in net loss of subsidiaries ................................. 83,392 44,819 19,090
Non-cash stock compensation expense ................................ 72 -- 16,725

Changes in assets and liabilities:
Other accounts receivable ....................................... 2 73 (75)
Due from subsidiaries ........................................... (20,741) (5,374) (436)
Other assets .................................................... (627) (771) (1,439)
Accounts payable and accrued expenses ........................... 4,999 198 1,578
Due to subsidiaries ............................................. 40,326 10,769 3,667
--------- -------- ---------
Net cash provided by (used in) operating activities ................... 1,669 (4,732) 636
--------- -------- ---------

CASH FLOWS USED IN INVESTING ACTIVITIES
Investment in subsidiaries ............................................ (136,658) (38,776) (461,193)
Purchases of property and equipment ................................... (262) (421) (171)
--------- -------- ---------
Net cash used in investing activities ................................. (136,920) (39,197) (461,364)
--------- -------- ---------

CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from issuance of common shares, net of offering costs ........ 58,217 (464) 508,078
Proceeds from issuance of preferred shares, net of offering costs ..... 71,838 -- --
Net cash paid in acquisition of subsidiaries .......................... -- -- (41,704)
Proceeds from junior subordinated debentures, net of issuance costs ... 19,591 38,776 --
--------- -------- ---------
Net cash provided by financing activities ............................. 149,646 38,312 466,374
--------- -------- ---------

Increase (decrease) in cash and cash equivalents ...................... 14,395 (5,617) 5,646
Cash and cash equivalents at beginning of period ...................... 29 5,646 --
--------- -------- ---------
Cash and cash equivalents at end of period ............................ $ 14,424 $ 29 $ 5,646
========= ======== =========

S-5

QUANTA CAPITAL HOLDINGS LTD.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

DECEMBER 31, 2005

Reserve Net
for Net Losses Amortization Other
Deferred Losses Net Investment and Loss of Deferred Operating Net
Acquisition and Loss Unearned Premiums Income Expenses Acquisition Expenses Premiums
Reporting segment Costs Expenses Premiums Earned (1) (4) Costs (2) (4) Written
------------------------- ----------- -------- -------- -------- ---------- -------- ------------ --------- --------

Insurance (3)............ $18,884 $289,579 $245,935 $197,131 $ -- $145,197 $26,910 $65,181 $256,563
Reinsurance.............. 15,572 244,404 90,615 166,944 -- 178,887 42,714 25,154 133,478
Technical Services....... -- -- -- -- -- -- -- 7,595 --
Not allocated to
individual segments... -- -- -- -- 27,181 -- -- -- --
------- -------- -------- -------- ------- -------- ------- ------- --------
Total.................... $34,456 $533,983 $336,550 $364,075 $27,181 $324,084 $69,624 $97,930 $390,041
------- -------- -------- -------- ------- -------- ------- ------- --------

DECEMBER 31, 2004

Reserve Net
for Net Losses Amortization Other
Deferred Losses Net Investment and Loss of Deferred Operating Net
Acquisition and Loss Unearned Premiums Income Expenses Acquisition Expenses Premiums
Reporting segment Costs Expenses Premiums Earned (1) Costs (2) (4) Written
------------------------- ----------- -------- -------- -------- ---------- -------- ------------ --------- --------

Insurance (3)............ $ 9,306 $ 53,111 $130,589 $ 75,167 $ -- $ 49,805 $14,287 $34,303 $170,321
Reinsurance.............. 32,190 106,683 117,347 161,973 -- 149,111 39,708 21,301 249,220
Technical Services....... -- -- -- -- -- -- -- 7,788 --
Not allocated to
individual segments... -- -- -- -- 14,307 -- -- -- --
------- -------- -------- -------- ------- -------- ------- ------- --------
Total.................... $41,496 $159,794 $247,936 $237,140 $14,307 $198,916 $53,995 $63,392 $419,541
------- -------- -------- -------- ------- -------- ------- ------- --------

Period from May 23, 2003 to December 31, 2003

Reserve
for Net Net Amortization Other
Deferred Losses Net Investment Losses of Deferred Operating Net
Acquisition and Loss Unearned Premiums Income and Loss Acquisition Expenses Premiums
Reporting segment Costs Expenses Premiums Earned (1) Expenses Costs (2) Written
------------------------- ----------- -------- -------- -------- ---------- -------- ------------ --------- --------

Insurance................ $ 768 $3,446 $ 8,649 $ 339 $ -- $ 183 $ 24 $ -- $ 7,064
Reinsurance.............. 5,848 1,008 11,395 1,601 -- 1,008 140 -- 12,996
Technical Services....... -- -- -- -- -- -- -- 2,657 --
Not allocated to
individual segments... -- -- -- -- 2,290 -- -- 24,814 --
------ ------ ------- ------ ------ ------ ---- ------- -------
Total.................... $6,616 $4,454 $20,044 $1,940 $2,290 $1,191 $164 $27,471 $20,060
------ ------ ------- ------ ------ ------ ---- ------- -------

(1) Because the Company does not manage its assets by segment, net investment
income is not allocated to the individual segments.

(2) The Company did not allocate general administrative expenses to its
insurance and reinsurance segments individually during the period from May
23, 2003 to December 31, 2003. General and administrative expenses incurred
by the Technical Services segment have been allocated directly.

(3) During the year ended December 31, 2005, the Company changed the
composition of its reportable segments such that the Lloyd's operating
segment, which was previously a reportable segment, is aggregated with the
Company's specialty insurance reportable segment. The December 31, 2004
balances have been restated to conform with the presentation for the year
ended December 31, 2005.

(4) For the years ended December 31, 2005 and 2004, inter-segment elimination
of $3.1 million and $2.3 million for general and administrative expenses
and $0.2 million and none for net losses and loss expenses have been
eliminated against Technical Services general and administrative expenses
and Insurance segment net losses and loss expenses.

S-6

QUANTA CAPITAL HOLDINGS LTD.
SCHEDULE IV
REINSURANCE
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

DECEMBER 31, 2005

PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
OTHER FROM OTHER NET ASSUMED
Premiums GROSS COMPANIES COMPANIES AMOUNT TO NET
-------- --------- ---------- -------- ----------

Property and liability insurance................ $367,890 $218,894 $241,045 $390,041 62%

DECEMBER 31, 2004

PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
OTHER FROM OTHER NET ASSUMED
Premiums GROSS COMPANIES COMPANIES AMOUNT TO NET
-------- --------- ---------- -------- ----------

Property and liability insurance................ $136,600 $74,871 $357,812 $419,541 85%

PERIOD FROM MAY 23, 2003 TO DECEMBER 31, 2003

PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
OTHER FROM OTHER NET ASSUMED
Premiums GROSS COMPANIES COMPANIES AMOUNT TO NET
------ --------- ---------- ------- ----------

Property and liability insurance................ $7,469 $405 $12,996 $20,060 65%

S-7

QUANTA CAPITAL HOLDINGS LTD.
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
VALUATION AND QUALIFYING ACCOUNTS

ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ----------

DEFERRED TAX VALUATION ALLOWANCE:
December 31, 2005 $13,348 $13,254 $ -- $26,602
December 31, 2004 $ 6,130 $ 7,218 $ -- $13,348
Period from May 23, 2003 to December 31, 2003 $ -- $ 6,130 $ -- $ 6,130

ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended December 31, 2005 $ -- $ -- $ -- $ --
Year Ended December 31, 2004 $ 362 $ 1 $(363) $ --
Period from May 23, 2003 to December 31, 2003 $ 362 $ -- $ -- $ 362

ALLOWANCE FOR LOSSES AND LOSS ADJUSTMENT
expenses recoverable:
Year Ended December 31, 2005 $ -- $ 639 $ -- $ 639
Year Ended December 31, 2004 $ -- $ -- $ -- $ --
Period from May 23, 2003 to December 31, 2003 $ -- $ -- $ -- $ --

S-8

Exhibit Index

3.1 Memorandum of Association of the Company (incorporated by reference
from Exhibit 3.1 to the Company's Registration Statement on Form S-1
(No. 333-111535) filed on December 24, 2003)

3.2 Amended and Restated Bye-Laws of the Company (incorporated by
reference from Exhibit 3.2 to the Company's Registration Statement on
Form S-1 (No. 333-111535) filed on December 24, 2003)

4.1 Memorandum of Association of the Company (included as Exhibit 3.1)

4.2 Amended and Restated Bye-Laws of the Company (included as Exhibit 3.2)

4.3 Form of Common Share Certificate (incorporated by reference from
Exhibit 4.1 to the Company's Amendment No. 1 to Registration Statement
on Form S-1/A (No. 333-111535) filed on February 13, 2004)

10.2+ Amendment to Employment Agreement dated as of March 18, 2005 between
Quanta Capital Holdings Ltd. and Michael J. Murphy (incorporated by
reference from Exhibit 10.1 to the Company's Current Report on Form
8-K dated March 22, 2005)

10.4*+ Form of Non-Qualified Stock Option Agreement for recipients of options
under 2003 Long Term Incentive Plan

10.5*+ Form of Performance-Based Share Unit Agreement for recipients of
performance-based share units under 2003 Long Term Incentive Plan

151

10.12+ Employment Agreement of Jonathan J.R. Dodd dated December 22, 2004
(incorporated by reference from Exhibit 10.1 to the Company's Current
Report on Form 8-K dated July 26, 2005)

152

10.20 Form of Capital Security Certificate (incorporated by reference from
Exhibit 10.6 to the Company's Current Report on Form 8-K dated
December 23, 2004)

10.26 Form of Capital Securities Certificate (incorporated by reference from
Exhibit 10.06 to the Company's Current Report on Form 8-K dated March
1, 2005)

10.27 Common Securities Certificate dated February 24, 2005 (incorporated by
reference from Exhibit 10.07 to the Company's Current Report on Form
8-K dated March 1, 2005)

153

10.32* Commutation and Mutual Release Agreement dated November 21, 2005,
between Quanta Reinsurance Limited and Houston Casualty Company and
certain of its subsidiaries

10.34*+ Form of Restricted Share Agreement for recipients of restricted shares
under 2003 Long Term Incentive Plan

10.35*+ Retention Agreement by and between Quanta Capital Holdings Ltd. and
Jonathan J.R. Dodd, dated March 30, 2006

12* Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Dividends

21* List of subsidiaries of the Company

23* Consent of PricewaterhouseCoopers LLP

31.1* Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002

31.2* Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002

32.1* Certification of Principal Executive Officer of Quanta Capital
Holdings Ltd. pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

32.2* Certification of Principal Financial Officer of Quanta Capital
Holdings Ltd. pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

----------
* Filed herewith
+ Represents a management contract or compensatory plan arrangement

154