We commenced substantive operations on September 3, 2003 and wrote a small number of insurance and reinsurance contracts during the fourth quarter of 2003. During the period from January 1, 2004 to September 30, 2004, we continued to grow and diversify our specialty lines of business, and we experienced a significant increase in the number of insurance and reinsurance contracts underwritten.

We generated approximately $86.0 million and $312.5 million of net premiums written during the three months and nine months ended September 30, 2004 after premiums ceded on purchased reinsurance protection. We recognized approximately $65.5 million and $149.6 million of net premiums earned for those periods. In addition to our net premiums written of $86.0 million and $312.5 million, we expect to generate an estimated $22.3 million of additional net premiums written in future periods from existing reinsurance contracts entered into during the nine months ended September 30, 2004.

The primary drivers of growth in our business lines were the continued development of our relationships with important insurance and reinsurance brokers, our success during the January renewal season in the reinsurance industry and approvals from various state regulators. Our insurance product lines demonstrated continued premium growth during the three months ended September 30, 2004. Our insurance product lines continue to become an increasingly significant contributor to our overall business and represented approximately 48% of our total net premiums written in the three months ended September 30, 2004. Because we only began to write insurance and reinsurance business during the fourth quarter of 2003, we believe that our net premiums written and net premiums earned will increase as we further develop our current businesses and enter new product lines and insurance and reinsurance markets. In addition, we believe that our portfolio is not yet widely diversified either among classes of risks or source of origination. For example, during the nine months ended September 30, 2004, we continued to write a residential builders' and contractors' program that accounted for approximately 59.4% of our insurance segment gross written premium and, as described below, each of our reinsurance product lines showed significant concentrations across certain risk classes. In addition, our reinsurance segment generated 79% of its gross written premiums through four brokers. We expect, but cannot assure you, that our portfolio will diversify further through the remainder of the year. We believe we will deploy substantially all of our available capital by the end of 2004 at a net written premium to tangible shareholders' equity (which is defined as total shareholders' equity less intangible assets and goodwill) ratio of approximately 1.04 to 1 and which equates to total net written premium for 2004 of approximately $440 million.

We estimate that we incurred approximately $45 million of catastrophe losses relating to hurricanes Charley, Ivan, Frances and Jeanne during the three months and nine months ended September 30, 2004. Substantially all of these losses occurred in our reinsurance property portfolio. Although these losses were within our exposure limits, both in terms of risk class and geographic location, as prescribed by our underwriting guidelines, we believe they were unusual and unexpected since their occurrence related to multiple events affecting a concentrated geographic location.

A number of insurance companies have been subpoenaed by U.S. regulators in connection with investigations relating to practices in the insurance industry. To date, we have not been served any subpoenas. We entered into Placement Service Agreements (PSAs) and Market Service Agreements (MSAs) with Aon Corporation and Marsh Inc. and have paid a total of $31,000 under these agreements as of September 30, 2004. 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. We do not believe that our relationships with brokers or the potential termination of our PSAs and MSAs will have a material adverse effect on our results of operations, financial condition or liquidity.

With respect to market conditions, we believe that premium rates continue to remain unchanged with exceptions in the professional liability insurance and property and casualty reinsurance lines of business where we see uncertainty around pricing. We believe that favorable market conditions will continue to exist in the markets we are targeting in the remainder of 2004 and into 2005. We will also continue to seek opportunities to provide insurance and reinsurance in areas that require both capacity and highly technical underwriting expertise.

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Segment Information

We classify our businesses into three operating segments — insurance, reinsurance and technical services:

•

Insurance.    Our insurance segment primarily offers corporate clients specialty insurance lines, which provide tailored solutions that respond to distinctive characteristics. In our insurance segment, we write marine, technical risk and aviation, environmental liability, professional liability, fidelity and crime, surety and structured insurance. These products may be offered to clients on a traditional or structured basis, or a combination of both. Our insurance segment writes 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.

•

Reinsurance.    Our reinsurance segment primarily offers reinsurance products to insurance and reinsurance clients that provide products primarily on a treaty, but also to a lesser extent on a facultative, quota share, per risk excess, clash or aggregate excess of loss basis. In our reinsurance segment, we write property, casualty, marine, technical risk and aviation and structured reinsurance. These product lines may be written on a traditional or structured basis, or a combination of both.

•

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. We have started to expand the scope of our technical services to provide risk assessment and evaluation services in other specialty insurance and claims areas. These technical services are currently provided to clients primarily in private sector businesses in the U.S. Our technical services segment also provides technical and information management services to our insurance and reinsurance segments.

The determination of these segments reflects how we monitor the performance of our insurance and reinsurance operations. We refer to these 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 also allocate corporate general and administrative expenses to each segment based upon each segment's allocated capital for the current reporting period. We allocate capital to each of our segments 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.

Revenues

We derive the majority of our revenues from two principal sources: premiums from policies written by our underwriting segments 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, as well as prevailing market prices. We write a number of insurance and reinsurance contracts with unique terms and conditions and expected profit margins. As a result, the volume of premiums written may not be an indicator of profitability.

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

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assets. Under U.S. GAAP, our 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 net of income taxes as a separate component of shareholders' equity. 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.

We also derive revenues from the activities of our technical services segment. Our technical services segment operates primarily in the environmental area and its revenues principally comprise fees from technical services and risk management services provided under various short-term service contracts and from revenues for services performed by subcontractors we engage on behalf of clients. We also generate revenues from remediation fees which are used to extinguish environmental remediation obligations that we have assumed under contracts of remediation. 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.

Expenses

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

Net losses 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 will be critical factors in determining our profitability.

Acquisition expenses, which are net of acquisition 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.

General and administrative expenses consist primarily of personnel expenses, 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, including the growth in personnel and the volume of insurance and reinsurance contracts written. These general and administrative expenses may be incurred directly by an operating segment or indirectly at the corporate level.

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.

Results of Operations

The following is a discussion of our consolidated results of operations for the three months and nine months ended September 30, 2004. Because we were incorporated on May 23, 2003 and

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commenced substantive operations on September 3, 2003, but did not write any insurance and reinsurance contracts during the period to September 30, 2003, comparisons to prior periods, including those of our predecessor, are not meaningful except for a comparison of the results of operations of our technical services segment. We do not, therefore, compare our consolidated results of operations for the three months and nine months ended September 30, 2004 to the same periods for 2003.

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 three months and nine months ended September 30, 2004 to the pro-forma financial information for the periods from July 1, 2003 to September 30, 2003 and from January 1, 2003 to September 30, 2003 within the discussion of our technical services segment under "Results by Operating Segments."

Three months ended September 30, 2004

Results of operations for the three months ended September 30, 2004 were as follows:

				($ in thousands)
Revenues
Gross premiums written				$	116,729
Net premiums written				$	85,969
Net premiums earned				$	65,523
Technical services revenues					7,727
Net investment income					3,258
Net realized gains on investments					297
Net foreign exchange losses					(43	)
Other income					264
Total revenues					77,026
Expenses
Net losses and loss expenses					(77,963	)
Acquisition expenses					(16,424	)
Direct technical services costs					(5,231	)
General and administrative expenses					(14,294	)
Depreciation and amortization of intangible assets					(560	)
Total expenses					(114,472	)
Income taxes					—
Net loss				$	(37,446	)

Revenues.

Technical services revenues were derived from the operations of ESC. Substantially all other revenues were generated by our underwriting subsidiaries in Bermuda and the U.S.

Premiums.    We commenced writing insurance and reinsurance business during the fourth quarter of 2003 and we believe we were well positioned to fully commence underwriting operations by the beginning of 2004. Gross premiums written and premiums ceded were $116.7 million and $30.7 million for the three months ended September 30, 2004. We believe that our reinsurance segment capitalized on the reinsurance opportunities during the July 2004 renewal season and generated $47.2 million, or 40.4%, and $44.7 million, or 52.0%, of our gross and net premiums written during the third quarter. Our insurance segment generated $69.5 million, or 59.6%, and $41.2 million, or 48.0%, of gross and net premiums written due primarily to solid growth in U.S. insurance business as we received additional regulatory approvals and state licenses and maintained key distribution channels through brokerage relationships. We expect that our reinsurance and insurance gross and net premiums written will grow as we continue to execute our specialty lines business strategy.

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We have entered into reinsurance treaties for our marine, technical risk and aviation reinsurance product line and for each of our insurance product lines in order to limit our net loss exposures to our planned net limits and to control our aggregate exposures to particular classes of risk. These reinsurance treaties provide us with reinsurance protection on either a quota share, excess of loss treaty or facultative basis for policies written in our insurance product lines of business. We ceded $28.3 million and $2.5 million of premium written under these treaties during the three months ended September 30, 2004.

Net premiums earned were $65.5 million in the three months ended September 30, 2004 reflecting the earning of premiums on contracts written during the nine months ended September 30, 2004 and during the fourth quarter of 2003. We expect that our net premiums earned will increase in future periods as we enter into more insurance and reinsurance contracts. Our net premiums written are typically earned over the risk periods of the underlying insurance policies which are generally twelve months. Net written premiums that are not yet earned and are deferred as unearned premium reserves, net of deferred reinsurance premiums, totaled $181.0 million at September 30, 2004 and will be earned and recognized in our results of operations in future periods. Because we do not have twelve months of operating history in our underwriting segments, we believe that our net premiums earned are not yet representative of a fully developed and diversified portfolio of insurance and reinsurance contracts.

Technical services revenues.    Technical services revenues were $7.7 million for the three months ended September 30, 2004 and consisted of $3.8 million from direct labor and $3.9 million from subcontractor related activities.

Net investment income and net realized gains.     Net investment income and net realized gains totaled $3.6 million for the three months ended September 30, 2004. Net investment income was $3.3 million 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 2.4% for the three months ended September 30, 2004. Net realized gains of $0.3 million were generated primarily from the sale of fixed maturity securities as we sought to manage our total investment returns and the duration of our investment portfolios.

Expenses.

Net losses and loss expenses.    Net losses and loss expenses were $78.0 million for the three months ended September 30, 2004, and were 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. Included in our expected ultimate losses are specific loss estimates on contracts of reinsurance and insurance insuring claims arising from hurricanes Charley, Frances, Ivan and Jeanne. We have received a limited number of claim notifications and our preliminary estimate of ultimate losses from these events is primarily based on claims received to date, industry loss estimates, output from industry models, a detailed review of affected contracts and discussion with cedants and brokers. Our estimate of our exposure to ultimate claim costs associated with these hurricanes based on currently available information is $45.1 million and is included in net losses and loss expenses for the three months ended September 30, 2004. The actual amount of losses from the hurricanes may vary significantly from the estimate. Other than claims related to these four hurricanes during the third quarter of 2004, as of September 30, 2004 we have received a limited number of claims notifications. However, we participate in lines of business where claims may not be reported for some period of time after those claims are incurred. Therefore, we have continued to use expected loss ratios established by our actuaries as our primary loss reserving methodology on our other contracts not affected by hurricanes. Our total net loss ratio (calculated by dividing net losses and loss expenses by net premiums earned) was 119.0% for the three months ended September 30, 2004 compared to a total net loss ratio of 57.3% for the six months ended June 30, 2004 reflecting the impact of the third quarter hurricanes. We expect that this ratio will decrease and stabilize during the remainder of 2004 as we continue to expand and diversify our lines of business and increase our net premiums earned.

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This expectation could change depending upon the occurrence of unusual or unexpected claim events, for example high severity catastrophe losses such as those that occurred during the third quarter of 2004.

Acquisition expenses.    Acquisition expenses were $16.4 million for the three months ended September 30, 2004, and were a function of the number of insurance and reinsurance contracts we entered into and the associated net premiums earned. Our acquisition cost ratio (calculated by dividing acquisition expenses by net premiums earned) for the three months ended September 30, 2004 was 25.1%. Deferred acquisition costs include, as of September 30, 2004, $42.6 million of acquisition expenses on written contracts of insurance and reinsurance that will by amortized in future periods as the premiums written to which they relate are earned.

Direct technical services costs.    Direct technical services costs were $5.2 million for the three months ended September 30, 2004 and were comprised of subcontractor and direct labor expenses at ESC. Direct technical services costs, as a percentage of technical services revenues was approximately 67.7% 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 $14.3 million for the three months ended September 30, 2004 and were comprised of $8.2 million of personnel related expenses and $6.1 million of other general and administrative expenses. General and administrative expenses include $12.3 million related to our underwriting activities, including $0.5 million of expenses charged by our technical services segment, and $2.5 million of expenses related to our technical services activities. Our general and administrative expense ratio (calculated by dividing underwriting related general and administrative expenses by net premiums written) was 14.4% for the three months ended September 30, 2004. Included in our general and administrative expenses for the three months ended September 30, 2003 is $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 and also to certain of our directors and officers in connection with the Private Offering on September 3, 2003.

Depreciation and amortization of intangible assets.    Depreciation and amortization of intangible assets was $0.6 million for the three months ended September 30, 2004 and consisted of amortization of intangible assets related to the acquisition of ESC and depreciation of fixed assets.

We have not recorded any net deferred income tax benefits or assets relating to tax operating losses generated by our U.S. subsidiaries since our results of operations include a 100% valuation allowance against net deferred tax assets. For the three months ended September 30, 2004, the net valuation allowance charged to earnings was approximately $1.8 million.

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Nine months ended September 30, 2004

Results of operations for the nine months ended September 30, 2004 were as follows:

				($ in thousands)
Revenues
Gross premiums written				$	370,428
Net premiums written				$	312,487
Net premiums earned				$	149,613
Technical services revenues					22,580
Net investment income					9,811
Net realized gains on investments					665
Net foreign exchange gains					85
Other income					690
Total revenues					183,444
Expenses
Net losses and loss expenses					(126,176	)
Acquisition expenses					(35,885	)
Direct technical services costs					(15,442	)
General and administrative expenses					(44,700	)
Depreciation and amortization of intangible assets					(1,397	)
Total expenses					(223,600	)
Income taxes					—
Net loss				$	(40,156	)

Revenues.

Technical services revenues were derived from the operations of ESC. Substantially all other revenues were generated by our underwriting subsidiaries in Bermuda and the U.S.

Premiums.    We commenced writing insurance and reinsurance business during the fourth quarter of 2003 and we believe we were well positioned to fully commence underwriting operations by January 1, 2004. Gross premiums written and premiums ceded were $370.4 million and $57.9 million for the nine months ended September 30, 2004. We believe that our reinsurance segment capitalized on the reinsurance opportunities during the January and July 2004 renewal seasons and generated $195.0 million, or 52.6%, and $192.6 million, or 61.6%, of our gross and net premiums written. Our insurance segment generated $175.4 million, or 47.8%, and $119.9 million, or 38.4%, of gross and net premiums written due in part to solid growth in U.S. insurance business, particularly in the second and third quarters of 2004 as we received additional state licenses and maintained key relationships with important insurance brokers. We expect that for the remainder of 2004 our insurance and reinsurance gross and net premiums written will continue to grow and that our reinsurance gross and net premiums written will decrease as compared to 2004 as we focus our business more towards the specialty insurance lines.

During the nine months ended September 30, 2004, we entered into reinsurance treaties for our marine, technical risk and aviation reinsurance product line and for each of our insurance product lines in order to limit our net loss exposures to our planned net limits and to control our aggregate exposures to particular classes of risk. These reinsurance treaties provide us with reinsurance protection on either a quota share, excess of loss treaty or facultative basis for policies written in our insurance product lines of business. We ceded $55.5 million and $2.5 million of premium written under these treaties during the nine months ended September 30, 2004.

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Net premiums earned were $149.6 million in the nine months ended September 30, 2004 reflecting the earning of premiums on contracts written during the nine months ended September 30, 2004 and during the fourth quarter of 2003. We expect that our net premiums earned will increase in future periods as we enter into more insurance and reinsurance contracts. Our net premiums written are typically earned over the risk periods of the underlying insurance policies, which are generally twelve months. Net written premiums that are not yet earned and are deferred as unearned premium reserves, net of deferred reinsurance premiums, totaled $181.0 million at September 30, 2004 and will be earned and recognized in our results of operations in future periods. Because we do not have twelve months of operating history in our underwriting segment, we believe that our net premiums earned are not yet representative of a fully developed portfolio of insurance and reinsurance contracts.

Technical services revenues.     Technical services revenues were $22.6 million for the nine months ended September 30, 2004 and consisted of $11.0 million from direct labor and $11.6 million from subcontractor related activities.

Net investment income and net realized gains.     Net investment income and net realized gains totaled $10.5 million for the nine months ended September 30, 2004. Net investment income was $9.8 million and was derived primarily from interest earned on fixed maturity investments and short term investments, partially offset by investment management fees. 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 2.6% for the nine months ended September 30, 2004. Net realized gains of $0.7 million were generated primarily from the sale of fixed maturity securities as we sought to manage our total investment returns and the duration of our investment portfolios.

As of September 30, 2004, the average duration of our investment portfolio was approximately 2.5 years with an average credit rating of approximately "AA".

Expenses.

Net losses and loss expenses.     Net losses and loss expenses were $126.2 million for the nine months ended September 30, 2004, and were 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. Included in our expected ultimate losses are specific loss estimates on contracts of reinsurance and insurance insuring claims arising from hurricanes Charley, Frances, Ivan and Jeanne. We have received a limited number of claim notifications and our preliminary estimate of ultimate losses from these events is primarily based on claims received to date, industry loss estimates, output from industry models, a detailed review of affected contracts and discussions with cedants and brokers. Our estimate of our exposure to ultimate claim costs associated with these hurricanes based on currently available information is $45.1 million and is included in net losses and loss expenses for the nine months ended September 30, 2004. The actual amount of losses from the hurricanes may vary significantly from the estimate. Other than claims related to these four hurricanes during the third quarter of 2004, as of September 30, 2004 we have received a limited number of claims notifications. However, we participate in lines of business where claims may not be reported for some period of time after those claims are incurred. Therefore, we have continued to use expected loss ratios established by our actuaries as our primary loss reserving methodology on our other contracts not affected by hurricanes. Our total net loss ratio (calculated by dividing net losses and loss expenses by net premiums earned) was 84.3% for the nine months ended September 30, 2004 compared to a total net loss ratio of 57.3% for the six months ended June 30, 2004 reflecting the impact of the third quarter hurricanes. We expect that this ratio will decrease and stabilize during the remainder of 2004 as we continue to expand and diversify our lines of business and increase our net premiums earned. This expectation could change depending upon the occurrence of unusual or unexpected claim events, for example high severity catastrophe losses such as those that occurred during the third quarter of 2004.

Acquisition expenses.     Acquisition expenses were $35.9 million for the nine months ended September 30, 2004, and were a function of the number of insurance and reinsurance contracts we

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entered into and the associated net premiums earned. Our acquisition cost ratio (calculated by dividing acquisition expenses by net premiums earned) for the nine months ended September 30, 2004 was 24.0%. Deferred acquisition costs include, as of September 30, 2004, $42.6 million of acquisition expenses on written contracts of insurance and reinsurance that will by amortized in future periods as the premiums written to which they relate are earned.

Direct technical services costs.     Direct technical services costs were $15.4 million for the nine months ended September 30, 2004 and were comprised of subcontractor and direct labor expenses at ESC. Direct technical services costs, as a percentage of technical services revenues was approximately 68.4% 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 $44.7 million for the nine months ended September 30, 2004 and were comprised of $28.8 million of personnel related expenses and $15.9 million of other general and administrative expenses. General and administrative expenses include $39.0 million related to our underwriting activities, including $1.5 million charged by our technical services segment, and $7.2 million of expenses related to our technical services activities. Our general and administrative expense ratio (calculated by dividing underwriting related general and administrative expense by net premiums written) was 12.5% for the nine months ended September 30, 2004. We expect that this ratio will decrease during the remainder of 2004 as we continue to expand our lines of business and increase our net premiums written and we expect that it will stabilize as we grow our business. Included in our general and administrative expenses for the period from May 23, 2003 to September 30, 2003 is $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 and also to certain of our directors and officers in connection with the Private Offering on September 3, 2003.

Depreciation and amortization of intangible assets.     Depreciation and amortization of intangible assets was $1.4 million for the nine months ended September 30, 2004 and consisted of amortization of intangible assets related to the acquisition of ESC and depreciation of fixed assets.

We have not recorded any net deferred income tax benefits or assets relating to tax operating losses generated by our U.S. subsidiaries since our results of operations include a 100% valuation allowance against net deferred tax assets. For the nine months ended September 30, 2004, the net valuation allowance charged to earnings was approximately $6.4 million.

Results by Operating 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. Our underwriting objective is to deploy capital to what we believe are the most attractive lines of business at the most opportune times in order to maximize our risk-adjusted returns on capital. In measuring the performance of our insurance and 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. 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. 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 written and indicates the level of indirect costs that we incur in acquiring and writing insurance and reinsurance business. Our combined ratio is the aggregate of our loss and loss expense, acquisition expense and general and administrative expense ratios. We

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believe that these financial ratios appropriately reflect the profitability of our underwriting activities. 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.

Effective January 1, 2004, we allocate indirect corporate general and administrative expenses between each of our operating segments, including those related to underwriting operations, as described under "Segment Information."

        Three months ended September 30, 2004

The following table summarizes our net underwriting results and profitability measures for our insurance and reinsurance segments for the three months ended September 30, 2004:

				Insurance				Reinsurance				Total underwriting
								($ in thousands)
Direct insurance				$	41,073			$	—			$	41,073
Reinsurance assumed					28,445				47,211				75,656
Total gross premiums written					69,518				47,211				116,729
Premiums ceded					(28,285	)			(2,475	)			(30,760	)
Net premiums written				$	41,233			$	44,736			$	85,969
Net premiums earned				$	20,516			$	45,007			$	65,523
Net losses and loss expenses					(12,084	)			(65,879	)			(77,963	)
Acquisition expenses					(5,292	)			(11,132	)			(16,424	)
General and administrative expenses					(7,562	)			(4,791	)			(12,353	)
Net underwriting loss				$	(4,422	)		$	(36,795	)		$	(41,217	)
Ratios:
Loss and loss expense ratio					58.9	%			146.4	%			119.0	%
Acquisition expense ratio					25.8	%			24.7	%			25.1	%
General and administrative expense ratio					18.3	%			10.7	%			14.4	%
Combined ratio					103.0	%			181.8	%			158.5	%

        Insurance

Our insurance segment includes the following product lines: marine, technical risk and aviation, professional liability, environmental liability, fidelity and crime, surety and structured insurance.

Premiums.     Gross written premiums were $69.5 million for the three months ended September 30, 2004 and reflect our increasing participation in the insurance marketplace and development of our insurance portfolios. The table below shows gross written premiums by product line:

				($ in thousands)
Marine, technical risk and aviation				$	38,697
Professional liability					13,013
Environmental liability					12,607
Fidelity and crime					2,465
Surety					1,677
Structured insurance					1,059
Total				$	69,518

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During the three months ended September 30, 2004 we expanded, in our marine, technical risk and aviation product line, a residential builders' and contractors' program that provides warranty, general liability, builders' risk and excess liability coverages on new home construction throughout the U.S. We began this program during the first quarter of 2004 and it accounted for approximately $37.1 million, or 53.4%, of total insurance segment gross written premiums in the three months ended September 30, 2004 compared to 64.9% for the three months ended June 30, 2004. The policies in this program are underwritten through a third party agent that we believe is an established specialist in this technical field. For the remainder of 2004, we expect that this program will continue to contribute substantial net written premiums and that we will experience further growth and diversification in our other insurance product lines. During the three months ended September 30, 2004, approximately 41% of insurance segment gross premiums were written as reinsurance of policies issued by another insurer on our behalf.

Ceded premiums were $28.3 million during the three months ended September 30, 2004 under the reinsurance treaties we purchased for each of our insurance product lines. 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. Net premiums earned were $20.5 million representing the earning of premiums written in 2003 and the earning and amortization of premiums written and ceded during the nine months ended September 30, 2004.

Net losses and loss expenses.     Net losses and loss expenses were $12.1 million, reflecting a loss ratio of 58.9% for the three months ended September 30, 2004. The increase of 15.7% compared to the total net loss ratio of 50.9% for the six months ended June 30, 2004 was driven by our insurance segment losses related to hurricanes Charley, Frances, Ivan and Jeanne. We estimate these hurricane losses to be $1.8 million based on currently available information. Other than claims related to these four hurricanes as of September 30, 2004 we have received a limited number of loss notifications in our insurance segment. We primarily continue to use an expected loss and loss expense ratio methodology to estimate our ultimate cost of losses. This method multiplies premiums earned by an expected loss and loss expense ratio that was derived, for each product line, from pricing and industry data and from information provided by our brokers and insured clients. We expect that our loss ratio will decrease and stabilize during the remainder of 2004 as we continue to expand and diversify our lines of business and increase our net premiums earned.

Acquisition expenses.     Acquisition expenses were $5.3 million, or 25.8%, of net premiums earned for the three months ended September 30, 2004. These acquisition expenses primarily represented brokerage fees, commission fees and premium tax expenses. Our acquisition expense ratio in the insurance segment was higher than expected because we wrote several marine, technical risk and aviation contracts, including the residential builders' and contractors' risk program, on a structured basis through another insurance company that resulted in incurring fees in excess of 20% of our written premiums. Our acquisition expense ratio increased slightly in third quarter compared to the second quarter of 2004 as we purchased additional reinsurance protection on an excess or facultative basis with no ceding commission income. This has the effect of increasing our net acquisition expense ratio. As we diversify and grow our insurance lines, we expect that our acquisition expense ratio will decrease and stabilize during the remainder of 2004.

General and administrative expenses.     Direct and allocated indirect general and administrative expenses totaled $7.6 million, or 18.3%, of net premiums written for the three months ended September 30, 2004.

        Reinsurance

Our reinsurance segment includes the following product lines: property, casualty, marine, technical risk and aviation and structured reinsurance.

Premiums.     Gross and net premiums written by our reinsurance segment were $47.2 million for the three months ended September 30, 2004. The table below shows gross written premiums by product line:

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				($ in thousands)
Property				$	19,364
Casualty					17,501
Marine, technical risk and aviation					10,346
Structured reinsurance					—
Total				$	47,211

Gross and net written premiums were $47.2 million and $44.7 million during the three months ended September 30, 2004 reflecting new accounts underwritten during the third quarter of 2004 driven primarily from our increasing participation in the reinsurance marketplace and additional premiums written on accounts bound in the first and second quarters of 2004 and the fourth quarter of 2003 across a number of key classes of business.

Gross reinsurance premiums written are being earned over the periods of reinsured or underlying insured risks which are typically one year. Ceded premiums were $2.5 million during the three months ended September 30, 2004 under the reinsurance treaties we purchased for our marine, technical risk and aviation product line. Gross premiums written and ceded premiums are earned over the period of each insured risk.

Net premiums earned were $45.0 million during the three months ended September 30, 2004 reflecting the earning of premiums on contracts written during the nine months ended September 30, 2004 and during the fourth quarter of 2003.

Net losses and loss expenses.     Net losses and loss expenses were $65.9 million for the three months ended September 30, 2004, and were 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. Included in our expected ultimate losses are specific loss estimates on contracts of reinsurance and insurance insuring claims arising from hurricanes Charley, Frances, Ivan and Jeanne. We have received a limited number of claim notifications and our preliminary estimate of ultimate losses from these events is primarily based on claims received to date, industry loss estimates, output from industry models, a detailed review of affected contracts and discussion with cedants and brokers. Our estimate of our exposure to ultimate claim costs in our reinsurance segment associated with these hurricanes based on currently available information is $43.3 million and is included in net losses and loss expenses for the three months ended September 30, 2004. The actual amount of losses from the hurricanes may vary significantly from the estimate. Other than claims related to these four hurricanes during the third quarter of 2004, as of September 30, 2004 we have received a limited number of claims notifications. However, we participate in lines of business where claims may not be reported for some period of time after those claims are incurred. Therefore, we have continued to use expected loss ratios established by our actuaries as our primary loss reserving methodology on our other contracts not affected by hurricanes. Our total net loss ratio (calculated by dividing net losses and loss expenses by net premiums earned) was 146.4% for the three months ended September 30, 2004 compared to a total net loss ratio of 59.9% for the three months ended June 30, 2004 reflecting the impact of the third quarter hurricanes. We expect that this ratio will decrease and stabilize during the remainder of 2004 as we continue to expand and diversify our lines of business and increase our net premiums earned. This expectation could change depending upon the occurrence of unusual or unexpected claim events, for example high severity catastrophe losses such as those that occurred during the third quarter of 2004.

Acquisition expenses.     Acquisition expenses were $11.1 million, or 24.7%, of net premiums earned for the three months ended September 30, 2004. These acquisition expenses primarily represented brokerage and ceding commissions.

General and administrative expenses.     Direct and indirect allocated general and administrative expenses were $4.8 million, or 10.7%, of net premiums written for the three months ended September 30, 2004.

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Technical services

Three months ended September 30, 2004, period from September 3, 2003 to September 30, 2003 and period from July 1, 2003 to September 3, 2003

The following table summarizes and compares our net technical services segment results for the three months ended September 30, 2004 and, on a pro-forma basis, the three months ended September 30, 2003. These results were generated primarily by the operations of our predecessor, ESC. The pro-forma technical services segment results for the three months ended September 30, 2003 are derived from the aggregation of segment results for the period from September 3, 2003 to September 30, 2003 and the segment results of ESC for the period July 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.

				($ in thousands)
				Three months ended				Period from								Pro-forma Three months ended
				September 30, 2004				September 3, 2003 to September 30, 2003				July 1, 2003 to September 3, 2003 (predecessor)				September 30, 2003
Technical services revenues				$	8,246			$	3,899			$	7,120			$	11,019
Other income					74				—				2				2
Direct technical services costs					(5,231	)			(2,501	)			(5,090	)			(7,591	)
General and administrative expenses					(2,460	)			(982	)			(1,541	)			(2,523	)
Net technical services income				$	629			$	416			$	491			$	907

Technical services revenues.     Technical services revenues were $8.2 million for the three months ended September 30, 2004, reflecting a decrease of $2.8 million, or 25.2%, compared to $11.0 million for the pro-forma three months ended September 30, 2003. The decrease in technical services revenues consists of a $3.2 million decrease in subcontractor revenue which is partially offset by a $0.4 million increase in direct labor revenue. The decrease of $3.2 million in subcontractor revenue compared to the pro-forma three months ended September 30, 2004 was primarily a result of decreased subcontractor remediation activity and the increase of $0.4 million in direct labor revenues was a result of increased client spending on environmental projects that were delayed or postponed in prior periods.

Other income.     Other income totaled $0.1 million for the three months ended September 30, 2004 and 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 three months ended September 30, 2003.

Direct technical services costs.     Direct technical services costs were $5.2 million for the three months ended September 30, 2004, reflecting a decrease of $2.4 million, or 31.1%, compared to $7.6 million for the pro-forma three months ended September 30, 2003. The decrease in direct technical services costs was primarily attributable to decreased subcontractor expenses which resulted from a reduction in the number and change in the nature of remediation projects undertaken during the three months ended September 30, 2004 compared to the pro-forma three months ended September 30, 2003. Direct technical services costs, as a percentage of revenue was 63.4% for the three months ended September 30, 2004, compared to 68.9% for the pro-forma three months ended September 30, 2003. This decrease in direct technical services costs as a percentage of technical services revenues was primarily due to the decreased subcontractor activity during this period.

General and administrative expenses.     Direct and indirect allocated general and administrative expenses totaled $2.5 million for the three months ended September 30, 2004 as compared to $2.5 million for the pro-forma three months ended September 30, 2003.

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        Nine months ended September 30, 2004

Underwriting

The following table summarizes our net underwriting results and profitability measures for our insurance and reinsurance segments for the nine months ended September 30, 2004:

				Insurance				Reinsurance				Total underwriting
								($ in thousands)
Direct insurance				$	80,333			$	—			$	80,333
Reinsurance assumed					95,056				195,039				290,095
Total gross premiums written					175,389				195,039				370,428
Premiums ceded					(55,466	)			(2,475	)			(57,941	)
Net premiums written				$	119,923			$	192,564			$	312,487
Net premiums earned				$	42,148			$	107,465			$	149,613
Net losses and loss expenses					(23,098	)			(103,078	)			(126,176	)
Acquisition expenses					(10,451	)			(25,434	)			(35,885	)
General and administrative expenses					(23,607	)			(15,364	)			(38,971	)
Net underwriting loss				$	(15,008	)		$	(36,411	)		$	(51,419	)
Ratios:
Loss and loss expense ratio					54.8	%			95.9	%			84.3	%
Acquisition expense ratio					24.8	%			23.7	%			24.0	%
General and administrative expense ratio					19.7	%			8.0	%			12.5	%
Combined ratio					99.3	%			127.6	%			120.8	%

        Insurance

Premiums.    Gross written premiums were $175.4 million for the nine months ended September 30, 2004 reflecting our increasing participation in the insurance marketplace and growth in our insurance portfolios as we received various additional state regulatory approvals and developed our key distribution channels through brokerage relationships. The table below shows gross written premiums by product line:

				($ in thousands)
Marine, technical risk and aviation				$	106,234
Environmental liability					30,798
Professional liability					28,089
Fidelity and crime					6,976
Surety					2,233
Structured insurance					1,059
Total				$	175,389

During the nine months ended September 30, 2004 we wrote, in our marine, technical risk and aviation product line, a residential builders' and contractors' program that provides warranty, general liability, builders' risk and excess liability coverages on new home construction throughout the U.S. This program accounted for approximately $104.2 million, or 59.4%, of total insurance segment gross written premiums in the nine months ended September 30, 2004 compared to 63.4% for the six months ended June 30, 2004. The policies in the program are underwritten through a third party agent that we believe is an established specialist in this technical field. For the remainder of 2004, we expect that this program will continue to contribute substantial net written premiums and that we will experience further growth and diversification in our other insurance product lines.

During the nine months ended September 30, 2004, approximately 54.2% of insurance segment gross premiums were written as reinsurance of policies issued by another insurer on our behalf.

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Approximately 59.5% of our insurance segment gross written premiums of $175.4 million were generated through direct relationships with underlying clients. Approximately 11.4% and 10.3% of our insurance segment gross written premiums were generated through Marsh Inc. and Aon Corporation during the nine months ended September 30, 2004. The remaining 18.8% of our insurance segment gross written premiums were generated through other brokers, none of which accounted for more than 10% of our total insurance segment gross written premiums. We expect this broker concentration to decrease as we experience further growth and diversification in our insurance product lines.

Ceded premiums were $55.5 million during the nine months ended September 30, 2004 under the reinsurance treaties we purchased for each of our insurance product lines. 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. Net premiums earned were $42.1 million representing the earning and amortization of premiums written and ceded during the nine months ended September 30, 2004 and the earning of premiums written in 2003.

Net losses and loss expenses.     Net losses and loss expenses were $23.1 million reflecting a loss ratio of 54.8% for the nine months ended September 30, 2004. The increase of 7.6% compared to the total net loss ratio of 50.9% for the six months ended June 30, 2004 was driven by our insurance segment losses related to hurricanes Charley, Frances, Ivan and Jeanne. We estimate these hurricane losses to be $1.8 million based on currently available information. Other than claims related to these four hurricanes as of September 30, 2004 we have received a limited number of loss notifications in our insurance segment. We primarily continue to use an expected loss and loss expense ratio methodology to estimate our ultimate cost of losses. This method multiplies premiums earned by an expected loss and loss expense ratio that was derived, for each product line, from pricing and industry data and from information provided by our brokers and insured clients. We expect that our loss ratio will decrease and stabilize during the remainder of 2004 as we continue to expand and diversify our lines of business and increase our net premiums earned.

Acquisition expenses.     Acquisition expenses were $10.5 million, or 24.8%, of net premiums earned for the nine months ended September 30, 2004. These acquisition expenses primarily represented brokerage fees, commission fees and premium tax expenses. Our acquisition expense ratio in the insurance business segment was higher than expected because we wrote several marine, technical risk and aviation contracts, including the residential builders' and contractors' risk program, on a structured basis through another insurance company that resulted in us incurring fees in excess of 20% of written premiums. As we diversify and grow our insurance lines, we expect that our acquisition expense ratio will decrease and stabilize during the remainder of 2004.

General and administrative expenses.     Direct and allocated indirect general and administrative expenses totaled $23.6 million, or 19.7%, of net premiums written for the nine months ended September 30, 2004. We expect our general and administrative expense ratio to continue to decrease during the remainder of 2004 as we continue to expand our product lines and increase our net premiums written.

        Reinsurance

Premiums.     Gross and net premiums written by our reinsurance segment were $195.0 million and $192.6 million or the nine months ended September 30, 2004 reflecting new accounts underwritten during this period driven primarily from our increasing participation in the reinsurance marketplace and additional premiums written on accounts bound in the fourth quarter of 2003. The table below shows gross written premiums by product line:

				($ in thousands)
Property				$	97,438
Casualty					62,909
Marine, technical risk and aviation					34,236
Structured reinsurance					456
Total				$	195,039

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Our property reinsurance gross premiums written during the nine months ended September 30, 2004 are summarized in the table below by risk class.

Homeowners and commercial property					76	%
Crop hail					24	%
Total					100	%

Our homeowners and commercial property category includes a single program covering personal lines and commercial risks of small regional accounts throughout the U.S., which accounts for approximately 16% of our total property reinsurance gross premiums written of $97.4 million during the nine months ended September, 20, 2004. Our crop hail category covers crops throughout the U.S.

Our property premiums written include contracts written on excess of loss and quota share bases. Of our total property reinsurance gross premiums written of $97.4 million for the nine months ended September 30, 2004, 16% represents excess of loss contracts that we believe are exposed to losses from natural catastrophe events worldwide.

Our casualty reinsurance gross premiums written during the nine months ended September 30, 2004 are summarized in the table below by risk class.

Directors and officers' liability					29	%
Employers' stop loss					20	%
Multiline commercial umbrella program					12	%
Other					39	%
Total					100	%

Our casualty reinsurance gross premiums written included in our other casualty category, was spread across 19 different risk classes, none of which accounted for more than 10% of our casualty reinsurance premiums written for the nine months ended September 30, 2004.

Approximately 36.8%, 15.6%, 14.3% and 11.9% of our reinsurance segment gross written premiums of $195.0 million were generated through Guy Carpenter & Company, Inc., Rattner MacKenzie Limited, Benfield Group and Willis Group. We expect this broker concentration to decrease as we experience further growth and diversification in our reinsurance product lines.

Gross reinsurance premiums written are being earned over the periods of reinsured or underlying insured risks which are typically one year. Ceded premiums were $2.5 million during the nine months ended September 30, 2004 under the reinsurance treaties we purchased for our marine, technical risk and aviation product line. Gross premiums written and ceded premiums are earned over the period of each insured risk.

Net premiums earned of $107.5 million reflect the earning of premiums on contracts written during the nine months ended September 30, 2004 and during the fourth quarter of 2003.

Net losses and loss expenses.     Net losses and loss expenses were $103.1 million for the nine months ended September 30, 2004, and were 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. Included in our expected ultimate losses are specific loss estimates on contracts of reinsurance and insurance insuring claims arising from hurricanes Charley, Frances, Ivan and Jeanne. We have received a limited number of claim notifications and our preliminary estimate of ultimate losses from these events is primarily based on claims received to date, industry loss estimates, output from industry models, a detailed review of affected contracts and discussion with cedants and brokers. Our estimate of our exposure to ultimate claim costs in our reinsurance segment associated with these hurricanes based on currently available information is $43.3 million and is included in net losses and loss expenses for the nine months ended September 30, 2004. The actual amount of losses from the hurricanes may vary significantly from the estimate. Other than claims related to these four hurricanes during the third quarter of 2004, as of September 30, 2004 we have received a limited number of claims notifications. However, we participate in lines of business where claims may not be

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reported for some period of time after those claims are incurred. Therefore, we have continued to use expected loss ratios established by our actuaries as our primary loss reserving methodology on our other contracts not affected by hurricanes. Our total net loss ratio (calculated by dividing net losses and loss expenses by net premiums earned) was 95.9% for the nine months ended September 30, 2004 compared to a total net loss ratio of 59.6% for the six months ended June 30, 2004 reflecting the impact of the third quarter hurricanes. We expect that this ratio will decrease and stabilize during the remainder of 2004 as we continue to expand and diversify our lines of business and increase our net premiums earned, barring any further significant catastrophe losses.

Acquisition expenses.     Acquisition expenses were $25.4 million, or 23.7%, of net premiums earned for the nine months ended September 30, 2004. These acquisition expenses primarily represented brokerage and ceding commissions.

General and administrative expenses.     Direct and indirect allocated general and administrative expenses were $15.4 million, or 8.0%, of net premiums written for the nine months ended September 30, 2004. We expect our general and administrative expense ratio to remain comparable for the remainder of 2004.

        Technical services

Nine months ended September 30, 2004, period from September 3, 2003 to September 30, 2003 and period from January 1, 2003 to September 3, 2003

The following table summarizes and compares our net technical services segment results for the nine months ended September 30, 2004 and, on a pro-forma basis, the nine months ended September 30, 2003. These results were generated primarily by the operations of our predecessor, ESC. The pro-forma technical services segment results for the nine months ended September 30, 2003 are derived from the aggregation of segment results for the period from September 3, 2003 to September 30, 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.

				($ in thousands)
				Nine months ended				Period from								Pro-forma Nice months ended
				September 30, 2004				September 3, 2003 to September 30, 2003				January 1, 2003 to September 3, 2003 (predecessor)				September 30, 2003
Technical services revenues				$	24,123			$	3,899			$	20,350			$	24,249
Other income					351				—				14				14
Direct technical services costs					(15,442	)			(2,501	)			(12,992	)			(15,493	)
General and administrative expenses					(7,272	)			(982	)			(5,820	)			(6,802	)
Net technical services income				$	1,760			$	416			$	1,552			$	1,968

Technical services revenues.     Technical services revenues were $24.1 million for the nine months ended September 30, 2004, a decrease of $0.1 million, or 0.5%, compared to $24.2 million for the pro-forma nine months ended September 30, 2003. The decrease of $0.1 million in technical services revenues consists of a $1.0 million decrease in subcontractor revenue partially offset by a $0.9 million increase in direct labor revenue. The decrease in subcontractor revenue during the nine months ended September 30, 2004 was the result of a reduction in subcontractor remediation activity.

Other income.     Other income totaled $0.4 million for the nine months ended September 30, 2004 and 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 nine months ended September 30, 2003.

Direct technical services costs.     Direct technical services costs were $15.4 million for the nine months ended September 30, 2004, a decrease of $0.1 million, or 0.3%, compared to $15.5 million for

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the pro-forma nine months ended September 30, 2003. The decrease in direct technical services costs was primarily attributable to decreased subcontractor expenses which resulted from a reduction in the number, and change in the nature of, remediation projects undertaken during the nine months ended September 30, 2004 compared to the pro-forma nine months ended September 30, 2003. Direct technical services costs, as a percentage of revenue was 64.0% for the nine months ended September 30, 2004 compared to 63.9% for the pro-forma nine months ended September 30, 2003.

General and administrative expenses.     Direct and indirect allocated general and administrative expenses were $7.3 million for the nine months ended September 30, 2004, an increase of $0.5 million, or 6.9% compared to $6.8 million for the pro-forma nine months ended September 30, 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 nine months ended September 30, 2004 compared to the pro-forma nine months ended September 30, 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 September 30, 2004, we had subsidiary operations in Bermuda, the U.S. and Ireland and a representative office in the U.K.

As a holding company, we will have continuing funding needs for general corporate expenses, the payment of principal and interest on future borrowings, if any, 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 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. These restrictions on the payment of dividends to us by our insurance subsidiaries are described in more detail in the Registration Statement.

        Financial condition

Our available-for-sale investments totaled $510.7 million as of September 30, 2004 compared to $467.0 million at December 31, 2003. The majority of our investment portfolio consists of fixed maturity investments which are managed by several external investment advisors. Included in our investment portfolio is a mortality-risk-linked security for which the repayment of principal is dependent on the performance of a specified mortality index. The total market value of this security was $20.4 million as of September 30, 2004. As of September 30, 2004, all of the fixed maturity investments were investment grade, with a weighted average credit rating of "AA" based on ratings assigned by Standard & Poors, or S&P. Our cash and cash equivalents totaled $73.2 million as of September 30, 2004 compared to $47.3 million at December 31, 2003. The increase in our available-for-sale investments and cash and cash equivalents is primarily due to the increase in our net premiums written during the nine months ended September 30, 2004 and limited claims notifications and associated loss payments made to date. We expect that our available-for-sale investments and cash and cash equivalent balances to decrease during the remainder of 2004 as we continue to pay loss and loss expenses related to reported claims, particularly those arising from the hurricane events during the third quarter of 2004.

Our insurance and reinsurance premiums receivable balances totaled $132.3 million as of September 30, 2004 compared to $11.0 million at December 31, 2003. The increase in premiums receivable reflects our growth across all product lines during the first nine months of 2004 and the associated increase in the level of premiums written. Included in our premiums receivable are approximately $88 million of written premium installments that are not yet currently due under the terms of the related insurance and reinsurance contracts.

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Our deferred acquisition costs and unearned premiums, net of deferred reinsurance premiums, totaled $42.6 million and $181.0 million, respectively, as of September 30, 2004 compared to $6.6 million and $18.1 million as of December 31, 2003. These increases were due to the growth in our premiums written during the nine months ended September 30, 2004. These amounts represent acquisition expenses and premiums 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 $118.5 million as September 30, 2004 compared to $1.2 million as of December 31, 2003. The increase in our net loss and loss expense reserves reflects the growth in our business, the associated insured risks we assumed during the nine months ended September 30, 2004 and include our estimate of ultimate unpaid loss expenses totaling $38.6 million relating to hurricanes Charley, Frances, Ivan and Jeanne. We have received a limited number of claim notifications related to the hurricanes and our preliminary estimate of ultimate losses from these events is primarily based on claims received to date, industry loss estimates, output from industry models, extensive actuarial modeling, a detailed review of affected contracts and discussion with cedants and brokers. As of September 30, 2004, other than claims notifications related to the four hurricanes during the third quarter of 2004, we have received a limited number of reported losses on our product lines. Given our limited operating history, we have therefore continued to use an expected loss and loss expense ratio methodology to estimate our ultimate cost of reinsurance and insurance losses on our other contracts not affected by the hurricane events. This method multiplies premiums earned by an expected loss and loss expense ratio derived from pricing data and information provided by brokers, insureds and ceding companies. While we believe that the reserves for losses and loss expenses are sufficient to cover claims from losses occurring up to September 30, 2004. Ultimate losses and loss expenses may differ materially from the amounts we have recorded. We will continually review and adjust our reserve estimates and reserving methodologies taking into account all currently known information and update our assumptions related to unknown information.

Our shareholders' equity was $445.9 million as of September 30, 2004 compared to $487.5 million as of December 31, 2003, reflecting a decrease of $41.6 million that was primarily related to a net loss of $40.2 million and a net change in unrealized losses on our investment portfolios of $0.9 million for the nine months ended September 30, 2004. As of September 30, 2004, we have provided a 100% cumulative valuation allowance against our deferred tax assets in the amount of $12.5 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.

        Liquidity

Our principal cash requirements are expected to be investments in operating subsidiaries, expenses to develop and implement our business strategy, capital expenditures, premiums ceded, losses and loss adjustment expenses and other policy holder benefits, brokerage and commissions, the servicing of future borrowing arrangements, taxes and other operating expenses. 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. While our board of directors currently does not intend to declare dividends or make any other distributions to the shareholders of Quanta Holdings, our board plans to periodically reevaluate our dividend policy. Our cash requirements will also include the payment of any future dividends to our shareholders if and when our board of directors determines to change our dividend policy.

We are finalizing our due diligence on Lloyd's to potentially establish an underwriting syndicate which will, if pursued, require a capital contribution.

We have entered into a commitment letter with Friedman, Billings, Ramsey & Co. with respect to the potential issuance of $40 million of debt in the form of pooled trust preferred securities and cannot assure you that this transaction will take place.

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We have paid some claims relating to the third quarter of 2004 hurricane events and expect that our cash requirements for the payment of reinsurance losses will be significant in future periods as we received and settle claims associated with hurricanes Charley, Frances, Ivan and Jeanne.

While we have sufficient liquidity to pay the losses we experienced in the past hurricane season, we may raise additional funds to further expand our business strategy, enter new business lines and manage our expected growth. We may raise capital through debt or equity or other securities. The amount and timing of this 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 and expected growth targets, our business, results of operations and financial condition may be adversely affected.

We expect to hire additional employees during the remainder of 2004. As a result, we anticipate that our cash requirements for the payment of annual salaries and benefits for these employees will increase in future periods as compared to the nine months ended September 30, 2004.

We incurred capital expenditures of $3.5 million during the nine months ended September 30, 2004 related primarily to the purchase and development of information technology assets. During the remainder of 2004, we expect capital expenditures principally relating to information systems, furniture and fixtures and leasehold improvements to be less than $5 million.

In addition to these liquidity requirements, under the purchase agreement with ESC, we will be required to pay ESC's former shareholders an earn-out payment if ESC achieves specified EBITDA targets. EBITDA generally is defined to mean earnings before interest, taxes, depreciation and amortization. Under the earn-out arrangements, if EBITDA for the two-year period ending December 31, 2005 is $7.5 million or greater, we will be required to pay an earn-out payment of $5.0 million. If EBITDA is greater than $7.0 million and less than $7.5 million, then we will be required to pay a pro rata portion of the $5.0 million. We cannot, at this time, determine whether ESC will achieve these EBITDA targets, or estimate the amount of any potential earn-out payments that would be required if these targets are achieved.

ESC generally is required to fund implementation of projects for its customers prior to receipt of related fee revenues. Historically, ESC's positive cash flows generated from operations and its available credit facility have provided adequate liquidity to fund its operations.

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 may offer a liability assumption program under which a special-purpose entity assumes specified liabilities (at times including taking title to property) 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.

Our treasury function is responsible for managing our investments, banking relationships, capital raising activities including equity and debt issues, our overall cash and liquidity positions and the payment of dividends from subsidiaries. Our subsidiaries are responsible for managing local cash and liquidity positions.

Our sources of cash consist primarily of existing cash and cash equivalents, premiums written, proceeds from sales and redemptions of investment assets, 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.

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On July 13, 2004, Quanta Holdings and certain designated insurance subsidiaries entered into a credit agreement providing for a secured bank credit facility and a revolving credit facility with a syndicate of lenders in the amount of $150 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. As of September 30, 2004, we had $28.9 million of secured letters of credit issued and outstanding under the facility. As of September 30, 2004, we have not made any borrowings under the revolving credit facility. 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. The facility terminates on July 12, 2005. 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 the 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.

We generated net operating cash flow of approximately $100.7 million during the nine months ended September 30, 2004, primarily related to premiums and investment income received and offset by general and administrative expenses paid. During the same period, we invested net cash of $70.8 million in our investment assets and, as of September 30, 2004, had net cash and cash equivalent balances of $73.2 million. Included in our cash and cash equivalents and investments is $32.6 million that is pledged as collateral for letters of credit and $29.2 million that is on deposit with, or has been pledged to, U.S. state insurance departments. Our cash flows from operations for the nine months ended September 30, 2004 provided us with sufficient liquidity to meet operating cash requirements during that period.

        Commitments

The following table provides an analysis of our future annual contractual commitments under operating lease agreements as of September 30, 2004:

Year ending September 30,				($ in thousands)
2005				$	3,926
2006					3,892
2007					3,795
2008					3,004
2009					2,718
2010 and thereafter					23,930
Total				$	41,265

Off-balance sheet arrangements

We have no off-balance sheet arrangements with unconsolidated, special purposes entities or variable interest entities.

Adequacy of Regulatory and Rating Capital

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.

In Bermuda and the United States, insurers and reinsurers are required to maintain certain minimum levels of capital and risk-based capital, the calculation of which includes numerous factors as

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specified by the respective insurance regulatory authorities and the related insurance regulations. We will capitalize our insurance operations in excess of the minimum regulatory requirements so that we may maintain adequate financial ratings. Generally, a higher financial rating creates a higher demand for insurance products. A higher financial rating will enable us both 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 a start-up insurance operation such as ours.

We currently have sufficient capital and surplus to meet regulatory and rating agency requirements at our current rating levels. 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 will allow us to provide to our insured clients up to $150 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. As of September 30, 2004, we had $28.9 million of secured letters of credit issued and outstanding under the facility.

If we fail to maintain adequate letter of credit facilities, and are unable to otherwise provide the necessary security, U.S. insurance companies may be less willing to purchase our reinsurance products, which could 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 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.

We have received a rating of "A-" (excellent) from A.M. Best, which is the fourth highest of fifteen rating levels and indicates A.M. Best's opinion of our financial strength and ability to meet ongoing obligations to our future policyholders. We cannot assure you that we will be able to maintain this rating. A significant ratings downgrade would result in a substantial loss of business and business opportunities as insureds and ceding companies purchase insurance from companies with higher claims-paying and financial strength ratings instead of from us.

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Critical Accounting Policies and Estimates

Our management makes certain judgments, estimates and assumptions in the application of accounting policies used to determine inherently subjective amounts reported in our condensed consolidated financial statements. If management uses different assumptions and estimates than it currently does, it could produce materially different estimates of the reported amounts. For a detailed discussion of our critical accounting policies, judgments, estimates and assumptions management uses please refer to the Registration Statement. Other than as described below under "Derivative contracts" and "Annual Incentive Plan" there were no significant changes in the application of our critical accounting policies and estimates subsequent to December 31, 2003.

        Derivative Instruments and Hedging Activities

Derivative contracts

During the nine months ended September 30, 2004, we engaged in certain derivative related activities and 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 September 30, 2004, we hold in our available-for-sale fixed maturity portfolio a mortality-risk-linked security for which the repayment of principal is dependent on the performance of a specified mortality index. The component of the bond that is linked to the mortality index has been determined, under SFAS 133, to be an embedded derivative that is not clearly and closely related to its host contract (a debt security) and is therefore bifurcated and accounted for as a derivative under SFAS 133. 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 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. Given the nature of derivative instruments and estimates used in estimating their fair value, changes in the 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

In the second quarter of 2004, 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 business unit 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. 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.

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

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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.

ITEM 3.    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 functional 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, premiums receivable and insurance reserves arising from known or probable losses that are denominated in foreign currencies. We manage our foreign currency risk by maintaining assets denominated in the same currency 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. A foreign currency forward contract results in an obligation to purchase or sell a specified currency at 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 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 September 30, 2004, our investment portfolio included $12.3 million, or 2.4%, 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. $11.4 million of these securities were rated AAA and $0.9 million were rated BAA, and were substantially hedged into U.S. dollars according to our investment guidelines.

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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 September 30, 2004, assuming parallel shifts in interest rates, the impact of an immediate 100 basis point increase in market interest rates on our net invested assets of approximately $511 million, excluding cash on hand, would have been an estimated decrease in market value of approximately $14.2 million, or 2.8%, and the impact on our invested assets, excluding cash on hand, of an immediate 100 basis point decrease in market interest rates would have been an estimated increase in market value of approximately $13.3 million, or 2.6%.

As of September 30, 2004, our investment portfolio included AAA rated mortgage-backed securities with a market value of $130.5 million, or 25.6%, of net invested assets. 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 Service, Inc. and/or S&P. Our investment guidelines require that the average credit quality of our portfolio will typically 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 September 30, 2004, the average credit quality of our investment portfolio was AA, and all fixed income securities held were investment grade. In addition, we held as part our investment portfolio $20.0 million in par value of variable rate mortality linked securities issued by a single issuer which mature on January 1, 2007. We are subject to loss of principal and interest in the event of the occurrence of certain changes in a predefined mortality index. As of September 30, 2004, the fair value of the security was $20.3 million and represented approximately 4% of our net invested assets.

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. 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.

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Effects of Inflation

We do not believe that inflation has had a material affect 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 4.     CONTROLS AND PROCEDURES

As of the end of the period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in allowing information required to be disclosed in reports filed under the Securities and Exchange Act of 1934 to be recorded, processed, summarized and reported within time periods specified in the rules and forms of the Securities and Exchange Commission. In connection with the evaluation described above, we identified no change in our internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2004, and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.     OTHER INFORMATION

ITEM 1.    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 may become involved in various claims and legal proceedings.

ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the quarter ended September 30, 2004, the Company issued 135,500 options to purchase common stock to certain employees. These transactions were completed without registration of the relevant security under the Securities Act of 1933, as amended, in reliance upon the exemptions provided by Section 4(2) for transactions not involving a public offering.

ITEM 5.     OTHER INFORMATION

The Board of Directors of the Registrant has established June 2, 2005 as the date for its next annual general shareholders meeting.

ITEM 6.     EXHIBITS

31.1				Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2				Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1				Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2				Certification of the Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

				Quanta Capital Holdings Ltd.
Date:    November 4, 2004				/s/ Tobey J. Russ
				Tobey J. Russ (On behalf of the registrant and as Principal Executive Officer)
Date:    November 4, 2004				/s/ John S. Brittain, Jr..
				John S. Brittain, Jr.
				(Principal Financial Officer)

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Index to Exhibits

31.1	Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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