Quanta Reports Increased Q4 Loss; Best Lowers Ratings

Quanta Capital Holdings Ltd. has reported preliminary financial results for the fourth quarter and full-year ended Dec. 31, 2005, “subject,” the company said, “to completion of review by its auditors.” Quanta also acknowledged that it has “received notification from A.M. Best of a downgrade of its financial strength ratings, driven by Quanta’s significant fourth quarter net loss.”

Quanta explained that its “underwriting results for the fourth quarter and full year were negatively impacted by windstorm catastrophe costs, principally related to hurricanes Katrina, Rita and Wilma that hit the Gulf of Mexico and the Southeast United States during the third and fourth quarters of 2005. Fourth quarter 2005 results include $12.0 million of expenses associated with hurricane Wilma, and $10.2 million of additional costs related to hurricanes Katrina and Rita, $5.5 million related to a previously reported environmental loss and $8.0 to $13.0 million of general reserve strengthening. Results for the quarter were also impacted by costs associated with exiting catastrophe exposed lines of property reinsurance and technical risk property insurance other than program businesses. Total severance charges for the quarter were $5.8 million.”

Quanta then announced that it “anticipates its net loss for the fourth quarter of 2005 will be in a range of $40.0 million to $45.0 million. This compares to a net loss of $14.4 million, or $0.25 per diluted share for the fourth quarter of 2004.”

Following that announcement, A.M. Best Co. issued a bulletin, which noted that it has “downgraded the financial strength ratings (FSR) to ‘B++’ (Very Good) from ‘A-‘ (Excellent) and the issuer credit ratings (ICR) to ‘bbb’ from ‘a-‘ for the insurance/reinsurance subsidiaries of Quanta Capital Holdings Ltd.” Best explained that the “rating actions apply to Quanta Reinsurance Ltd. (Quanta Re) (Hamilton, Bermuda), its subsidiaries and Quanta Europe Ltd. (Dublin, Ireland).” It also downgraded Quanta’s ICR to “bb” from “bbb-” and the securities rating to “b+” from “bb” of its $75 million 10.25 percent Series A non-cumulative perpetual preferred shares”.

In addition Best place all of the ratings “under review with negative implications”, where they will remain “until A.M. Best is comfortable with management’s business plans and its ability to execute those plans.”

Best took notice of the possibly severe impact on a reinsurer when its ratings fall below “A” grade. It said the “under review status also contemplates the impact of the downgrades as it pertains to rating triggers, collateral requirements, the need to develop strategic alternatives and any other constraints, which have not yet been quantified.”

Bob Lippincott, Quanta’s Interim CEO commented: “Quanta’s fourth quarter underwriting results clearly were not acceptable and do not represent the changes we are putting in place. We are disappointed that the impacts of the historic windstorm events, other costs related to exited lines and severance charges have contributed significantly to the negative ratings action by A.M. Best.”

James J. Ritchie, Quanta’s Chairman, added: “Quanta had taken key steps that substantially reduce the Company’s exposure to catastrophes, cut expenses, and increase our capital base. Despite our total capital of approximately $520 million at December 31, 2005, our financial strength ratings will be downgraded. In anticipation of the impacts of such action on our business, Quanta’s Management and Board are moving expeditiously to implement three key steps designed to preserve shareholder value.”

He described these steps as follows:
— A special committee of Quanta’s Board of Directors has engaged Friedman Billings Ramsey as financial advisor to help us evaluate:
— strategic alternatives including the potential sale of some or all of our businesses
— the potential use of excess capital to repay debt or to return value to our shareholders.

Ritchie added that Quanta “will continue to operate in business lines that we do not expect will require Quanta to have an “A-” rating, such as our engineering services company ESC, our Lloyd’s Syndicate 4000, and potentially certain program businesses. We will evaluate whether we can continue to operate our remaining business lines. We also will consider running off selected lines ourselves as an alternative to sale. Based on our evaluation of the business lines, management will accelerate steps to reduce our infrastructure.”

The full text, additional comments as well as a rebroadcasts of the earnings conference call may be consulted on the company’s Web site at: http://www.quantaholdings.com.