HAMILTON, Bermuda—Embattled Quanta Capital Holdings Ltd. is downsizing its operations by placing the bulk of its specialty lines insurance and reinsurance business into runoff and selling a portion of its U.S. business.

Hamilton, Bermuda-based Quanta announced the changes last week, though it had been exploring strategic alternatives since a March ratings downgrade to B++ from A- by A.M. Best Co. Inc.

Best downgraded Quanta after the insurer and reinsurer reported hefty losses stemming from the string of hurricanes that pounded the U.S. last year. According to the company's 2005 financial statement, Quanta posted a net loss of $106 million last year after the storms blew through its reinsurance protections. Quanta, which recorded gross premiums of $608.9 million in 2005, reported $87.4 million in losses stemming directly from the hurricanes.

Following a strategic review--carried out with the help of financial advisors J.P. Morgan Securities Inc. and Friedman, Billings, Ramsey & Co.--Quanta has ceased underwriting or seeking new business and has opted to place its remaining U.S. specialty lines, Bermuda reinsurance, and European business into runoff, it said in a statement.

The company's Lloyd's of London syndicate 4000 and environmental consulting business, however, will not be affected by the runoff plan and will continue to seek new business, Quanta said. The Lloyd's business accounted for $80.7 million of gross premiums written in 2005.

"While Quanta had made progress in its transition to a specialty lines focused carrier, the decision of A.M. Best to downgrade Quanta below the A-level in March interrupted that effort and significantly impacted our ability to write attractive business," James J. Ritchie, Quanta's chairman, said in a statement. "After consideration of alternatives, Quanta's board has made a decision that it believes enables the company to best protect the value of its capital."

Quanta additionally announced an agreement with Liberty International Underwriters, a division of Boston-based Liberty Mutual Group Inc., to acquire the renewal rights to Quanta U.S. Holdings Inc.'s environmental liability business. Terms of that deal were not disclosed. Quanta reported total environmental liability gross written premiums of $40 million in 2005, but it is not clear how much of that business is included in the deal with LIU.

"This approach offers us the flexibility to support our syndicate in the A-rated Lloyd's market and to protect the value of our ESC consulting operation, which provides us with fee-for-service business," said Mr. Ritchie.

"Quanta's business and people complement our existing strategy, and our acquisition of the renewal rights to Quanta's environmental business lets their brokers keep the business with an 'A' rated company.  It also will give many of their existing customers an opportunity to move their business without penalty," David Cohen, LIU's chief underwriting officer of Global Casualty, said in a statement. Liberty Mutual said it is mulling the transfer of certain key staff from Quanta to LIU. 

In its statement, Quanta indicated that it would consider similar transactions for other portions of its business.

What went wrong?

"There are a lot of reasons why this company is in the position it is in," said Joyce Sharaf, assistant vp and managing senior financial analyst at Best. "The (catastrophes) clearly were a major reason... but they ran the company less than conservatively, for a startup," Ms. Sharaf said of Quanta, which opened its doors in September 2003.

"They had a very high expense structure, including salary structure," Ms. Sharaf said. Furthermore, under the original management team, "this company was not being run conservatively in terms of its business lines, in terms of how it wrote its policies, and the biggest one--its appetite for risk--was inconsistent with its capital," she said.

"The new management team had recognized the issues and tried to reverse that, but just didn't have time to do it all," Ms. Sharaf said.

Quanta's senior management changed last year when its founding chief executive officer, Tobey Russ, resigned and Robert Lippincott III was named interim CEO.

Complicating matters at Quanta, said an analyst who did not wish to be named, "the underwriters weren't as experienced" as those at other Bermuda-based reinsurers. "They were obviously a younger company trying to come out and write business," and "they started off at a pretty inopportune time," he said.

"They did have bad luck in that the first two years of their operations were two of the worst (catastrophe) years...but had they not written the risk, they would not have suffered those losses," Ms. Sharaf noted.

In a statement, analysts from BB&T Capital Markets, a unit of Winston-Salem, N.C.-based BB&T Corp., said they were "not surprised by the decision to keep the ESC business afloat, but we question the company's plans to shut down all other underwriting businesses but keep the Lloyd's business open."

"Lloyd's syndicates carry the rating of the entire Lloyd's group, but, with the uncertainty surrounding (Quanta), customers and brokers may be wary of placing business with an entity that may not be around in a few years."

Following Quanta's announcement, Best noted Quanta's B++ financial strength rating remains under review with negative implications for the following subsidiaries of the company: Quanta Reinsurance Ltd.; Quanta Europe Ltd.; Quanta Indemnity Co.; Quanta Reinsurance U.S. Ltd.; and Quanta Specialty Lines Insurance Co.