Bermudian insurer and reinsurer Quanta Capital Holdings is facing a fight for survival after AM Best downgraded its financial strength rating to B++ from A-. The rating agency took action after it was surprised by the size of Quanta's preliminary fourth-quarter loss. It already had a negative outlook on Quanta's rating. The action came two weeks after fellow Bermudian PXRe lost its A- ratings from AM Best and Standard & Poor's.

The downgrade means Quanta will struggle to write new business in many of the areas it operates in. Quanta's management says it is exploring strategic alternatives for the company including the potential sale of some of all of its businesses. Observers say the company's future is bleak.

"It is the end of the road for anything we recognise as Quanta Capital," says Doug Mewhirter, equity analyst at investment bank Ferris, Baker Watts. "It is going to be a different company in two quarters' time. There will probably still be a Lloyd's syndicate run by Quanta people, and maybe an environmental business. But the structure and make-up of the company is going to change dramatically. A large part of the business will be put into run-off or sold on a renewal rights basis."

Quanta expects its net loss for the fourth quarter of 2005 to be between $40 million and $45 million, compared with a net loss of $14 million for the same period of 2004. The fourth-quarter results include $12 million of expenses associated with Hurricane Wilma, $10 million of additional costs associated with hurricanes Katrina and Rita, a $5.5 million loss from a previously reported environmental claim, and between $8 million and $13 million of general reserve strengthening.

Quanta is hopeful it can continue doing business where it believes an A- rating is not required, such as Syndicate 4000 at Lloyd's, its engineering company ESC and possibly some of its program business. It is evaluating whether it can continue to operate in its remaining business lines. Mewhirter says the downgrade has effectively killed any chance of the company continuing in most of its lines.

"The AM Best downgrade has really pulled the rug out from under the company," he says. "It still has about $500 million of capital depending on how you look at it, so you could argue that if AM Best had not intervened, there would have been more than a zero chance that it could stay in the businesses it wanted to. But now it cannot write a lot of U.S. business any more because customers won't take less than A-."

AM Best's concerns about Quanta's ability to make profits were heightened by the fourth-quarter loss, as well as by recent management changes. Tobey Russ resigned as chief executive officer last November, and was replaced on an interim basis by Bob Lippincott, an independent director at the company.

AM Best acknowledges that Quanta's management is taking steps to improve the company's performance. Quanta has already pulled out of property business. But AM Best has concerns about Quanta's previous risk management practices, market position, cost structure disadvantages and increased reliance upon reinsurance to mitigate earnings volatility.

Quanta has struggled since it was set up in 2003. It has not made a profit in any of the years since its establishment. Mewhirter says it did not learn its lesson after the 2004 hurricane season.

"In 2004 it took a big hit from the hurricanes in Florida, then said it would reorganise its reinsurance buying, restructure and that everything would be better," he says. "As it turns out it was far too exposed to this year's losses. It was so overexposed in Louisiana that it exhausted its reinsurance coverage. The property side really hit it hard. That is the core catalyst for where it is now."