e10vq
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Quarterly Period Ended June 30, 2007
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Transition Period From          to          
 
 
001-33289
Commission File Number
 
 
ENSTAR GROUP LIMITED
(Exact name of registrant as specified in its charter)
 
 
     
Bermuda
 
N/A
 
(State or other jurisdiction
of incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
 
P.O. Box HM 2267
Windsor Place, 3rd Floor
18 Queen Street
Hamilton HM JX
Bermuda
(Address of principal executive office including zip code)
 
 
(441) 292-3645
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  o;          Accelerated filer  þ;          Non-accelerated filer  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No  þ
 
As of August 7, 2007, the registrant had outstanding 11,909,969 ordinary shares, par value $1.00 per share.
 


 

 
TABLE OF CONTENTS
 
                 
        Page
 
PART I — FINANCIAL INFORMATION
  Financial Statements:   1
   
  1
   
  2
   
  3
   
  4
   
  5
   
  6
   
  20
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   21
  Quantitative and Qualitative Disclosures About Market Risk   34
  Controls and Procedures   34
 
  Legal Proceedings   34
  Risk Factors   34
  Submission of Matters to a Vote of Security Holders   35
  Other Information   44
  Exhibits   45
    Signatures
  46
Certification pursuant to Rule 13a-14(a)/15d-14(a)
   
Certification pursuant to Rule 13a-14(a)/15d-14(a)
   
Certification pursuant to 18 U.S.C. Section 1350
   
Certification pursuant to 18 U.S.C. Section 1350
   
 AMENDED AND RESTATED EMPLOYMENT AGREEMENT
 DELOITTE & TOUCHE LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION
 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
 CERTIFICATION OF CHIEF FINANCIAL OFFICER
 CERTIFICATION SECTION 906 OF CHIEF EXECUTIVE OFFICER
 CERTIFICATION SECTION 906 OF CHIEF FINANCIAL OFFICER


Table of Contents

 
Item 1.   FINANCIAL STATEMENTS
 
ENSTAR GROUP LIMITED
(FORMERLY KNOWN AS CASTLEWOOD HOLDINGS LIMITED)

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
as of June 30, 2007 and December 31, 2006
 
                 
    June 30,
    December 31,
 
    2007     2006  
    (expressed in thousands of U.S. dollars, except share and per share data)  
 
ASSETS
Short-term investments and fixed maturities, available for sale, at fair value (amortized cost: 2007 — $242,905; 2006 — $279,137)
  $ 242,803     $ 279,137  
Fixed maturities, held to maturity, at amortized cost (fair value: 2007 — $308,063; 2006 — $328,183)
    312,435       332,750  
Fixed maturities, trading, at fair value (amortized cost: 2007 — $302,180; 2006 — $93,581)
    296,659       93,221  
Other investments, at fair value
    68,395       42,421  
                 
Total investments
    920,292       747,529  
Cash and cash equivalents
    724,120       450,817  
Restricted cash and cash equivalents
    178,461       62,746  
Accrued interest receivable
    10,610       7,305  
Accounts receivable, net
    11,284       17,758  
Reinsurance balances receivable, net
    493,064       408,142  
Investment in partly-owned company
          17,998  
Goodwill
    21,222       21,222  
Other assets
    97,447       40,735  
                 
TOTAL ASSETS
  $ 2,456,500     $ 1,774,252  
                 
 
LIABILITIES
Losses and loss adjustment expenses
  $ 1,627,276     $ 1,214,419  
Reinsurance balances payable
    218,938       62,831  
Accounts payable and accrued liabilities
    11,659       29,191  
Income taxes payable
    126       1,542  
Loans payable
    70,942       62,148  
Other liabilities
    55,790       29,991  
                 
TOTAL LIABLITIES
    1,984,731       1,400,122  
                 
MINORITY INTEREST
    59,935       55,520  
                 
SHAREHOLDER’S EQUITY
               
Share capital
               
Authorized issued and fully paid, par value $1 each (Authorized 2007: 156,000,000; 2006: 99,000,000) Ordinary shares (Issued and Outstanding 2007: 11,920,377; 2006: 18,885)
    11,920       19  
Non-voting convertible ordinary shares (Issued 2007: 2,972,892; 2006: Nil)
    2,973        
Treasury stock at cost (non-voting convertible ordinary shares 2007: 2,972,892; 2006: Nil)
    (421,559 )      
Additional paid-in capital
    590,504       111,371  
Accumulated other comprehensive income
    5,207       4,565  
Retained earnings
    222,789       202,655  
                 
TOTAL SHAREHOLDERS’ EQUITY
    411,834       318,610  
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 2,456,500     $ 1,774,252  
                 
 
See accompanying notes to the unaudited condensed consolidated financial statements


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ENSTAR GROUP LIMITED
(FORMERLY KNOWN AS CASTLEWOOD HOLDINGS LIMITED)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
for the Three and Six-Month Periods Ended June 30, 2007 and 2006
 
                                 
    Three Months Ended     Six Months Ended  
    June 30,
    June 30,
    June 30,
    June 30,
 
    2007     2006     2007     2006  
    (expressed in thousands of U.S. dollars,
 
    except share and per share data)  
 
INCOME
                               
Consulting fees
  $ 3,826     $ 5,251     $ 8,487     $ 11,600  
Net investment income
    16,976       11,145       34,756       20,805  
Net realized (losses) gains
    (132 )     (79 )     439       (79 )
                                 
      20,670       16,317       43,682       32,326  
                                 
EXPENSES
                               
Net (reduction) increase in loss and loss adjustment
                               
expense liabilities
    (805 )     (4,323 )     1,705       (6,780 )
Salaries and benefits
    10,360       6,491       23,162       14,440  
General and administrative expenses
    7,915       4,995       13,588       8,133  
Interest expense
    1,307       532       2,325       532  
Net foreign exchange gain
    (3,069 )     (7,497 )     (3,015 )     (7,967 )
                                 
      15,708       198       37,765       8,358  
                                 
EARNINGS BEFORE INCOME TAXES, MINORITY INTEREST AND SHARE OF NET EARNINGS OF PARTLY-OWNED COMPANY
    4,962       16,119       5,917       23,968  
INCOME TAXES RECOVERY
    8,109       581       7,093       795  
MINORITY INTEREST
    (2,167 )     (4,974 )     (4,415 )     (5,186 )
SHARE OF NET EARNINGS OF PARTLY-OWNED COMPANY
          151             263  
                                 
EARNINGS BEFORE EXTRAORDINARY GAIN
    10,904       11,877       8,595       19,840  
EXTRAORDINARY GAIN — NEGATIVE GOODWILL (2006: NET OF MINORITY INTEREST OF $4,329)
                15,683       4,347  
                                 
NET EARNINGS
  $ 10,904     $ 11,877     $ 24,278     $ 24,187  
                                 
PER SHARE DATA:
                               
Basic earnings per share before extraordinary gain — basic
  $ 0.92     $ 1.21     $ 0.74     $ 2.02  
Extraordinary gain per share — basic
                1.36       0.44  
                                 
Basic earnings per share
  $ 0.92     $ 1.21     $ 2.10     $ 2.46  
                                 
Diluted earnings per share before extraordinary gain — diluted
  $ 0.89     $ 1.19     $ 0.73     $ 2.00  
Extraordinary gain per share — diluted
                1.33       0.44  
                                 
Diluted earnings per share
  $ 0.89     $ 1.19     $ 2.06     $ 2.44  
                                 
Dividends declared per ordinary share
  $     $ 2.92     $     $ 2.92  
                                 
Weighted average ordinary shares outstanding — basic
    11,916,013       9,849,321       11,540,318       9,802,832  
Weighted average ordinary shares outstanding — diluted
    12,204,562       9,945,994       11,817,225       9,930,359  
 
See accompanying notes to the unaudited condensed consolidated financial statements


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ENSTAR GROUP LIMITED
(FORMERLY KNOWN AS CASTLEWOOD HOLDINGS LIMITED)

UNAUDITED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
for the Three and Six-Month Periods Ended June 30, 2007 and 2006
 
                                 
    Three Months
    Six Months
 
    Ended     Ended  
    June 30,
    June 30,
    June 30,
    June 30,
 
    2007     2006     2007     2006  
    (expressed in thousands of U.S. dollars)  
 
NET EARNINGS
  $ 10,904     $ 11,877     $ 24,278     $ 24,187  
Other comprehensive income:
                               
Unrealized holding (losses) gains on investments arising during the period
    (176 )     1,511       395       1,391  
Reclassification adjustment for net realized losses (gains) included in net earnings
    132       79       (439 )     79  
Currency translation adjustment
    46       492       686       577  
                                 
Other comprehensive income:
    2       2,082       642       2,047  
                                 
COMPREHENSIVE INCOME
  $ 10,906     $ 13,959     $ 24,920     $ 26,234  
                                 
 
See accompanying notes to the unaudited condensed consolidated financial statements


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ENSTAR GROUP LIMITED
(FORMERLY KNOWN AS CASTLEWOOD HOLDINGS LIMITED)
 
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
for the Six-Month Periods Ended June 30, 2007 and 2006
 
                 
    2007     2006  
    (expressed in thousands of U.S. dollars)  
 
Share capital — ordinary shares
               
Balance, beginning of period
  $ 19     $ 22,661  
Redemption of Class E shares
          (22,642 )
Conversion of shares
    6,029        
Issue of shares
    5,775        
Shares repurchased
    (7 )      
Share awards granted/vested
    104        
                 
Balance, end of period
  $ 11,920     $ 19  
                 
Share capital — non-voting convertible ordinary shares
               
Balance, beginning of period
  $     $  
Conversion of shares
    2,973        
                 
Balance, end of period
  $ 2,973     $  
                 
Treasury stock
               
Balance, beginning of period
  $     $  
Shares acquired, at cost
    (421,559 )      
                 
Balance, end of period
  $ (421,559 )   $  
                 
Additional paid-in capital
               
Balance, beginning of period
  $ 111,371     $ 89,090  
Reclassification of deferred compensation
          (112 )
Share awards granted/vested
    3,665       21,210  
Shares repurchased
    (16,755 )      
Issue of shares
    490,269        
Amortization of share awards
    1,954        
                 
Balance, end of period
  $ 590,504     $ 110,188  
                 
Deferred compensation
               
Balance, beginning of period
  $     $ (112 )
Reclassification of deferred compensation
          112  
                 
Balance, end of period
  $     $  
                 
Accumulated other comprehensive income
               
Balance, beginning of period
  $ 4,565     $ 1,010  
Other comprehensive income (loss)
    642       2,047  
                 
Balance, end of period
  $ 5,207     $ 3,057  
                 
Retained earnings
               
Balance, beginning of period
  $ 202,655     $ 148,257  
Adjustment to initially apply FIN 48
    4,858        
                 
Adjusted balance, beginning of period
    207,513       148,257  
Conversion of shares
    (9,002 )      
Dividend paid
          (27,948 )
Net earnings
    24,278       24,187  
                 
Balance, end of period
  $ 222,789     $ 144,496  
                 
 
See accompanying notes to the unaudited condensed consolidated financial statements


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ENSTAR GROUP LIMITED
(FORMERLY KNOWN AS CASTLEWOOD HOLDINGS LIMITED)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Six-Month Periods Ended June 30, 2007 and 2006
 
                 
    2007     2006  
    (expressed in thousands of U.S. dollars)  
 
OPERATING ACTIVITIES:
               
Net earnings
  $ 24,278     $ 24,187  
Adjustments to reconcile net earnings to cash flows provided by (used in) operating activities:
               
Minority interest
    4,415       5,186  
Negative goodwill (2006: net of minority interest of $4,329)
    (15,683 )     (4,347 )
Share of net earnings of partly-owned companies
          (263 )
Amortization of deferred compensation
          112  
Amortization of bond premiums or discounts
    (104 )     1,362  
Share-based compensation expense
    1,954       21,098  
Net realized and unrealized investments (gain) loss
    (439 )     79  
Other items
    1,217       310  
Changes in assets and liabilities:
               
Sales of trading securities
    133,227        
Reinsurance balances receivable
    66,151       4,604  
Other assets
    484       24,381  
Losses and loss adjustment expenses
    (24,276 )     (27,881 )
Reinsurance balances payable
    (39,783 )     4,522  
Accounts payable and accrued liabilities
    (15,387 )     (23,142 )
Other liabilities
    89       (14,820 )
                 
Net cash flows provided by operating activities
    136,143       15,388  
                 
INVESTING ACTIVITIES:
               
Acquisition, net of cash acquired
    29,651       29,015  
Purchase of available-for-sale securities
    (52,148 )     (62,358 )
Sales and maturities of available-for-sale securities
    147,073       197,263  
Purchase of held-to-maturity securities
    (2,476 )      
Maturity of held-to-maturity securities
    77,492       30,066  
Movement in restricted cash and cash equivalents
    (69,334 )     14,100  
Funding of other investments
    (267 )      
Other investing activities
    (453 )     (721 )
                 
Net cash flows provided by investing activities
    129,538       207,365  
                 
FINANCING ACTIVITIES:
               
Redemption of shares
          (22,642 )
Distribution of capital to minority shareholders
          (11,765 )
Contribution to surplus of subsidiary by minority interest
          22,918  
Dividend paid
          (27,948 )
Receipt of loan
    26,825       44,356  
Repayment of loan
    (2,571 )     (25,156 )
Repayment of vendor loan note
          (20,970 )
Repurchase of shares
    (16,762 )      
                 
Net cash flows provided by (used in) financing activities
    7,492       (41,207 )
                 
Translation adjustment
    130       330  
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    273,303       181,876  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    450,817       280,212  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 724,120     $ 462,088  
                 
Supplemental Cash Flow Information
               
Income taxes (paid) recovered
  $ (2,598 )   $ 603  
Interest (paid)
  $ (2,571 )   $  
                 
 
See accompanying notes to the unaudited condensed consolidated financial statements


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ENSTAR GROUP LIMITED
(FORMERLY KNOWN AS CASTLEWOOD HOLDINGS LIMITED)
 
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007 and December 31, 2006
(expressed in thousands of U.S. dollars, except share and per share data)
(unaudited)
 
1.   BASIS OF PREPARATION AND CONSOLIDATION
 
Our condensed consolidated financial statements have not been audited. These statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of our financial position and results of operations as at the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. All significant inter-company accounts and transactions have been eliminated. In these notes, the terms “we,” “us,” “our,” or “the Company” refer to Enstar Group Limited and its direct and indirect subsidiaries. The following information is unaudited and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2006.
 
Accounting Standards Not Yet Adopted
 
The term “FAS” used in these notes refers to Statements of Financial Accounting Standards issued by the United States Financial Accounting Standards Board (“FASB”).
 
In September 2006, the FASB issued FAS No. 157, “Fair Value Measurement” (“FAS 157”). This Statement provides guidance for using fair value to measure assets and liabilities. Under this standard, the definition of fair value focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). FAS 157 clarifies that fair value is a market based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets and the lowest priority being unobservable data. Further, FAS 157 requires tabular disclosures of the fair value measurements by level within the fair value hierarchy.
 
FAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Although early adoption is permitted as of January 1, 2007, we have not yet adopted FAS 157 and are evaluating the potential impact of adoption on our financial condition, results of operations and cash flows.
 
In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). This standard permits an entity to irrevocably elect fair value on a contract-by-contract basis as the initial and subsequent measurement attribute for many financial instruments and certain other items including insurance contracts. An entity electing the fair value option would be required to recognize changes in fair value in earnings and provide disclosure that will assist investors and other users of financial information to more easily understand the effect of the company’s choice to use fair value on its earnings. Further, the entity is required to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. This standard does not eliminate the disclosure requirements about fair value measurements included in FAS 157 and FAS No. 107, “Disclosures about Fair Value of Financial Instruments”. FAS 159 is effective for fiscal years beginning after November 15, 2007. Although early adoption is permitted as of January 1, 2007, we have not yet adopted FAS 159 and are evaluating the potential adoption impact on our financial condition, results of operations and cash flows.


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ENSTAR GROUP LIMITED
(FORMERLY KNOWN AS CASTLEWOOD HOLDINGS LIMITED)
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.   ACQUISITIONS
 
In June 2006, a subsidiary of the Company entered into a definitive agreement for the purchase of a minority interest in a U.S. holding company that owns two property and casualty insurers based in Rhode Island, both of which are in run-off. Completion of the transaction is conditioned on, among other things, governmental and regulatory approvals and satisfaction of various other closing conditions. As a consequence, the Company cannot predict if or when this transaction will be completed.
 
On January 31, 2007, the Company completed the merger (the “Merger”) of CWMS Subsidiary Corp., a Georgia corporation and its wholly-owned subsidiary (“CWMS”), with and into The Enstar Group, Inc. (“EGI”). As a result of the Merger, EGI, renamed Enstar USA, Inc., is now a direct wholly-owned subsidiary of the Company.
 
On January 31, 2007, the Company also acquired the 55% of the shares of B.H. Acquisition Ltd. (“BH”) that it previously did not own. The Company acquired 22% of BH from an affiliate of Trident II, L.P. for total cash consideration of $10,164 and acquired EGI’s 33% interest in BH as part of the Merger. BH wholly owns two insurance companies in run-off, Brittany Insurance Company Ltd., incorporated in Bermuda, and Compagnie Européenne d’Assurances Industrielles S.A., incorporated in Belgium. After completion of the acquisition and the Merger, the Company owns all outstanding shares in BH.
 
The acquisitions have been accounted for using the purchase method of accounting, which requires that the acquirer record the assets and liabilities acquired at their estimated fair value.
 
The purchase price and fair value of assets acquired for the EGI and BH acquisitions were as follows:
 
         
Purchase price
  $ 506,189  
Direct costs of acquisition
    3,149  
         
Total purchase price
  $ 509,338  
         
Net assets acquired at fair value
  $ 514,986  
         
Excess of net assets over purchase price
  $ (5,648 )
         


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ENSTAR GROUP LIMITED
(FORMERLY KNOWN AS CASTLEWOOD HOLDINGS LIMITED)
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.   ACQUISITIONS — (cont’d)
 
The following summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition:
 
                         
          Allocation of
       
    Net Assets
    Excess of Net
    Adjusted Net
 
    Acquired at
    Assets Over
    Assets Acquired
 
    Fair Value     Purchase Price     at Fair Value  
 
Cash
  $ 83,111     $     $ 83,111  
Other investments
    18,139       (223 )     17,916  
Investment in Enstar Group Limited
    426,797       (5,238 )     421,559  
Investment in BH
    15,246       (187 )     15,059  
Accounts receivable
    4,931             4,931  
Reinsurance balances payable (net)
    (509 )           (509 )
Losses and loss adjustment expenses
    (11,901 )           (11,901 )
Accounts payable
    (20,828 )           (20,828 )
                         
Net assets acquired at fair value
  $ 514,986     $ (5,648 )   $ 509,338  
                         
 
On February 23, 2007, the Company completed the acquisition of Inter-Ocean Holdings Ltd. (“Inter-Ocean”) for total consideration of $57,504. Inter-Ocean owns two reinsurance companies, one based in Bermuda and the other based in Ireland.
 
The purchase price and fair value of assets acquired for Inter-Ocean was as follows:
 
         
Purchase price
  $ 57,201  
Direct costs of acquisition
    303  
         
Total purchase price
  $ 57,504  
         
Net assets acquired at fair value
  $ 73,187  
         
Excess of net assets over purchase price (negative goodwill)
  $ (15,683 )
         
 
The negative goodwill of $15,683 relating to the acquisition of Inter-Ocean arose primarily as a result of the strategic desire of the vendors to achieve an exit from such operations and therefore to dispose of Inter-Ocean at a discount to fair value.
 
The following summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition:
 
         
Cash, restricted cash and investments
  $ 479,760  
Accounts receivable and accrued interest
    5,620  
Reinsurance balances receivable
    149,043  
Losses and loss adjustment expenses
    (415,551 )
Insurance and reinsurance balances payable
    (145,317 )
Accounts payable
    (368 )
         
Net assets acquired at fair value
  $ 73,187  
         


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Table of Contents

 
ENSTAR GROUP LIMITED
(FORMERLY KNOWN AS CASTLEWOOD HOLDINGS LIMITED)
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.   ACQUISITIONS — (cont’d)
 
The fair values of reinsurance assets and liabilities acquired are derived from probability weighted ranges of the associated projected cash flows, based on actuarially prepared information and management’s run-off strategy. Any amendment to the fair values resulting from changes in such information or strategy will be recognized when they occur.
 
The following unaudited proforma condensed combined income statement for the three and six months ended June 30, 2007 and 2006 combines the historical consolidated statements of income of the Company, EGI, BH and Inter-Ocean giving effect to the business combinations and related transactions as if they had occurred on January 1 of 2007 and 2006, respectively.
 
                                                                 
                                              Enstar
 
    Enstar
                                        Group
 
    Group
                Proforma
                Proforma
    Limited
 
Three Months Ended June 30, 2007:
  Limited     BH     EGI     Adjustment     Sub-Total     Inter-Ocean     Adjustment     Proforma  
 
Total Income
  $ 16,972       1,567       1,222       (1,492 )     18,269       679       (187 )     18,761  
Total Expenses
    (16,865 )     (773 )     7,820       1,072       (8,746 )     (206 )     187       (8,765 )
                                                                 
Net Earnings
  $ 107       794       9,042       (420 )     9,523       473             9,996  
                                                                 
Net Earnings per Ordinary Share — Basic
                                                          $ 0.84  
                                                                 
Net Earnings per Ordinary Share — Diluted
                                                          $ 0.82  
                                                                 
Weighted Average Shares — Basic
                                                            11,916,013  
                                                                 
Weighted Average Shares — Diluted
                                                            12,204,562  
                                                                 
                                                                 
Three Months Ended June 30, 2006:
                                                               
                                                                 
Total Income
  $ 16,317       613       1,173       (119 )     17,984       1,219       (188 )     19,015  
Total Expenses
    (4,440 )     (277 )     (41 )     (3,947 )     (8,705 )     (718 )     188       (9,235 )
                                                                 
Net Earnings
  $ 11,877       336       1,132       (4,066 )     9,279       501             9,780  
                                                                 
Net Earnings per Ordinary Share — Basic
                                                          $ 0.99  
                                                                 
Net Earnings per Ordinary Share — Diluted
                                                          $ 0.98  
                                                                 
Weighted Average Shares — Basic
                                                            9,849,321  
                                                                 
Weighted Average Shares — Diluted
                                                            9,945,994  
                                                                 


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Table of Contents

ENSTAR GROUP LIMITED
(FORMERLY KNOWN AS CASTLEWOOD HOLDINGS LIMITED)
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.   ACQUISITIONS — (cont’d)
 
                                                                 
                                              Enstar
 
    Enstar
                                        Group
 
    Group
                Proforma
                Proforma
    Limited
 
Six Months Ended June 30, 2007:
  Limited     BH     EGI     Adjustment     Sub-Total     Inter-Ocean     Adjustment     Proforma  
 
Total Income
  $ 38,769       2,819       2,280       (2,025 )     41,843       1,837       (375 )     43,305  
Total Expenses
    (41,993 )     (1,547 )     907       1,605       (41,028 )     (244 )     375       (40,897 )
                                                                 
Net (Loss) Earnings before Extraordinary Gain
    (3,224 )     1,272       3,187       (420 )     815       1,593             2,408  
Extraordinary Gain
    15,683                         15,683                     15,683  
                                                                 
Net Earnings
  $ 12,459       1,272       3,187       (420 )     16,498       1,593             18,091  
                                                                 
Net Earnings per Ordinary Share before Extraordinary Gains — Basic
                                                          $ 0.21  
Extraordinary Gain — Basic
                                                            1.36  
                                                                 
Net Earnings per Ordinary Share — Basic
                                                          $ 1.57  
                                                                 
Net Earnings per Ordinary Share before Extraordinary Gains — Diluted
                                                          $ 0.20  
Extraordinary Gain — Diluted
                                                            1.33  
                                                                 
Net Earnings per Ordinary Share — Diluted
                                                          $ 1.53  
                                                                 
Weighted Average Shares — Basic
                                                            11,540,318  
                                                                 
Weighted Average Shares — Diluted
                                                            11,817,225  
                                                                 
                                                                 
Six Months Ended June 30, 2006:
                                                               
                                                                 
Total Income
  $ 32,326       1,156       2,257       (626 )     35,113       2,271       (376 )     37,008  
Total Expenses
    (12,486 )     (572 )     703       (6,232 )     (18,587 )     (2,191 )     376       (20,402 )
                                                                 
Net Earnings (Loss) before Extraordinary Gain
    19,840       584       2,960       (6,858 )     16,526       80             16,606  
Extraordinary Gain
    4,347             875       (875 )     4,347                   4,347  
                                                                 
Net Earnings (Loss)
  $ 24,187       584       3,835       (7,733 )     20,873       80             20,953  
                                                                 
Net Earnings per Ordinary Share before Extraordinary Gains — Basic
                                                          $ 1.69  
Extraordinary gain — Basic
                                                            0.44  
                                                                 
Net Earnings per Ordinary Share — Basic
                                                          $ 2.13  
                                                                 
Net Earnings per Ordinary Share before Extraordinary Gains — Diluted
                                                          $ 1.67  
Extraordinary Gain — Diluted
                                                          $ 0.44  
                                                                 
Net Earnings per Ordinary Share — Diluted
                                                          $ 2.11  
                                                                 
Weighted Average Shares — Basic
                                                            9,802,832  
                                                                 
Weighted Average Shares — Diluted
                                                            9,930,359  
                                                                 
 
On June 12, 2007, the Company completed the acquisition of Tate & Lyle Reinsurance Ltd. (“Tate & Lyle”) for total consideration of $5,873. Tate & Lyle is a Bermuda-based reinsurance company in run-off. The purchase price and fair value of assets acquired for Tate & Lyle was as follows:
 
         
Purchase price
  $ 5,788  
Direct costs of acquisition
    85  
         
Total purchase price
  $ 5,873  
         
Net assets acquired at fair value
  $ 5,873  
         

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Table of Contents

 
ENSTAR GROUP LIMITED
(FORMERLY KNOWN AS CASTLEWOOD HOLDINGS LIMITED)
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.   ACQUISITIONS — (cont’d)
 
The following summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition:
 
         
Cash, restricted cash and investments
  $ 16,794  
Reinsurance balances receivable
    223  
Losses and loss adjustment expenses
    (11,144 )
         
Net assets acquired at fair value
  $ 5,873  
         
 
3.   EMPLOYEE BENEFITS
 
Our share-based compensation plans provide for the grant of various awards to our employees and to members of the Board of Directors. These are described, with the exception of the Options and the Deferred Compensation and Stock Plan for Non-employee Directors, in Note 12 to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2006. The information below includes both the employee and director components of our share-based compensation.
 
a) Employee share plans
 
         
Nonvested — January 1, 2007
    92,293  
Granted
    38,357  
Vested
    (104,788 )
Forfeited
     
         
Nonvested — June 30, 2007
    25,862  
         
 
On May 23, 2006, the Company entered into a merger agreement and a recapitalization agreement. These agreements provided for the cancellation of the then current annual incentive compensation plan and replaced it with a new annual incentive compensation plan.
 
i) 2004 -2005 employee share plan
 
As a result of the execution of these agreements, the accounting treatment for share-based awards under our employee share plan changed from book value to fair value. The determination of the share-award expenses was based on the fair-market value per common share of EGI as of the grant date and is recognized over the vesting period.
 
Compensation costs of $216 and $1,954 relating to the issuance of share-awards to employees of the Company in 2004 and 2005 have been recognized in the Company’s statement of earnings for the three and six months ended June 30, 2007, respectively, as compared to $19,161 and $19,598 for the three and six months ended June 30, 2006, respectively. Included in the amounts for the three and six months ended June 30, 2006 is $15,584 relating to the modification of the Company’s employee share plan from a book value plan to a fair value plan.
 
As of June 30, 2007, total unrecognized compensation costs related to the non-vested share awards amounted to $1,039. These costs are expected to be recognized over a weighted average period of 0.69 years.
 
ii) 2006-2010 Annual Incentive Plan and 2006 Equity Incentive Plan
 
For the six months ended June 30, 2007, 38,387 shares were awarded to a director, officers and employees under the 2006 Equity Incentive Plan. The total value of the awards were $3,788 of which $500 was charged as an


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Table of Contents

 
ENSTAR GROUP LIMITED
(FORMERLY KNOWN AS CASTLEWOOD HOLDINGS LIMITED)
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3.   EMPLOYEE BENEFITS — (cont’d)
 
expense for the six months ended June 30, 2007 and $3,288 was charged against the 2006-2010 Annual Incentive Plan accrual established for the year ended December 31, 2006.
 
As a result of the cancellation of the previous annual incentive compensation plan, $21,193 of unpaid bonus accrual was reversed during the three and six months ended June 30, 2006.
 
The accrued expense relating to the 2006-2010 Annual Incentive Plan for the three and six months ended June 30, 2007 was $1,925 and $4,285, respectively, as compared to $2,096 and $4,268 for the three and six months ended June 30, 2006, respectively.
 
(b) Options
 
Prior to the Merger, the Company had no options outstanding to purchase any of its share capital. In accordance with the Merger Agreement, on January 31, 2007, fully vested options were granted by the Company to replace options previously issued by EGI with the same fair value as the EGI options.
 
                 
          Weighted
 
          Average
 
    Number of
    Exercise
 
    Shares     Price  
 
Outstanding — January 1, 2007
        $  
Granted
    490,371       25.40  
Exercised
           
Forfeited
           
                 
Outstanding — June 30, 2007
    490,371     $ 25.40  
                 
 
Stock options outstanding and exercisable as of June 30, 2007 were as follows:
 
                         
Ranges of
          Weighted Average
Exercise
  Number of
  Weighted Average
  Remaining
Prices
  Options   Exercise Price   Contractual Life
 
$10 - 20
    323,645     $ 17.20       3.6 years  
  40 - 60
    166,726       41.32       6.2 years  
 
(c) Deferred Compensation and Stock Plan for Non-Employee Directors
 
EGI, prior to the Merger, had in place a Deferred Compensation and Stock Plan for Non-Employee Directors which permitted non-employee directors to receive all or a portion of their retainer and meeting fees in common stock and to defer all or a portion of their retainer and meeting fees in stock units. Upon completion of the Merger, each stock unit was converted from a right to receive a share of EGI common stock into a right to receive an Enstar Group Limited ordinary share.
 
On June 5, 2007, the Compensation Committee of the Board of Directors of the Company approved the Enstar Group Limited Deferred Compensation and Ordinary Share Plan for Non-Employee Directors (the “EGL Deferred Compensation Plan”). The EGL Deferred Compensation Plan became effective immediately. The EGL Deferred Compensation Plan provides each member of the Company’s Board of Directors who is not an officer or employee of the Company or any of its subsidiaries (each, a “Non-Employee Director”) with the opportunity to elect (i) to receive all or a portion of his or her compensation for services as a director in the form of the Company’s ordinary shares instead of cash and (ii) to defer receipt of all or a portion of such compensation until retirement or termination.


12


Table of Contents

 
ENSTAR GROUP LIMITED
(FORMERLY KNOWN AS CASTLEWOOD HOLDINGS LIMITED)
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Non-Employee Directors electing to receive compensation in the form of ordinary shares will receive whole ordinary shares (with any fractional shares payable in cash) as of the date compensation would otherwise have been payable. Non-Employee Directors electing to defer compensation will have such compensation converted into share units payable as a lump sum distribution after the director’s “separation from service” as defined under Section 409A of the Internal Revenue Code of 1986, as amended. The lump sum share unit distribution will be made in the form of ordinary shares, with fractional shares paid in cash.
 
4.   EARNINGS PER SHARE
 
The following table sets forth the comparison of basic and diluted earnings per share for the three and six-month periods ended June 30, 2007 and 2006.
 
                                 
    Three Months Ended     Six Months Ended  
    June 30,
    June 30,
    June 30,
    June 30,
 
    2007     2006     2007     2006  
 
Basic earnings per share
                               
Net earnings
  $ 10,904     $ 11,877     $ 24,278     $ 24,187  
Weighted average shares outstanding — basic
    11,916,013       9,849,321       11,540,318       9,802,832  
                                 
Basic earnings per share
  $ 0.92     $ 1.21     $ 2.10     $ 2.46  
                                 
Diluted earnings per share
                               
Net earnings
  $ 10,904     $ 11,877     $ 24,278     $ 24,187  
Weighted average shares outstanding — basic
    11,916,013       9,849,321       11,540,318       9,802,832  
Share equivalents:
                               
Unvested shares
    30,242       96,673       61,096       127,527  
Options
    258,307             215,811        
                                 
Weighted average shares outstanding — diluted
    12,204,562       9,945,994       11,817,225       9,930,359  
                                 
Diluted earnings per share
  $ 0.89     $ 1.19     $ 2.06     $ 2.44  
                                 
 
The weighted average ordinary shares outstanding shown for the three and six months ended June 30, 2007 and June 30, 2006 reflect the conversion of Class A, B, C and D shares to ordinary shares on January 31, 2007, as part of the recapitalization completed in connection with the Merger, as if the conversion occurred on January 1, 2007 and January 1, 2006. For the three and six months ended June 30, 2007, the ordinary shares issued to acquire EGI are reflected in the calculation of the weighted average ordinary shares outstanding from January 31, 2007, the date of issue.
 
5.   COMMITMENTS
 
On April 15, 2007, the Company entered into a Third Party Equity Commitment Letter (the “Commitment Letter”) with J.C. Flowers II L.P. (the “Flowers Fund”). The Commitment Letter provides for the Company to contribute up to an aggregate of $200,000 to one or more co-investment vehicles (the “Co-Investment Vehicles”) that will be created to participate alongside the Flowers Fund and certain other investors in the proposed acquisition of SLM Corporation, commonly known as Sallie Mae. The Company’s investment is conditioned upon the conditions to the closing of the proposed acquisition of Sallie Mae being satisfied or waived by the Flowers Fund. Pursuant to the terms of the Commitment Letter, in the event that the transaction is consummated, a Flowers Fund designee would be named general partner and managing member of each Co-Investment Vehicle.
 
The Company’s current commitment to the Sallie Mae transaction has reduced to approximately $130 million. Although this commitment may be reduced further, the Company currently intends to hold a substantial investment


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Table of Contents

 
ENSTAR GROUP LIMITED
(FORMERLY KNOWN AS CASTLEWOOD HOLDINGS LIMITED)
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

in Sallie Mae, should the transaction be completed. In the event the transaction closes, the Company expects to receive underwriting fees for that portion of its original commitment which is taken up by other investors. In the event that the transaction is not completed, the Company would receive a portion of any termination fees paid by Sallie Mae and would also be responsible for a portion of termination fees due to Sallie Mae, if any.
 
The Company has previously committed to invest an aggregate of $100,000 in the Flowers Fund. The commitment to invest in the Co-Investment Vehicles pursuant to the Commitment Letter is in addition to that prior $100,000 commitment.
 
J.C. Flowers II L.P. is a private investment fund for which JCF Associates II L.P. is the general partner and J.C. Flowers & Co. LLC is the investment advisor. JCF Associates II L.P. and J.C. Flowers & Co. LLC are controlled by J. Christopher Flowers, a director and one of the largest shareholders of the Company. In addition, John J. Oros, a director and Executive Chairman of the Company, is a Managing Director of J.C. Flowers & Co. LLC.
 
On June 1, 2007, a wholly-owned subsidiary of the Company entered into a definitive agreement for the acquisition of a UK based reinsurance company in run-off for a purchase price of approximately $30,750. Completion of the transaction, expected during the third quarter, is conditioned on receipt of regulatory approval.
 
6.   RELATED PARTY TRANSACTIONS
 
The Company has entered into certain transactions with companies and partnerships that are affiliated with Messrs. J. Christopher Flowers and John J. Oros. Messrs Flowers and Oros are members of the Company’s Board of Directors and Mr. Flowers is one of the largest shareholders of Enstar.
 
The transactions involving companies and partnerships where Mr. Flowers and Mr. Oros have an involvement are, with the exception of those disclosed elsewhere in the unaudited condensed consolidated financial statements, as follows:
 
  •  On June 19, 2007 and December 22, 2006, the Company received management fees for advisory services provided to J.C. Flowers II L.P. (the “Flowers Fund”), a private investment fund, totaling $1,365. Of this amount $455 was earned during the six months ended June 30, 2007.
 
  •  On June 7, 2006, the commitment made by the Company in March 2006 to invest an aggregate of $75,000 in the Flowers Fund was accepted by the Flowers Fund. In addition, as a result of the merger with EGI, the commitment made by EGI of $25,000 to the Flowers Fund increases the Company’s total commitment to $100,000. The Company’s commitment may be drawn down by the Flowers Fund over approximately the next six years. As at June 30, 2007 the Flowers Fund had drawn down a total of $21,664 of the Company’s $100,000 commitment to the Flowers Fund.
 
7.   TAXATION
 
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a $4,858 increase to the January 1, 2007 balance of retained earnings.
 
As a result of the Company’s merger with EGI on January 31, 2007, the Company assumed approximately $15,208 of liabilities for unrecognized tax benefits related to various U.S., state and local income tax matters, and $2,491 of accrued interest related to uncertain tax positions as a result of EGI’s adoption of FIN 48 on January 1, 2007. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $4,856.
 
Within specific countries, the Company’s subsidiaries may be subject to audit by various tax authorities and may be subject to different statutes of limitations expiration dates. With limited exceptions, the Company’s major


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ENSTAR GROUP LIMITED
(FORMERLY KNOWN AS CASTLEWOOD HOLDINGS LIMITED)
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

subsidiaries which operate in the U.S. and U.K. are no longer subject to audits for years before 2003 and 2005, respectively.
 
During the quarter, there were reductions to the unrecognized tax benefit due to the expiration of statutes of limitations of $8,495.
 
It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of the unrecognized tax positions could significantly decrease by up to approximately $3,515 within the next 12 months if the statute of limitations expires on certain tax periods.
 
8.   SEGMENT INFORMATION
 
The determination of reportable segments is based on how senior management monitors the Company’s operations. The Company measures the results of its operations under two major business categories: reinsurance and consulting.


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ENSTAR GROUP LIMITED
(FORMERLY KNOWN AS CASTLEWOOD HOLDINGS LIMITED)
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8.   SEGMENT INFORMATION — (cont’d)
 
Consulting fees for the reinsurance segment are intercompany fees paid to the consulting segment. Salary and benefits for the reinsurance segment relate to the discretionary bonus expense on the net income after taxes of the reinsurance segment.
 
                         
    Three Months Ended June 30, 2007  
    Consulting     Reinsurance     Total  
 
Consulting fees
  $ 10,479     $ (6,653 )   $ 3,826  
Net investment income
    778       16,198       16,976  
Net realized losses
          (132 )     (132 )
                         
      11,257       9,413       20,670  
                         
Net reduction in loss and loss adjustment expense liabilities
          (805 )     (805 )
Salaries and benefits
    8,121       2,239       10,360  
General and administrative expenses
    5,217       2,698       7,915  
Interest expense
          1,307       1,307  
Net foreign exchange loss (gain)
    26       (3,095 )     (3,069 )
                         
      13,364       2,344       15,708  
                         
Earnings (loss) before income taxes and minority interest
    (2,107 )     7,069       4,962  
Income taxes
    175       7,934       8,109  
Minority interest
          (2,167 )     (2,167 )
                         
Net (loss) earnings
  $ (1,932 )   $ 12,836     $ 10,904  
                         
 


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ENSTAR GROUP LIMITED
(FORMERLY KNOWN AS CASTLEWOOD HOLDINGS LIMITED)
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8.   SEGMENT INFORMATION — (cont’d)
 
                         
    Three Months Ended June 30, 2006  
    Consulting     Reinsurance     Total  
 
Consulting fees
  $ 10,487     $ (5,236 )   $ 5,251  
Net investment income
    336       10,809       11,145  
Net realized losses
          (79 )     (79 )
                         
      10,823       5,494       16,317  
                         
Net reduction in loss and loss adjustment expense liabilities
          (4,323 )     (4,323 )
Salaries and benefits
    4,723       1,768       6,491  
General and administrative expenses
    3,543       1,452       4,995  
Interest expense
          532       532  
Net foreign exchange loss (gain)
    1,275       (8,772 )     (7,497 )
                         
      9,541       (9,343 )     198  
                         
Earnings before income taxes, minority interest and share of income of partly-owned company
    1,282       14,837       16,119  
Income taxes
    574       7       581  
Minority interest
          (4,974 )     (4,974 )
Share of income of partly-owned company
          151       151  
                         
Net earnings before extraordinary gain
    1,856       10,021       11,877  
Extraordinary gain
                 
                         
Net earnings
  $ 1,856     $ 10,021     $ 11,877  
                         
 

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ENSTAR GROUP LIMITED
(FORMERLY KNOWN AS CASTLEWOOD HOLDINGS LIMITED)
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8.   SEGMENT INFORMATION — (cont’d)
 
                         
    Six Months Ended June 30, 2007  
    Consulting     Reinsurance     Total  
 
Consulting fees
  $ 21,338     $ (12,851 )   $ 8,487  
Net investment income
    1,471       33,285       34,756  
Net realized gains
          439       439  
                         
      22,809       20,873       43,682  
                         
Net increase in loss and loss adjustment expense liabilities
          1,705       1,705  
Salaries and benefits
    18,059       5,103       23,162  
General and administrative expenses
    8,585       5,003       13,588  
Interest expense
          2,325       2,325  
Net foreign exchange loss (gain)
    73       (3,088 )     (3,015 )
                         
      26,717       11,048       37,765  
                         
Earnings (loss) before income taxes and minority interest
    (3,908 )     9,825       5,917  
Income taxes
    (733 )     7,826       7,093  
Minority interest
          (4,415 )     (4,415 )
                         
Net (loss) earnings before extraordinary gain
    (4,641 )     13,236       8,595  
Extraordinary gain
          15,683       15,683  
                         
Net (loss) earnings
  $ (4,641 )   $ 28,919     $ 24,278  
                         
 

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ENSTAR GROUP LIMITED
(FORMERLY KNOWN AS CASTLEWOOD HOLDINGS LIMITED)
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8.   SEGMENT INFORMATION — (cont’d)
 
                         
    Six Months Ended June 30, 2006  
    Consulting     Reinsurance     Total  
 
Consulting fees
  $ 20,422     $ (8,822 )   $ 11,600  
Net investment income
    577       20,228       20,805  
Net realized losses
          (79 )     (79 )
                         
      20,999       11,327       32,326  
                         
Net reduction in loss and loss adjustment expense liabilities
          (6,780 )     (6,780 )
Salaries and benefits
    10,821       3,619       14,440  
General and administrative expenses
    6,004       2,129       8,133  
Interest expense
          532       532  
Net foreign exchange loss (gain)
    1,249       (9,216 )     (7,967 )
                         
      18,074       (9,716 )     8,358  
                         
Earnings before income taxes, minority interest and share of income of partly-owned company
    2,925       21,043       23,968  
Income taxes
    751       44       795  
Minority interest
          (5,186 )     (5,186 )
Share of income of partly-owned company
          263       263  
                         
Net earnings before extraordinary gain
    3,676       16,164       19,840  
Extraordinary gain
          4,347       4,347  
                         
Net earnings
  $ 3,676     $ 20,511     $ 24,187  
                         

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders
of Enstar Group Limited (formerly known as Castlewood Holdings Limited)
 
We have reviewed the accompanying condensed consolidated balance sheet of Enstar Group Limited and subsidiaries (the “Company”) as of June 30, 2007, and the related condensed consolidated statements of earnings and comprehensive income for the three-month and the six-month periods ended June 30, 2007 and 2006, and changes in shareholders’ equity and statements of cash flows for the six-month periods ended June 30, 2007 and 2006. These interim financial statements are the responsibility of the Company’s management.
 
We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Enstar Group Limited and subsidiaries as of December 31, 2006 and the related consolidated statements of earnings, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended; and in our report dated March 16, 2007, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2006 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 
/s/  Deloitte & Touche
Hamilton, Bermuda
August 9, 2007


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Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following is a discussion and analysis of our results of operations for the three and six months ended June 30, 2007 and 2006. This discussion and analysis should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto and the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
 
Business Overview
 
Enstar Group Limited (formerly Castlewood Holdings Limited) was formed in August 2001 under the laws of Bermuda to acquire and manage insurance and reinsurance companies in run-off, and to provide management, consulting and other services to the insurance and reinsurance industry. Since our formation, we, through our subsidiaries, have completed several acquisitions of insurance and reinsurance companies and are now administering those businesses in run-off. We derive our net earnings from the ownership and management of these companies primarily by settling insurance and reinsurance claims below the recorded loss reserves and from returns on the portfolio of investments retained to pay future claims. In addition, we have formed other businesses that provide management and consultancy services, claims inspection services and reinsurance collection services to our affiliates and third-party clients for both fixed and success-based fees.
 
Recent Transactions
 
On January 31, 2007, we completed the merger, or the Merger, of our wholly-owned subsidiary, CWMS Subsidiary Corp., with and into The Enstar Group, Inc., a Georgia corporation, or EGI. As a result of the Merger, EGI, renamed Enstar USA, Inc., is now our direct wholly-owned subsidiary.
 
On February 23, 2007, Oceania Holdings Ltd., our wholly-owned subsidiary, completed the previously announced acquisition of Inter-Ocean Holdings Ltd., or Inter-Ocean. We acquired Inter-Ocean by purchasing all of the outstanding capital stock of Inter-Ocean from its stockholders for a total purchase price of approximately $57 million, which was funded with available cash on hand and the proceeds of approximately $26.8 million in new bank debt. Inter-Ocean owns two reinsurance companies, one based in Bermuda and the other based in Ireland. Both companies wrote international reinsurance and had in place retrocessional policies providing for the full reinsurance of all of the risks they assumed. In April 2005, the board of directors of Inter-Ocean decided to cease underwriting. We provided management services to Inter-Ocean for approximately 13 months prior to the completion of the acquisition.
 
On June 1, 2007, a wholly-owned subsidiary of the Company entered into a definitive agreement for the acquisition of a U.K. based reinsurance company in run-off for a purchase price of approximately $30.7 million. Completion of the transaction, expected during the third quarter, is conditioned on receipt of regulatory approval.
 
On June 12, 2007, Kenmare Holdings Ltd., our wholly-owned subsidiary, completed the acquisition of Tate & Lyle Reinsurance Ltd., or Tate & Lyle, a Bermuda based reinsurance company in run-off. We acquired Tate & Lyle by purchasing all of the outstanding capital stock of Tate & Lyle from its stockholders for a total purchase price of approximately $5.9 million.


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Results of Operations
 
The following table sets forth Enstar’s selected consolidated statement of operations data for each of the periods indicated.
 
                                 
                Six Months Ended
 
    Three Months Ended June 30,     June 30,  
    2007     2006     2007     2006  
    (in thousands of U.S. dollars)  
 
INCOME
                               
Consulting fees
  $ 3,826     $ 5,251     $ 8,487     $ 11,600  
Net investment income
    16,976       11,145       34,756       20,805  
Net realized (losses)/gains
    (132 )     (79 )     439       (79 )
                                 
TOTAL INCOME
    20,670       16,317       43,682       32,326  
                                 
EXPENSES
                               
Net (reduction) increase in loss and loss adjustment expense liabilities
    (805 )     (4,323 )     1,705       (6,780 )
Salaries and benefits
    10,360       6,491       23,162       14,440  
General and administrative expenses
    7,915       4,995       13,588       8,133  
Interest expense
    1,307       532       2,325       532  
Net foreign exchange (gain)
    (3,069 )     (7,497 )     (3,015 )     (7,967 )
                                 
TOTAL EXPENSES
    15,708       198       37,765       8,358  
                                 
Earnings before income taxes, minority interest and share of net earnings of partly-owned company
    4,962       16,119       5,917       23,968  
Income tax recovery
    8,109       581       7,093       795  
Minority interest
    (2,167 )     (4,974 )     (4,415 )     (5,186 )
Share of net earnings of partly-owned company
    0       151       0       263  
                                 
Earnings before extraordinary gain
    10,904       11,877       8,595       19,840  
Extraordinary gain — Negative goodwill (2006:
                               
net of minority interest of $4,329)
    0       0       15,683       4,347  
                                 
NET EARNINGS
  $ 10,904     $ 11,877     $ 24,278     $ 24,187  
                                 
 
Comparison of Three Months Ended June 30, 2007 and 2006
 
We reported consolidated net earnings of approximately $10.9 million for the three months ended June 30, 2007 compared to approximately $11.9 million for the same period in 2006. The decrease of approximately $1.0 million was primarily a result of the following:
 
(i) an increase in salary and general administrative expenses of $6.8 million partially offset by an increase in net investment income of $5.8 million;
 
(ii) reductions in consulting fee income of $1.4 million, primarily due to the expiry of one consulting fee engagement;
 
(iii) lower reduction in loss and loss adjustment expense liabilities of $3.5 million largely due to increased cost of amortizing fair value adjustments relating to companies acquired subsequent to June 30, 2006;
 
(iv) reduced foreign exchange gains of $4.4 million partially offset by reduced minority interest costs of $2.8 million related to 2006 foreign exchange gains;
 
(v) increased interest expense of $0.8 million due to additional borrowings since June 30, 2006; largely offset by


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(vi) an increase in income tax recovery of $7.5 million relating primarily to the expiry of the statute of limitations on certain of our previously recorded uncertain tax liabilities.
 
Consulting Fees:
 
                         
    Three Months Ended June 30,  
    2007     2006     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ 10,479     $ 10,487     $ (8 )
Reinsurance
    (6,653 )     (5,236 )     (1,417 )
                         
Total
  $ 3,826     $ 5,251     $ (1,425 )
                         
 
We earned consulting fees of approximately $3.8 million and $5.3 million for the three months ended June 30, 2007 and 2006, respectively. The reduction in consulting fees primarily relates to the expiry of one external consulting fee engagement which had generated total fees of $1.5 million for the three months ended June 30, 2006.
 
Internal management fees of $6.7 million and $5.2 million were paid in the three months ended June 30, 2007 and 2006, respectively, by our reinsurance companies to our consulting companies. The increase in fees paid by the reinsurance segment was due primarily to the fees paid by reinsurance companies that were acquired subsequent to June 30, 2006.
 
Net Investment Income and Net Realized Gains/(Losses):
 
                                                 
    Three Months Ended June 30,  
    Net Investment Income           Net Realized Gains/(Losses)  
    2007     2006     Variance     2007     2006     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ 778     $ 336     $ 442     $ 0     $ 0     $ 0  
Reinsurance
    16,198       10,809       5,389       (132 )     (79 )     (53 )
                                                 
Total
  $ 16,976     $ 11,145     $ 5,831     $ (132 )   $ (79 )   $ (53 )
                                                 
 
Net investment income for the three month period ended June 30, 2007 increased by $5.8 million to $17.0 million, as compared to $11.2 million for the three-month period ended June 30, 2006. The increase was primarily attributable to the increase in average cash and investments balances from $1,132.5 million to $1,470.3 million for the three months ended June 30, 2006 and 2007. The increase in average cash and investment balances was due to the merger and acquisitions completed subsequent to June 30, 2006.
 
Net realized losses for the three months ended June 30, 2007 and 2006 were $0.1 million and $0.1 million, respectively. Based on our current investment strategy, we do not expect net realized gains and losses to be significant in the foreseeable future.
 
The average return on the cash and fixed maturities investments for the three month period ended June 30, 2007 was 4.58%, as compared to the average return of 3.91% for the three-month period ended June 30, 2006. The increase in yield was primarily the result of increasing U.S. interest rates — the U.S. Federal Funds Rate has increased from an average of 4.97% for the quarter ended June 30, 2006 to an average of 5.25% for the quarter ended June 30, 2007. In respect of our fixed income investments at June 30, 2007, 91.8% had a Standard & Poor’s credit rating of AAA.
 
Net Reduction in Loss and Loss Adjustment Expense Liabilities:
 
The net reduction in loss and loss adjustment expense liabilities for the three months ended June 30, 2007 and 2006 was $0.8 million and $4.3 million, respectively. The change between the periods is attributable to the amortization, over the estimated payout period, of fair value adjustments relating to companies acquired of $6.1 million, compared to $1.3 million for the same period in 2006, partially offset by the reduction in estimates of ultimate losses of $1.1 million, compared to an increase of $0.2 million for the same period in 2006. The following


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table shows the components of the movement in net reduction in loss and loss adjustment expense liabilities for the three months ended June 30, 2007 and 2006.
 
                 
    Three Months Ended June 30,  
    2007     2006  
    (in thousands of U.S. dollars)  
 
Net Losses Paid
  $ (13,179 )   $ (23,244 )
Net Change in Case and LAE Reserves
    6,399       8,229  
Net Change in IBNR
    7,585       19,338  
                 
Net Reduction in Loss and Loss Adjustment
               
Expense Liabilities
  $ 805     $ 4,323  
                 
 
The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended June 30, 2007 and 2006. Losses incurred and paid are reflected net of reinsurance recoverables.
 
                 
    Three Months Ended June 30,  
    2007     2006  
    (in thousands of U.S. dollars)  
 
Balance as of April 1
  $ 1,622,061     $ 1,042,608  
Less: Reinsurance Recoverables
    316,487       251,001  
                 
      1,305,574       791,607  
Incurred Related to Prior Years
    (805 )     (4,323 )
Paids Related to Prior Years
    (13,179 )     (23,244 )
Effect of Exchange Rate Movement
    7,531       7,970  
Acquired on Acquisition of Subsidiaries
    11,029       0  
                 
Net Balance as at June 30
    1,310,150       772,010  
Plus: Reinsurance Recoverables
    317,126       253,961  
                 
Balance as at June 30
  $ 1,627,276     $ 1,025,971  
                 
 
Salaries and Benefits:
 
                         
    Three Months Ended June 30,  
    2007     2006     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ 8,121     $ 4,723     $ (3,398 )
Reinsurance
    2,239       1,768       (471 )
                         
Total
  $ 10,360     $ 6,491     $ (3,869 )
                         
 
Salaries and benefits, which include expenses relating to our discretionary bonus and employee share plans, were $10.4 million and $6.5 million for the three month periods ended June 30, 2007 and 2006, respectively. The increase in salaries and benefits for the consulting segment was due to the following factors: 1) the growth in staff numbers from 182, as of June 30, 2006, to 203, as of June 30, 2007; and 2) on May 23, 2006 the Company entered into a merger agreement and a recapitalization agreement which resulted in the existing annual incentive compensation plan being cancelled and the modification of the accounting treatment for share-based awards from a book value plan to a fair value plan. The net effect of these changes was to reduce the total salaries and benefits expense for the three-months ended June 30, 2006 by $2.0 million.
 
We expect that staff costs will continue to increase moderately during 2007 as we continue to grow and add staff. Bonus accrual expenses will be variable and dependent on our overall profitability.


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General and Administrative Expenses:
 
                         
    Three Months Ended June 30,  
    2007     2006     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ 5,217     $ 3,543     $ (1,674 )
Reinsurance
    2,698       1,452       (1,246 )
                         
Total
  $ 7,915     $ 4,995     $ (2,920 )
                         
 
General and administrative expenses attributable to the consulting segment increased by $1.7 million during the three months ended June 30, 2007, as compared to the three months ended June 30, 2006 due primarily to increased professional fees relating to legal and accounting costs associated with our reporting obligations as a public company.
 
General and administrative expenses attributable to the reinsurance segment increased by $1.3 million during the three months ended June 30, 2007, as compared to the three months ended June 30, 2006. The increased costs for the current quarter related primarily to additional general and administrative expenses of $1.4 million incurred in relation to companies that we acquired subsequent to June 30, 2006.
 
Interest Expense:
 
                         
    Three Months Ended June 30,  
    2007     2006     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $     $     $  
Reinsurance
    1,307       532       (775 )
                         
Total
  $ 1,307     $ 532     $ (775 )
                         
 
Interest expense of $1.3 million and $0.5 million was recorded for the three months ended June 30, 2007 and 2006, respectively. This amount relates to the interest on the funds that were borrowed from a London-based bank to assist with the financing of the Brampton Insurance Company Limited, or Brampton, Cavell Holdings Limited, or Cavell, and Inter-Ocean acquisitions. The increase in 2007 over 2006 was due to the Cavell and Inter-Ocean facilities that were entered into subsequent to June 30, 2006.
 
Foreign Exchange Gain/(Loss):
 
                         
    Three Months Ended June 30,  
    2007     2006     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ (26 )   $ (1,275 )   $ 1,249  
Reinsurance
    3,095       8,772       (5,677 )
                         
Total
  $ 3,069     $ 7,497     $ (4,428 )
                         
 
We recorded a foreign exchange gain of $3.1 million for the three month period ended June 30, 2007, as compared to a foreign exchange gain of $7.5 million for the same period in 2006. For the three months ended June 30, 2007, the foreign exchange gain arose primarily as a result of: 1) the holding of surplus British Pounds; and 2) the holding by Cavell of surplus net Canadian and Australian dollars, as required by local regulatory obligations, at a time when these currencies have been appreciating against the U.S. Dollar.
 
The gain for the three-month period ended June 30, 2006 arose as a result of having a short-term surplus of British Pounds following our acquisition of Brampton during a period of strengthening of the British Pound against the U.S. Dollar.


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Income Taxes Recovery:
 
                         
    Three Months Ended June 30,  
    2007     2006     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ 175     $ 574     $ (399 )
Reinsurance
    7,934       7       7,927  
                         
Total
  $ 8,109     $ 581     $ 7,528  
                         
 
We recorded an income tax recovery of $8.1 million and $0.6 million for the three months ended June 30, 2007 and 2006, respectively. During the quarter ended June 30, 2007, the statute of limitations expired on certain previously recorded uncertain tax liabilities. The benefit of the expiration of tax recoveries was $8.5 million.
 
Minority Interest:
 
                         
    Three Months Ended June 30,  
    2007     2006     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $     $     $  
Reinsurance
    (2,167 )     (4,974 )     2,807  
                         
Total
  $ (2,167 )   $ (4,974 )   $ 2,807  
                         
 
We recorded a minority interest in earnings of $2.2 million and $5.0 million for the three months ended June 30, 2007 and 2006, respectively, reflecting the 49.9% minority economic interest held by a third party in the earnings from Hillcot and Brampton. The decrease in minority interest was due to the decrease in the combined net earnings for the quarter of Brampton and Hillcot primarily as a result of reduced foreign exchange gains in Brampton.
 
Comparison of Six Months Ended June 30, 2007 and 2006
 
We reported consolidated net earnings of approximately $24.3 million for the six months ended June 30, 2007 compared to approximately $24.2 million for the same period in 2006. Included as part of net earnings for 2007 and 2006 are extraordinary gains relating to negative goodwill of $15.7 million and $4.3 million (net of minority interest of $4.3 million), respectively. For the six months ended June 30, 2007, we reported earnings before extraordinary gains of approximately $8.6 million compared to earnings before extraordinary gains of approximately $19.8 million for the same period in 2006. The decrease of approximately $11.2 million was primarily a result of the following:
 
(i) an increase in salary and general administrative expenses of $14.2 million offset by an increase in net investment income of $14.0 million;
 
(ii) reductions in consulting fee income of $3.1 million, primarily due to the expiry of one consulting fee engagement and the reduction in external fee income generated from companies that were subsequently acquired;
 
(iii) lower reduction in loss and loss adjustment expense liabilities of $8.5 million largely due to increased cost of amortizing fair value adjustments partially offset by increased reductions in provisions for run-off expenses, both relating to companies acquired subsequent to June 30, 2006, together with the costs of commuting one of the company’s largest reinsurance receivables in the first quarter of 2007;
 
(iv) reduced foreign exchange gains of $5.0 million partially offset by reduced minority interest costs of $0.8 million related to 2006 foreign exchange gains;
 
(v) increased interest expense of $1.8 million due to additional borrowings since June 30, 2006; partially offset by
 
(vi) an increase in income tax recovery of $6.3 million relating primarily to the expiry of the statute of limitations on certain of our previously recorded uncertain tax liabilities.


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Consulting Fees:
 
                         
    Six Months Ended June 30,  
    2007     2006     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ 21,338     $ 20,422     $ 916  
Reinsurance
    (12,851 )     (8,822 )     (4,029 )
                         
Total
  $ 8,487     $ 11,600     $ (3,113 )
                         
 
We earned consulting fees of approximately $8.5 million and $11.6 million for the six months ended June 30, 2007 and 2006, respectively. The reduction in consulting fees primarily relates to the expiry of one external consulting fee arrangement which had generated total fees of $2.0 million for the six months ended June 30, 2006 along with $1.0 million in fees from third party companies earned to June 30, 2006 that were subsequently acquired and now form part of internal management fee income.
 
Internal management fees of $12.9 million and $8.8 million were paid in the six months ended June 30, 2007 and 2006, respectively, by our reinsurance companies to our consulting companies. The increase in fees paid by the reinsurance segment was due primarily to the fees paid by reinsurance companies that were acquired subsequent to June 30, 2006.
 
Net Investment Income and Net Realized Gains/(Losses):
 
                                                 
    Six Months Ended June 30,  
                Net Realized
       
    Net Investment Income           Gains/(Losses)        
    2007     2006     Variance     2007     2006     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ 1,471     $ 577     $ 894     $ 0     $ 0     $ 0  
Reinsurance
    33,285       20,228       13,057       439       (79 )     518  
                                                 
Total
  $ 34,756     $ 20,805     $ 13,951     $ 439     $ (79 )   $ 518  
                                                 
 
Net investment income for the six month period ended June 30, 2006 increased by $14.0 million to $34.8 million, as compared to $20.8 million for the six month period ended June 30, 2006. The increase was primarily attributable to the increase in average cash and investment balances from $996.9 million to $1,439.7 million for the six months ended June 30, 2006 and 2007, respectively. The increase in average cash and investment balances was due to the merger and acquisitions that were completed subsequent to June 30, 2006.
 
The average return on the cash and fixed maturities investments for the six month period ended June 30, 2007 was 4.89%, as compared to the average return of 4.16% for the six month period ended June 30, 2006. The increase in yield was primarily the result of increasing U.S. interest rates — the U.S. Federal Funds Rate increased from an average of 4.66% for the six months ended June 30, 2006 to an average of 5.25% for the six months ended June 30, 2007.
 
Net realized gains/(losses) for the six months ended June 30, 2006 and 2005 were $0.4 million and $(0.1) million, respectively. Based on our current investment strategy, we do not expect net realized gains and losses to be significant in the foreseeable future.
 
Net Increase (Reduction) in Loss and Loss Adjustment Expense Liabilities:
 
Net increase (reduction) in loss and loss adjustment expense liabilities for the six months ended June 30, 2007 and 2006 were $1.7 million and $(6.8) million, respectively. The change in the period is attributable to the amortization, over the estimated payout period, of fair value adjustments relating to companies acquired amounting to $11.8 million compared to $2.6 million for the same period in 2006, an increase in loss and loss adjustment expense liabilities of $0.7 million, primarily caused by a $2.2 million loss in the first quarter of 2007 following the commutation of one of the Company’s largest reinsurance receivables, partially offset by the reduction in estimates


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of loss adjustment expense liabilities of $11.1 million, to reflect 2007 run-off activity, compared to $9.7 million for the same period in 2006.
 
The following table shows the components of the movement in net reduction in loss and loss adjustment expense liabilities for the six months ended June 30, 2007 and 2006:
 
                 
    Six Months Ended June 30,  
    2007     2006  
    (in thousands of U.S. dollars)  
 
Net Losses Paid
  $ (12,656 )   $ (27,456 )
Net Change in Case and LAE Reserves
    (1,768 )     16,121  
Net Change in IBNR
    12,719       18,115  
                 
Net (Increase) Reduction in Loss and Loss Adjustment
               
Expense Liabilities
  $ (1,705 )   $ 6,780  
                 
 
The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the six months ended June 30, 2007 and 2006. Losses incurred and paid are reflected net of reinsurance recoverables.
 
                 
    Six Months Ended June 30,  
    2007     2006  
    (in thousands of U.S. dollars)  
 
Balance as of January 1,
  $ 1,214,419     $ 806,559  
Less: Reinsurance Recoverables
    342,160       213,399  
                 
      872,259       593,160  
Incurred Related to Prior Years
    1,705       (6,780 )
Paids Related to Prior Years
    (12,656 )     (27,456 )
Effect of Exchange Rate Movement
    8,892       4,838  
Acquired on Acquisition of Subsidiaries
    439,950       208,248  
                 
Net Balance as at June 30,
    1,310,150       772,010  
Plus: Reinsurance Recoverables
    317,126       253,961  
                 
Balance as of June 30
  $ 1,627,276     $ 1,025,971  
                 
 
Salaries and Benefits:
 
                         
    Six Months Ended June 30,  
    2007     2006     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ 18,059     $ 10,821     $ (7,238 )
Reinsurance
    5,103       3,619       (1,484 )
                         
Total
  $ 23,162     $ 14,440     $ (8,722 )
                         
 
Salaries and benefits, which include expenses relating to our discretionary bonus and employee share plans, were $23.2 million and $14.4 million for the six month periods ended June 30, 2007 and 2006, respectively. The increase in salaries and benefits for the consulting segment was due to the following factors: 1) the growth in staff numbers from 182, as of June 30, 2006, to 203, as of June 30, 2007, 2) on May 23, 2006 the Company entered into a merger agreement and a recapitalization agreement which resulted in the existing annual incentive compensation plan being cancelled and the modification of the accounting treatment for share-based awards from a book value plan to a fair value plan — the net effect of these changes was to reduce the total salaries and benefits by $2.0 million; and 3) payment of a special bonus to Mr. John J. Oros and Mr. Nimrod T. Frazer, totaling $2.0 million, in recognition of their contributions to the successful completion of the merger. We expect that staff costs will


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continue to increase moderately during 2007 as we continue to grow and add staff. Bonus accrual expenses will be variable and dependent on our overall profitability.
 
General and Administrative Expenses:
 
                         
    Six Months Ended June 30,  
    2007     2006     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ 8,585     $ 6,004     $ (2,581 )
Reinsurance
    5,003       2,129       (2,874 )
                         
Total
  $ 13,588     $ 8,133     $ (5,455 )
                         
 
General and administrative expenses attributable to the consulting segment increased by $2.6 million during the six months ended June 30, 2007, as compared to the six months ended June 30, 2006 due primarily to increased professional fees relating to legal and accounting costs associated with our reporting obligations as a public company.
 
General and administrative expenses attributable to the reinsurance segment increased by $2.9 million during the six months ended June 30, 2007, as compared to the six months ended June 30, 2006. The increased costs for the period related primarily to additional general and administrative expenses of $1.6 million incurred in relation to companies that we acquired subsequent to June 30, 2006 together with an increase in professional fees.
 
Interest Expense:
 
                         
    Six Months Ended June 30,  
    2007     2006     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $     $     $  
Reinsurance
    2,325       532       (1,793 )
                         
Total
  $ 2,325     $ 532     $ (1,793 )
                         
 
Interest expense of $2.3 million and $0.5 million was recorded for the six months ended June 30, 2007 and 2006, respectively. This amount relates to the interest on the funds that were borrowed from a London-based bank to assist with the financing of the Brampton, Cavell and Inter-Ocean acquisitions. The increase in 2007 over 2006 was due to the Cavell and Inter-Ocean facilities that were entered into subsequent to June 30, 2006.
 
Foreign Exchange Gain/(Loss):
 
                         
    Six Months Ended June 30,  
    2007     2006     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ (73 )   $ (1,249 )   $ 1,176  
Reinsurance
    3,088       9,216       (6,128 )
                         
Total
  $ 3,015     $ 7,967     $ 4,952  
                         
 
We recorded a foreign exchange gain of $3.0 million for the six month period ended June 30, 2007, as compared to a foreign exchange gain of $8.0 million for the same period in 2006. For the six months ended June 30, 2007, the foreign exchange gain arose primarily as a result of: 1) the holding of surplus British Pounds; and 2) the holding by Cavell of surplus net Canadian and Australian dollars, as required by local regulatory obligations, at a time when these currencies have been appreciating against the U.S. Dollar.
 
The gain for the six-month period ended June 30, 2006 arose as a result of having a short-term surplus of British Pounds following our acquisition of Brampton during a period of strengthening of the British Pound against the U.S. Dollar.


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Income Tax (Expense)/Recovery:
 
                                         
    Six Months Ended June 30,  
          2007     2006     Variance        
    (in thousands of U.S. dollars)  
 
Consulting
          $ (733 )   $ 751     $ (1,484 )        
Reinsurance
            7,826       44       7,782          
                                         
Total
          $ 7,093     $ 795     $ 6,298          
                                         
 
We recorded an income tax recovery of $7.1 million and $0.8 million for the six months ended June 30, 2007 and 2006, respectively.
 
Income tax (expense) recovery of $(0.7) million and $0.8 million were recorded in the consulting segment for the six months ended June 30, 2007 and 2006, respectively. The variance between the two periods arose because, in 2006, we applied available loss carryforwards from our U.K. insurance companies to relieve profits in our U.K. consulting companies.
 
During the quarter ended June 30, 2007, in the reinsurance segment, the statute of limitations expired on certain previously recorded uncertain tax liabilities. The benefit was $8.5 million.
 
Minority Interest:
 
                         
    Six Months Ended June 30,  
    2007     2006     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $     $     $  
Reinsurance
    (4,415 )     (5,186 )     771  
                         
Total
  $ (4,415 )   $ (5,186 )   $ 771  
                         
 
We recorded a minority interest in earnings of $4.4 million and $5.2 million for the six months ended June 30, 2007 and 2006, respectively, reflecting the 49.9% minority economic interest held by a third party in the earnings from Hillcot and Brampton. The decrease in minority interest was primarily as a result of reduced foreign exchange gains in Brampton partially offset by increased earnings.
 
Negative Goodwill:
 
                         
    Six Months Ended June 30,  
    2007     2006     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $     $     $  
Reinsurance
    15,683       4,347       11,336  
                         
Total
  $ 15,683     $ 4,347     $ 11,336  
                         
 
Negative goodwill of $15.7 million and $4.3 million (net of minority interest of $4.3 million) was recorded for the six months ended June 30, 2007 and 2006, respectively. For the six months ended June 30, 2007 the negative goodwill of $15.7 million was earned in connection with our acquisition of Inter-Ocean and represents the excess of the cumulative fair value of net assets acquired of $73.2 million over the cost of $57.5 million. This excess has, in accordance with SFAS 141 “Business Combinations,” been recognized as an extraordinary gain in 2007. The negative goodwill arose primarily as a result of the strategic desire of the vendors to achieve an exit from such operations and therefore to dispose of the companies at a discount to fair value. The negative goodwill of $4.3 million (net of minority interest of $4.3 million) for the six months ended June 30, 2006 related to the acquisition of Brampton and arose primarily as a result of the income earned by Brampton between the date of the balance sheet on which the agreed purchase price was based, December 31, 2004, and the date the acquisition closed, March 30, 2006.


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Liquidity and Capital Resources
 
As we are a holding company and have no substantial operations of our own, our assets consist primarily of our investments in subsidiaries. The potential sources of the cash flows to the holding company consist of dividends, advances and loans from our subsidiary companies.
 
Our future cash flows depend upon the availability of dividends or other statutorily permissible payments from our subsidiaries. The ability to pay dividends and make other distributions is limited by the applicable laws and regulations of the jurisdictions in which our insurance and reinsurance subsidiaries operate, including Bermuda, the United Kingdom and Europe, which subject these subsidiaries to significant regulatory restrictions. These laws and regulations require, among other things, certain of our insurance and reinsurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends and other payments that these subsidiaries can pay to us, which in turn may limit our ability to pay dividends and make other payments.
 
As of June 30, 2007, the insurance and reinsurance subsidiaries’ solvency and liquidity were in excess of the minimum levels required. Retained earnings of our insurance and reinsurance subsidiaries are not currently restricted as minimum capital solvency margins are covered by share capital and additional paid-in-capital with the exception of one subsidiary where retained earnings of $22.3 million requires regulatory approval prior to distribution.
 
Our capital management strategy is to preserve sufficient capital to enable us to make future acquisitions while maintaining a conservative investment strategy. We believe that restrictions on liquidity resulting from restrictions on the payments of dividends by our subsidiary companies will not have a material impact on our ability to meet our cash obligations.
 
Our sources of funds primarily consist of the cash and investment portfolios acquired on the completion of the acquisition of an insurance or reinsurance company in run-off. These acquired cash balances are classified as cash provided by investing activities. We expect to use these funds acquired, together with collections from reinsurance debtors, consulting income, investment income and proceeds from sales and redemption of investments, to pay losses and loss expenses, salaries and benefits and general and administrative expenses, with the remainder used for acquisitions, additional investments and, in the past, for dividend payments to shareholders. We expect that our reinsurance segment will have a net use of cash from operations as total net claim settlements and operating expenses will generally be in excess of investment income earned. We expect that our consulting segment operating cash flows will generally be breakeven. We expect our operating cash flows, together with our existing capital base and cash and investments acquired on the acquisition of our insurance and reinsurance subsidiaries, to be sufficient to meet cash requirements and to operate its business. We currently do not intend to pay cash dividends on our ordinary shares.
 
Our total assets were $2,457 million at June 30, 2007, including $920.3 million in investments, $902.6 million in cash and cash equivalents, and $493.1 million in reinsurance balances receivable as compared to total assets of $1,774 million at December 31, 2006. The increase in total assets was due primarily to the completion of the merger with EGI on January 31, 2007 and the completion of the acquisition of Inter-Ocean on February 23, 2007. Shareholders’ equity was $411.8 million at June 30, 2007, up from $318.6 million at December 31, 2006. The increase in shareholders’ equity was primarily a result of additional paid-in capital of approximately $58.4 million acquired in connection with the merger with EGI on January 31, 2007, net earnings of $24.3 million for the six months ended June 30, 2007, an increase in other paid-in capital arising from employee share awards of $5.7 million recorded in the six months ended June 30, 2007 and an increase in net retained earnings of $4.8 million following the adoption of FIN 48 (Accounting for Uncertainty in Income Taxes — an Interpretation of FASB 109).
 
Source of Funds
 
Operating
 
Net cash provided by operating activities for the six months ended June 30, 2007 was $136.1 million compared to $15.4 million for the six months ended June 30, 2006. This increase in cash flows is attributable to higher investment income and the sales of trading securities, offset by higher general and administrative and interest


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expenses and lower consulting fee income for the six months ended June 30, 2007 as compared to the same period in 2006.
 
Investing
 
Investing cash flows consist primarily of cash acquired and used for acquisitions along with net proceeds on the sale and purchase of investments. Net cash provided by investing activities was $129.5 million during the six months ended June 30, 2007 compared to $207.4 million during the six months ended June 30, 2006. The decrease in the cash flows was primarily due to the increase of restricted cash balances during the six months ended June 30, 2007 as compared to the same period of 2006.
 
Financing
 
Net cash provided by (used in) financing activities was $7.5 million during the six months ended June 30, 2007 compared to ($41.2) million during the six months ended June 30, 2006. Cash provided by financing activities was primarily attributable to the combination of the receipt of a bank loan, offset by our repurchase of our ordinary shares in respect of the merger. In 2006, cash flow used in financing activities represented the combination of redemption of shares, dividends paid and repayment of bank and vendor loans offset by net capital contributions by the minority interest shareholder of a subsidiary.
 
Commitments and Contingencies
 
On April 15, 2007, we entered into a Third Party Equity Commitment Letter, or the Commitment Letter, with J.C. Flowers II L.P., or the Flowers Fund. The Commitment Letter provides for us to contribute up to an aggregate of $200 million to one or more co-investment vehicles, or the Co-Investment Vehicles, that will be created to participate alongside the Flowers Fund and certain other investors in the proposed acquisition of SLM Corporation, commonly known as Sallie Mae. Our investment is conditioned upon the conditions to the closing of the proposed acquisition of Sallie Mae being satisfied or waived by the Flowers Fund. Pursuant to the terms of the Commitment Letter, in the event that the transaction is consummated, a Flowers Fund designee would be named general partner and managing member of each Co-Investment Vehicle.
 
Our current commitment to the Sallie Mae transaction has reduced to approximately $130 million. Although this commitment may be reduced further, we currently intend to hold a substantial investment in Sallie Mae, should the transaction be completed. In the event the transaction closes, we expect to receive underwriting fees for that portion of our original commitment which is taken up by other investors. In the event that the transaction is not completed, we would receive a portion of any termination fees paid by Sallie Mae and would also be responsible for a portion of termination fees due to Sallie Mae, if any.
 
Critical Accounting Estimates
 
Our critical accounting estimates are discussed in Management’s Discussion and Analysis of Results of Operations and Financial Condition contained in our Annual Report on Form 10-K for the year ended December 31, 2006, filed with the SEC on March 16, 2007.
 
Off-Balance Sheet and Special Purpose Entity Arrangements
 
At June 30, 2007, we have not entered into any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K.
 
Cautionary Note Regarding Forward-Looking Statements
 
This quarterly report and the documents incorporated by reference contain statements that constitute “forward-looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended, or the Exchange Act, with respect to our financial condition, results of operations, business strategies, operating efficiencies, competitive positions, growth opportunities, plans and objectives of our management, as well as the markets for our ordinary shares and the insurance and reinsurance sectors in general. Statements that include words


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such as “estimate,” “project,” “plan,” “intend,” “expect,” “anticipate,” “believe,” “would,” “should,” “could,” “seek,” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise. All forward-looking statements are necessarily estimates or expectations, and not statements of historical fact, reflecting the best judgment of our management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in and incorporated by reference in this quarterly report.
 
Factors that could cause actual results to differ materially from those suggested by the forward-looking statements include:
 
  •  risks associated with implementing our business strategies and initiatives;
 
  •  the adequacy of our loss reserves and the need to adjust such reserves as claims develop over time;
 
  •  risks relating to the availability and collectibility of our reinsurance;
 
  •  tax, regulatory or legal restrictions or limitations applicable to us or the insurance and reinsurance business generally;
 
  •  increased competitive pressures, including the consolidation and increased globalization of reinsurance providers;
 
  •  emerging claim and coverage issues;
 
  •  lengthy and unpredictable litigation affecting assessment of losses and/or coverage issues;
 
  •  loss of key personnel;
 
  •  changes in our plans, strategies, objectives, expectations or intentions, which may happen at any time at management’s discretion;
 
  •  operational risks, including system or human failures;
 
  •  risks that we may require additional capital in the future which may not be available or may be available only on unfavorable terms;
 
  •  the risk that ongoing or future industry regulatory developments will disrupt our business, or mandate changes in industry practices in ways that increase our costs, decrease our revenues or require us to alter aspects of the way we do business;
 
  •  changes in Bermuda law or regulation or the political stability of Bermuda;
 
  •  changes in regulations or tax laws applicable to us or our subsidiaries, or the risk that we or one of our non-U.S. subsidiaries become subject to significant, or significantly increased, income taxes in the United States or elsewhere;
 
  •  losses due to foreign currency exchange rate fluctuations;
 
  •  changes in accounting policies or practices; and
 
  •  changes in economic conditions, including interest rates, inflation, currency exchange rates, equity markets and credit conditions which could affect our investment portfolio.
 
The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements and Risk Factors that are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the SEC on March 16, 2007, as well as in the materials filed and to be filed with the SEC. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.


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Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
There have been no material changes in the Company’s market risk exposures since December 31, 2006. Please refer to Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2006, filed with the SEC on March 16, 2007, for our quantitative and qualitative disclosures about market risk.
 
Item 4.   CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Our management has performed an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of June 30, 2007. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Controls
 
Our management has performed an evaluation, with the participation of our Chief Executive Officer and our Chief Financial Officer, of changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2007. Based upon that evaluation there were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II — OTHER INFORMATION
 
Item 1.   LEGAL PROCEEDINGS
 
We are, from time to time, involved in various legal proceedings in the ordinary course of business, including litigation regarding claims. We do not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material adverse effect on our business, results of operations or financial condition. Nevertheless, we cannot assure you that lawsuits, arbitrations or other litigation will not have a material adverse effect on our business, financial condition or results of operations. We anticipate that, similar to the rest of the insurance and reinsurance industry, we will continue to be subject to litigation and arbitration proceedings in the ordinary course of business, including litigation generally related to the scope of coverage with respect to asbestos and environmental claims. There can be no assurance that any such future litigation will not have a material adverse effect on our business, financial condition or results of operations.
 
Item 1A.   RISK FACTORS
 
Our results of operations and financial condition are subject to numerous risks and uncertainties described in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the SEC on March 16, 2007. The risk factors identified therein have not materially changed.


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Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
The following matters were submitted to a vote of shareholders at our Annual General Meeting of Shareholders on June 5, 2007:
 
1. Election of the following nominees to serve as Class I Directors of our Board of Directors.
 
                         
Nominee
  Votes For   Votes Against   Votes Abstained
 
Gregory L. Curl
    11,320,920       4,257       5,886  
Nimrod T. Frazer
    11,281,676       43,626       5,261  
Paul J. O’Shea
    11,282,268       43,134       5,161  
 
The continuing members of our Board of Directors following the Annual General Meeting of Shareholders include Dominic F. Silvester, John J. Oros, J. Christopher Flowers, Nicholas A. Packer, T. Whit Armstrong, T. Wayne Davis and Paul J. Collins.
 
2. Ratification of the selection of Deloitte & Touche, Hamilton, Bermuda, to act as our independent registered public accounting firm for the fiscal year ending December 31, 2007 and authorization of our Board of Directors, acting through the Audit Committee, to approve the fees for the independent registered public accounting firm.
 
                     
Votes For   Votes Against   Votes Abstained
 
  11,320,012       5,460       5,091  
 
3. Election of directors of each of our subsidiaries identified in Proposal Number Three in the proxy statement (nominees for the respective subsidiaries and the results of voting are set forth below).
 
1.   CASTLEWOOD LIMITED
 
                         
Nominees:
  For     Against     Abstain  
 
Paul J. O’Shea
    9,190,251       1,883       11,933  
Richard J. Harris
    9,190,251       1,883       11,933  
Adrian Kimberley
    9,190,251       1,833       11,933  
Elizabeth Dasilva
    9,190,251       1,883       11,933  
Michael Smellie
    9,190,251       1,883       11,933  
 
2.   CASTLEWOOD (EU) HOLDINGS LTD.
 
                         
Nominees:
  For     Against     Abstain  
 
David Hackett
    9,190,050       1,909       12,108  
Alan Turner
    9,190,050       1,909       12,108  
 
3.   CASTLEWOOD BROKERS LIMITED
 
                         
Nominees:
  For     Against     Abstain  
 
Richard J. Harris
    9,190,251       1,883       11,933  
Elizabeth Dasilva
    9,190,076       1,883       12,108  
Adrian Kimberley
    9,190,076       1,883       12,108  
David Rocke
    9,190,251       1,883       11,933  


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4.   CASTLEWOOD (EU) LIMITED
 
                         
Nominees:
  For     Against     Abstain  
 
David Hackett
    9,190,076       1,883       12,108  
Alan Turner
    9,190,076       1,883       12,108  
Steve Aldous
    9,190,076       1,883       12,108  
Duncan McLaughlin
    9,190,076       1,883       12,108  
Derek Reid
    9,190,076       1,883       12,108  
Paul Thomas
    9,190,076       1,883       12,108  
David Grisley
    9,190,076       1,883       12,108  
David Atkins
    9,190,076       1,883       12,108  
Steve Given
    9,190,076       1,883       12,108  
 
5.   CRANMORE (BERMUDA) LTD.
 
                         
Nominees:
  For     Against     Abstain  
 
Paul J. O’Shea
    9,190,055       1,909       12,103  
Richard J. Harris
    9,190,055       1,909       12,103  
Adrian Kimberley
    9,189,880       1,909       12,278  
David Rocke
    9,190,055       1,909       12,103  
 
6.   CRANMORE ADJUSTERS LIMITED
 
                         
Nominees:
  For     Against     Abstain  
 
David Hackett
    9,189,880       1,909       12,278  
Alan Turner
    9,189,880       1,909       12,278  
Steve Norrington
    9,189,906       1,883       12,278  
Phil Cooper
    9,189,906       1,883       12,278  
Mark Wood
    9,189,906       1,883       12,278  
David Ellis
    9,189,880       1,883       12,278  
 
7.   BANTRY HOLDINGS LTD.
 
                         
Nominees:
  For     Against     Abstain  
 
Tim Houston
    9,189,906       1,883       12,278  
Duncan Scott
    9,189,906       1,883       12,278  
Adrian Kimberley
    9,189,880       1,909       12,278  
 
8.   BLACKROCK HOLDINGS LTD.
 
                         
Nominees:
  For     Against     Abstain  
 
Tim Houston
    9,189,880       1,909       12,278  
Duncan Scott
    9,189,880       1,909       12,278  
Adrian Kimberley
    9,189,880       1,909       12,278  


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9.   KENMARE HOLDINGS LIMITED
 
                         
Nominees:
  For     Against     Abstain  
 
Paul J. O’Shea
    9,190,055       1,909       12,103  
Richard J. Harris
    9,190,055       1,909       12,103  
Adrian Kimberley
    9,189,880       1,909       12,278  
Dominic F. Silvester
    9,189,906       1,883       12,278  
Nicholas A. Packer
    9,189,880       1,909       12,278  
David Rocke
    9,190,055       1,909       12,103  
 
10.   KINSALE BROKERS LIMITED
 
                         
Nominees:
  For     Against     Abstain  
 
Phil Hernon
    9,189,906       1,883       12,278  
Steve Western
    9,189,906       1,883       12,278  
Alan Turner
    9,189,880       1,909       12,278  
Steve Norrington
    9,189,906       1,883       12,278  
Derek Reid
    9,189,880       1,909       12,278  
 
11.   REGIS AGENCIES LIMITED
 
                         
Nominees:
  For     Against     Abstain  
 
Alan Turner
    9,189,880       1,909       12,278  
Steve Aldous
    9,189,906       1,883       12,278  
 
12.   FITZWILLIAM (SAC) INSURANCE LIMITED
 
                         
Nominees:
  For     Against     Abstain  
 
Paul J. O’Shea
    9,190,055       1,909       12,103  
Richard J. Harris
    9,190,055       1,909       12,103  
Adrian Kimberley
    9,189,880       1,909       12,278  
Nicholas A. Packer
    9,189,880       1,909       12,278  
David Rocke
    9,190,055       1,909       12,278  
 
13.   REVIR LIMITED
 
                         
Nominees:
  For     Against     Abstain  
 
Richard J. Harris
    9,190,055       1,909       12,103  
Adrian Kimberley
    9,190,081       1,883       12,103  
Elizabeth Dasilva
    9,189,880       1,883       12,304  
David Rocke
    9,190,055       1,909       12,103  
 
14.   RIVER THAMES INSURANCE COMPANY
 
                         
Nominees:
  For     Against     Abstain  
 
Alan Turner
    9,189,880       1,909       12,278  
Steve Aldous
    9,190,055       1,909       12,103  
David Rocke
    9,190,055       1,909       12,103  
Max Lewis
    9,189,880       1,909       12,278  


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15.   OVERSEAS REINSURANCE COMPANY LIMITED
 
                         
Nominees:
  For     Against     Abstain  
 
Paul J. O’Shea
    9,189,880       1,909       12,278  
Richard J. Harris
    9,189,880       1,909       12,278  
Adrian Kimberley
    9,189,880       1,909       12,278  
David Rocke
    9,190,055       1,898       12,103  
 
16.   HUDSON REINSURANCE COMPANY LIMITED
 
                         
Nominees:
  For     Against     Abstain  
 
Paul J. O’Shea
    9,189,880       1,909       12,278  
Richard J. Harris
    9,189,880       1,909       12,278  
Adrian Kimberley
    9,189,880       1,909       12,278  
Duncan Scott
    9,189,880       1,909       12,278  
David Rocke
    9,189,880       1,909       12,278  
 
17.   CAVELL HOLDINGS LIMITED (U.K.)
 
                         
Nominees:
  For     Against     Abstain  
 
Alan Turner
    9,189,880       1,909       12,278  
David Rocke
    9,190,055       1,909       12,103  
Steve Aldous
    9,189,880       1,909       12,278  
Derek Reid
    9,189,880       1,909       12,278  
 
18.   HARPER HOLDINGS SARL
 
                         
Nominees:
  For     Against     Abstain  
 
Nicholas A. Packer
    9,189,880       1,909       12,278  
Jean Baptiste Brekelmans
    9,189,906       1,883       12,278  
Marc Torbick
    9,189,906       1,883       12,278  
 
19.   DENMAN HOLDINGS LIMITED
 
                         
Nominees:
  For     Against     Abstain  
 
Richard J. Harris
    9,190,055       1,909       12,103  
John J. Oros
    9,190,081       1,883       12,103  
Cameron Leamy
    9,189,906       1,883       12,278  
Kenneth Thomson
    9,189,906       1,883       12,278  
 
20.   HARPER INSURANCE LIMITED
 
                         
Nominees:
  For     Against     Abstain  
 
Richard J. Harris
    9,190,055       1,909       12,103  
Nicholas A. Packer
    9,189,880       1,909       12,278  
Michael Handler
    9,189,906       1,883       12,278  
Florian von Meiss
    9,189,906       1,883       12,278  
Walter Boss
    9,189,906       1,883       12,278  


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21.   HARPER FINANCING LIMITED
 
                         
Nominees:
  For     Against     Abstain  
 
Derek Reid
    9,189,880       1,909       12,278  
Brian Walker
    9,189,906       1,883       12,278  
Alan Turner
    9,189,906       1,883       12,278  
 
22.   CASTLEWOOD (US) INC.
 
                         
Nominees:
  For     Against     Abstain  
 
Cheryl D. Davis
    9,189,880       1,909       12,278  
John J. Oros
    9,190,055       1,909       12,103  
Karl Wall
    9,189,880       1,909       12,278  
Donna Stolz
    9,189,880       1,909       12,278  
 
23.   CASTLEWOOD HOLDINGS (US) INC.
 
                         
Nominees:
  For     Against     Abstain  
 
Cheryl D. Davis
    9,190,050       1,909       12,108  
John J. Oros
    9,190,225       1,909       11,933  
Karl Wall
    9,190,225       1,909       12,108  
Donna Stolz
    9,190,050       1,909       12,108  
 
24.   CRANMORE (US) INC.
 
                         
Nominees:
  For     Against     Abstain  
 
Cheryl D. Davis
    9,189,880       1,909       12,278  
John J. Oros
    9,190,055       1,909       12,103  
Karl Wall
    9,189,880       1,909       12,278  
Donna Stolz
    9,189,880       1,909       12,278  
 
25.   CASTLEWOOD INVESTMENTS, INC.
 
                         
Nominees:
  For     Against     Abstain  
 
Cheryl D. Davis
    9,190,050       1,909       12,108  
John J. Oros
    9,190,225       1,909       11,933  
Karl Wall
    9,190,050       1,909       12,108  
Donna Stolz
    9,190,050       1,909       12,108  
 
26.   LONGMYND INSURANCE COMPANY LTD.
 
                         
Nominees:
  For     Against     Abstain  
 
David Hackett
    9,189,880       1,909       12,278  
David Rocke
    9,190,055       1,909       12,103  
Steve Aldous
    9,189,880       1,909       12,278  
Alan Turner
    9,189,880       1,909       12,278  


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27.   MERCANTILE INDEMNITY COMPANY LTD.
 
                         
Nominees:
  For     Against     Abstain  
 
David Hackett
    9,189,880       1,909       12,278  
David Rocke
    9,190,055       1,909       12,103  
Alan Turner
    9,189,880       1,909       12,278  
Steve Aldous
    9,189,880       1,909       12,278  
Derek Reid
    9,189,880       1,909       12,278  
 
28.   FIELDMILL INSURANCE COMPANY LTD.
 
                         
Nominees:
  For     Against     Abstain  
 
David Hackett
    9,189,880       1,909       12,278  
David Rocke
    9,190,055       1,909       12,103  
Steve Aldous
    9,189,880       1,909       12,278  
Alan Turner
    9,189,880       1,909       12,278  
 
29.   VIRGINIA HOLDINGS LTD.
 
                         
Nominees:
  For     Against     Abstain  
 
Paul J. O’Shea
    9,190,055       1,909       12,103  
Richard J. Harris
    9,190,055       1,909       12,103  
Adrian Kimberley
    9,189,880       1,909       12,278  
David Rocke
    9,190,055       1,909       12,103  
 
30.   UNIONE ITALIANA (UK) REINSURANCE COMPANY
 
                         
Nominees:
  For     Against     Abstain  
 
David Rocke
    9,190,055       1,909       12,103  
Alan Turner
    9,189,880       1,909       12,278  
Steve Aldous
    9,190,055       1,909       12,103  
Derek Reid
    9,189,880       1,883       12,278  
 
31.   CAVELL INSURANCE COMPANY LIMITED
 
                         
Nominees:
  For     Against     Abstain  
 
Alan Turner
    9,189,880       1,909       12,278  
David Rocke
    9,190,055       1,909       12,103  
Steve Aldous
    9,190,055       1,909       12,103  
Derek Reid
    9,189,880       1,909       12,278  
Darren Truman
    9,189,906       1,883       12,278  
 
32.   OCEANIA HOLDINGS LTD.
 
                         
Nominees:
  For     Against     Abstain  
 
Paul J. O’Shea
    9,190,055       1,909       12,103  
David Rocke
    9,190,055       1,909       12,103  
Richard J. Harris
    9,190,055       1,909       12,103  
Adrian Kimberley
    9,189,880       1,909       12,278  
Tim Houston
    9,189,906       1,883       12,278  


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33.   CIRRUS RE COMPANY A/S
 
                         
Nominees:
  For     Against     Abstain  
 
Alan Turner
    9,189,880       1,909       12,278  
David Rocke
    9,190,055       1,909       12,103  
Steve Aldous
    9,190,055       1,909       12,103  
Jan Endressen
    9,189,906       1,883       12,278  
 
34.   INTER-OCEAN HOLDINGS LIMITED
 
                         
Nominees:
  For     Against     Abstain  
 
Paul J. O’Shea
    9,190,055       1,909       12,103  
Tim Houston
    9,189,906       1,883       12,278  
Orla Gregory
    9,189,906       1,883       12,103  
Richard J. Harris
    9,190,055       1,909       12,278  
Adrian Kimberley
    9,189,880       1,909       12,278  
 
35.   ENSTAR USA, INC.
 
                         
Nominees:
  For     Against     Abstain  
 
John J. Oros
    9,190,050       1,909       12,103  
Cheryl D. Davis
    9,189,880       1,909       12,278  
Karl J. Wall
    9,189,880       1,909       12,278  
 
36.   INTER-OCEAN SERVICES LTD.
 
                         
Nominees:
  For     Against     Abstain  
 
Paul J. O’Shea
    9,190,055       1,909       12,103  
Tim Houston
    9,189,906       1,883       12,278  
Orla Gregory
    9,189,906       1,883       12,278  
Richard J. Harris
    9,190,055       1,909       12,103  
Adrian Kimberley
    9,189,880       1,909       12,278  
 
37.   INTER-OCEAN CREDIT PRODUCTS LTD.
 
                         
Nominees:
  For     Against     Abstain  
 
Paul J. O’Shea
    9,190,055       1,909       12,103  
Orla Gregory
    9,189,880       1,909       12,278  
Richard J. Harris
    9,190,055       1,909       12,103  
Adrian Kimberley
    9,189,880       1,909       12,278  
 
38.   HILLCOT UNDERWRITING MANAGEMENT
 
                         
Nominees:
  For     Against     Abstain  
 
Alan Turner
    9,189,880       1,909       12,278  
David Rocke
    9,190,055       1,909       12,103  
Steve Aldous
    9,190,055       1,909       12,103  


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39.   INTER-OCEAN REINSURANCE COMPANY LTD.
 
                         
Nominees:
  For     Against     Abstain  
 
Paul J. O’Shea
    9,190,055       1,909       12,103  
Tim Houston
    9,189,880       1,909       12,278  
Orla Gregory
    9,189,880       1,909       12,278  
Richard J. Harris
    9,190,055       1,909       12,103  
Adrian Kimberley
    9,189,880       1,909       12,278  
 
40.   INTER-OCEAN REINSURANCE (IRELAND) LTD.
 
                         
Nominees:
  For     Against     Abstain  
 
Richard J. Harris
    9,190,055       1,909       12,103  
Nicholas A. Packer
    9,189,880       1,909       12,278  
Orla Gregory
    9,189,880       1,909       12,278  
Kevin O’Connor
    9,189,880       1,909       12,278  
 
41.   ENSTAR FINANCIAL SERVICES, INC.
 
                         
Nominees:
  For     Against     Abstain  
 
John J. Oros
    9,189,880       2,228       11,959  
Cheryl D. Davis
    9,190,050       1,909       12,108  
 
42.   HILLCOT HOLDINGS LIMITED