The following is a discussion and analysis of our results of operations for the three and nine months ended September 30, 2008 and 2007. 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, 2007.

Business Overview

Enstar Group 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 acquired a number 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

Hillcot Re

On October 27, 2008, Kenmare Holdings Ltd., our wholly-owned subsidiary, entered into a sale and purchase agreement with Hillcot Holdings Limited, or Hillcot, to purchase the entire issued share capital of its wholly-owned subsidiary Hillcot Re Ltd., or Hillcot Re, for consideration of $54.4 million. We currently own 50.1% of the outstanding share capital of Hillcot, with Shinsei Bank, Ltd., or Shinsei, owning the remaining 49.9%.

Upon completion of the transaction, Hillcot will pay a distribution to Shinsei of approximately $27.1 million representing its 49.9% share of the consideration received by Hillcot. J. Christopher Flowers, a member of our board of directors and one of our largest shareholders, is a director and the largest shareholder of Shinsei. The purchase price of $54.4 million is expected to be funded from available cash on hand. Hillcot Re is a U.K.-based reinsurer that is in run-off. Completion of the acquisition is conditioned on approval by the U.K.'s Financial Services Authority, or the FSA, and satisfaction of various customary closing conditions. The acquisition is expected to close in the fourth quarter of 2008.

Unionamerica

On October 6, 2008, we, through our indirect wholly-owned subsidiary, Royston Run-Off Limited, or Royston, entered into a definitive agreement for the purchase of Unionamerica Holdings Limited from St. Paul Fire and Marine Insurance Company, an affiliate of The Travelers Companies, Inc., or Travelers, for a purchase price of $343.4 million. Unionamerica Holdings Limited is comprised of the discontinued operations of Travelers' U.K.-based London Market business, which were placed into run-off between 1992 and 2003. In connection with the proposed acquisition, Royston entered into a Term Facilities Agreement with a London-based bank on October 3, 2008 for a $184.6 million loan to be made at the closing of the acquisition.

The purchase price of $343.4 million is expected to be financed approximately 54% through the bank loan; approximately 14% from J.C. Flowers II L.P., or the Flowers Fund; and approximately 32% from available cash on hand. Under the facilities agreement for the bank loan, Royston is permitted to borrow $152.6 million under Facility A and $32.0 million under Facility B. The loans will be secured by a lien covering all of the assets of Royston. The interest rate on the Facility A portion is LIBOR plus 3.50% and is repayable within three years. The interest rate on the Facility B portion is LIBOR plus 4.00% and is repayable within four years. Completion of the acquisition is conditioned on, among other things, completion of the proposed bank financing, approval by the FSA

and satisfaction of various customary closing conditions. The acquisition is expected to close in the fourth quarter of 2008.

The Flowers Fund 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 our largest shareholders. In addition, John J. Oros, a director and our Executive Chairman, is a Managing Director of J.C. Flowers & Co. LLC. The Flowers Fund will have a 30% non-voting equity interest in Royston Holdings Ltd., the direct parent company of Royston.

Capital Assurance

On August 18, 2008, we completed the acquisition of all of the outstanding capital stock of Capital Assurance Company Inc. and Capital Assurance Services, Inc. for a total purchase price of approximately $5.3 million. Capital Assurance Company, Inc. is a Florida-domiciled insurer that is in run-off. The acquisition was funded from available cash on hand.

Goshawk

On June 20, 2008 we, through our wholly-owned subsidiary Enstar Acquisitions Limited, or EAL, announced a cash offer to all of the shareholders of Goshawk Insurance Holdings Plc, or Goshawk, at 5.2 pence (approximately $0.103) for each share, or the Offer, conditioned, among other things, on receiving acceptance from shareholders owning 90% of the shares of Goshawk. Goshawk owns Rosemont Reinsurance Limited, a Bermuda-based reinsurer that wrote primarily property and marine business, which was placed into run-off in October 2005. The Offer valued Goshawk at approximately £45.7 million in the aggregate.

On July 17, 2008, after acquiring more than 30% of the shares of Goshawk through market purchases, EAL was obligated to remove all of the conditions of the Offer except for the receipt of acceptances from shareholders owning 50% of the shares of Goshawk. On July 25, 2008 the acceptance condition was met and the Offer became unconditional. On August 19, 2008, the Offer closed with shareholders representing approximately 89.44% of Goshawk accepting the Offer for total consideration of £40.9 million (approximately $80.9 million).

The total purchase price, including acquisition costs, of approximately $82.0 million was financed by a drawdown of $36.1 million from a credit facility provided by a London-based bank, a contribution of $11.7 million of the acquisition price from the Flowers Fund, by way of non-voting equity participation, and the remainder from available cash on hand. The interest rate on the credit facility is LIBOR plus 2.25% and the facility is repayable within three years and is secured by a first charge over our shares in Goshawk.

In connection with the acquisition, Goshawk's bank loan of $16.3 million was refinanced by the draw down of $12.2 million (net of fees) from a credit facility provided by a London-based bank and $4.1 million from the Flowers Fund.

EPIC

On August 14, 2008, we completed the acquisition of all of the outstanding capital stock of Electricity Producers Insurance Company (Bermuda) Limited, or EPIC, from its parent British Nuclear Fuels plc. The purchase price, including acquisition expenses, of £36.7 million (approximately $68.8 million) was financed by approximately $32.8 million from a credit facility provided by a London-based bank; approximately $10.2 million from the Flowers Fund by way of non-voting equity participation, and the remainder of $23.1 million from available cash on hand. The interest on the bank loan is LIBOR plus 2.25%. The facility is repayable within four years and is secured by a first charge over our shares in EPIC.

Share Offering

In July 2008, we completed the sale to the public of 1,372,028 newly-issued ordinary shares, inclusive of the underwriters' over-allotment, or the Offering. The shares were priced at $87.50 per share and we received net proceeds of approximately $116.8 million, after underwriting fees and other expenses of approximately $3.3 million. Fox-Pitt Kelton Cochran Caronia Waller (USA) LLC, or FPK, served as lead managing underwriter in the Offering. The Flowers Fund and certain of its affiliated investment partnerships purchased 285,714 ordinary

shares with a value of approximately $25.0 million in the Offering at the public offering price. An affiliate of the Flowers Fund controls approximately 41% of FPK.

Seaton and Stonewall

On June 16, 2006, our indirect subsidiary, Virginia Holdings Ltd., entered into a definitive agreement with Dukes Place Holdings, L.P., a portfolio company of GSC European Mezzanine Fund II, L.P., for the purchase of 44.4% of the outstanding capital stock of Stonewall Acquisition Corporation. Stonewall Acquisition Corporation is the parent of two Rhode Island-domiciled insurers, Stonewall Insurance Company and Seaton Insurance Company, both of which are in run-off. The purchase price was $20.4 million. On May 27, 2008, the Rhode Island Department of Business Regulation issued an order approving the proposed acquisition. The acquisition was completed on June 13, 2008 and was funded from available cash on hand.

Gordian

On March 5, 2008, we completed the acquisition of AMP Limited's, or AMP's, Australian-based closed reinsurance and insurance operations, or Gordian. The purchase price, including acquisition expenses, of AU$436.9 million (approximately $405.4 million) was financed by approximately AU$301.0 million (approximately $276.5 million), including an arrangement fee of AU$4.5 million (approximately $4.2 million), from bank financing provided jointly by a London-based bank and a German bank in which the Flowers Fund is a significant shareholder of the German bank; approximately AU$41.6 million (approximately $39.5 million) from the Flowers Fund, by way of non-voting equity participation; and approximately AU$98.7 million (approximately $93.6 million) from available cash on hand.

Guildhall

On February 29, 2008, we completed the acquisition of Guildhall Insurance Company Limited, or Guildhall, a U.K.-based insurance and reinsurance company that has been in run-off since 1986. The purchase price, including acquisition expenses, of approximately £33.4 million (approximately $65.9 million) was financed by the drawdown of approximately £16.5 million (approximately $32.5 million) from a U.S. dollar facility loan agreement with a London-based bank; approximately £5.0 million (approximately $10.0 million) from the Flowers Fund, by way of non-voting equity participation; and approximately £11.9 million (approximately $23.5 million) from available cash on hand.

Shelbourne

In December 2007, we, in conjunction with JCF FPK I L.P., or JCF FPK, and a newly-hired executive management team, formed Shelbourne Group Limited, or Shelbourne, to invest in Reinsurance to Close or "RITC" transactions (the transferring of liabilities from one Lloyd's Syndicate to another) with Lloyd's of London insurance and reinsurance syndicates in run-off. JCF FPK is a joint investment program between FPK and the Flowers Fund. Shelbourne is a holding company of a Lloyd's Managing Agency, Shelbourne Syndicate Services Limited. We own 50.1% of Shelbourne, which in turn owns 100% of Shelbourne Syndicate Services Limited, the Managing Agency for Lloyd's Syndicate 2008, a syndicate approved by Lloyd's of London on December 16, 2007 to undertake RITC transactions with Lloyd's syndicates in run-off. In February 2008, Lloyd's Syndicate 2008 entered into RITC agreements with four Lloyd's syndicates with total gross insurance reserves of approximately $471.2 million.

On February 29, 2008, we funded our capital commitment of approximately £36.0 million (approximately $72.0 million) by way of a letter of credit issued by a London-based bank to Lloyd's Syndicate 2008. The letter of credit was secured by a parental guarantee from us in the amount of £12.0 million (approximately $24.0 million); approximately £11.0 million (approximately $22.0 million) from the Flowers Fund (acting in its own capacity and not through JCF FPK), by way of a non-voting equity participation; and approximately £13.0 million (approximately $26.0 million) from available cash on hand. JCF FPK's capital commitment to Lloyd's Syndicate 2008 is approximately £14.0 million (approximately $28.0 million).

Results of Operations

The following table sets forth our selected condensed consolidated statement of
earnings for each of the periods indicated.


                                                      Three Months Ended            Nine Months Ended
                                                        September 30,                 September 30,
                                                      2008           2007          2008           2007
                                                              (in thousands of U.S. dollars)

INCOME
Consulting fees                                    $    7,410      $  6,238      $  17,046      $ 14,725
Net investment income                                   6,849        15,870         28,658        50,626
Net realized (losses) gains                              (192 )          31           (262 )         470

                                                       14,067        22,139         45,442        65,821

EXPENSES
Net (reduction) increase in loss and loss
adjustment expense liabilities                         (3,469 )        (313 )      (28,267 )       1,392
Salaries and benefits                                   6,013         8,671         31,317        31,833
General and administrative expenses                    10,121        10,890         36,004        24,478
Interest expense                                        7,919         1,442         18,878         3,767
Net foreign exchange loss (gain)                       25,056        (4,651 )       18,787        (7,666 )

                                                       45,640        16,039         76,719        53,804

(Loss) earnings before income taxes and minority
interest                                              (31,573 )       6,100        (31,277 )      12,017
Income taxes                                          (10,434 )        (933 )      (13,389 )       6,160
Minority interest                                       5,572        (2,599 )       (4,105 )      (7,014 )

(Loss) earnings before extraordinary gain             (36,435 )       2,568        (48,771 )      11,163
Extraordinary gain - Negative goodwill (2008:
net of minority interest)                                   -             -         35,196        15,683

NET (LOSS) EARNINGS                                $  (36,435 )    $  2,568      $ (13,575 )    $ 26,846

Comparison of Three Months Ended September 30, 2008 and 2007

We reported a consolidated net loss of approximately $(36.4) million for the three months ended September 30, 2008 compared to consolidated net earnings of approximately $2.6 million for the same period in 2007. The decrease in earnings of approximately $39.0 million was primarily a result of the following:

(i) a decrease in investment income (net of realized (losses)/gains) of $9.0 million, primarily due to write-downs of approximately $24.3 million of the fair values of our investments classified as other investments, partially offset by additional investment income earned in the quarter as a result of increased cash and investments balances relating to acquisitions completed in 2008;

(ii) movement in foreign exchange earnings from a gain of $4.7 million for the three months ended September 30, 2007 to a loss of $25.1 million for the three months ended September 30, 2008. This reduction of $29.8 million arose primarily as a result of holding surplus net foreign currency assets, primarily British pounds, at a time when the U.S. dollar was appreciating against the majority of currencies;

(iii) an increase in income tax expense of $9.5 million relating primarily to the increased tax liability recorded on the net earnings of our Australian subsidiary, partially offset by recoverables in one of our U.S. subsidiaries arising on write-downs of our other investments; and

(iv) an increase in interest expense of $6.4 million attributable to an increase in bank borrowings used in the funding of the acquisitions subsequent to September 30, 2007, primarily in relation to the Gordian Guildhall, EPIC and Goshawk acquisitions; partially offset by

(v) an increased reduction in loss and loss adjustment expense liabilities of $3.2 million;

(vi) a reduction in salary and general and administrative costs of $3.4 million, primarily due to a reduction in bonus accrual; and

(vii) a reduction in minority interest expense of $8.2 million resulting from reduced earnings in which minority shareholders have an interest.

Consulting Fees:


                                   Three Months Ended September 30,
                                 2008              2007         Variance
                                    (in thousands of U.S. dollars)

                Consulting    $    15,332       $    13,083     $   2,249
                Reinsurance        (7,922 )          (6,845 )      (1,077 )

                Total         $     7,410       $     6,238     $   1,172

We earned consulting fees of approximately $7.4 million and $6.2 million for the three months ended September 30, 2008 and 2007, respectively.

Internal management fees of $7.9 million and $6.8 million were paid in the three months ended September 30, 2008 and 2007, 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 September 30, 2007.

Net Investment Income and Net Realized (Losses) Gains:


                                          Three Months Ended September 30,
                                                                   Net Realized
                    Net Investment Income                         (Losses) Gains
                     2008             2007       Variance         2008        2007       Variance
                                           (in thousands of U.S. dollars)

    Consulting    $    (7,267 )     $    720     $  (7,987 )   $        -     $   -     $        -
    Reinsurance        14,116         15,150        (1,034 )         (192 )      31           (223 )

    Total         $     6,849       $ 15,870     $  (9,021 )   $     (192 )   $  31     $     (223 )

Net investment income for the three months ended September 30, 2008 decreased by $9.0 million to $6.8 million, as compared to $15.9 million for the three months ended September 30, 2007. The decrease in net investment income was primarily attributable to cumulative write-downs of approximately $24.3 million in the fair value of our private equity investments held by us as other investments. The write-downs in our private equity investments were primarily related to mark to market adjustments in the fair value of their underlying assets, which are primarily investments in financial institutions, arising as a result of the current global credit and liquidity crises. The fair value of these investments may continue to be volatile in the current economic environment.

Net realized (losses) gains for the three months ended September 30, 2008 and 2007 were $(0.2) 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 September 30, 2008 was 5.1%, as compared to the average return of 5.0% for the three-month period ended September 30, 2007. The returns for the three months ended September 30, 2008 are comparable to the returns for the three months ended September 30, 2007 primarily as a result of higher returns earned on our fixed maturity investment portfolio during 2008 offset by the lower returns earned on our cash and cash equivalents for the quarter ended September 30, 2008 as a result of lower average interest rates period over period. The U.S. Federal Funds Rate decreased from an average of 5.18% to an average of 2.00% for the three months ended September 30, 2007 and September 30, 2008, respectively. In respect of our fixed income investments as of September 30, 2008, 72.9% had a Standard & Poor's credit rating of AAA.

Fair Value Measurements

On January 1, 2008, we adopted FAS 157, Fair Value Measurements, or FAS 157, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date. See Note 1 of our Unaudited Condensed Consolidated Financial Statements for a further discussion of this new standard.

The following is a summary of valuation techniques or models we use to measure fair value by asset and liability classes, which have not changed significantly since December 31, 2007.

Fixed Maturity Investments

Our fixed maturity portfolio is managed by three investment advisors. Through these third parties, we use nationally recognized pricing services, including pricing vendors, index providers and broker-dealers to estimate fair value measurements for all of our fixed maturity investments. These pricing services include Lehman Index, Reuters Pricing Service, FT Interactive Data and others.

The pricing service uses market quotations for securities (e.g., public common and preferred securities) that have quoted prices in active markets. When quoted market prices are unavailable, the pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing.

With the exception of one security held within our trading portfolio, the fair value estimates of our fixed maturity investments are based on observable market data. We have therefore included these as Level 2 investments within the fair value hierarchy. The one security in our trading portfolio that does not have observable inputs has been included as a Level 3 investment within the fair value hierarchy.

To validate the techniques or models used by the pricing services, we compare the fair value estimates to our knowledge of the current market and will challenge any prices deemed not to be representative of fair value.

Further, on a quarterly basis, we evaluate whether the fair value of a fixed maturity security is other-than-temporarily impaired when its fair value is below amortized cost. To make this assessment we consider several factors including (i) the time period during which there has been a decline below cost,
(ii) the extent of the decline below cost, (iii) our intent and ability to hold the security, (iv) the potential for the security to recover in value, (v) an analysis of the financial condition of the issuer, and (vi) an analysis of the collateral structure and credit support of the security, if applicable. If we conclude a security is other-than-temporarily impaired, we write down the amortized cost of the security to fair value, with a charge to net realized investment gains (losses) in our consolidated statements of earnings.

Equity Securities

Our equity securities are predominately managed by one external advisor. Through this third party, we use nationally recognized pricing services, including pricing vendors, index providers and broker-dealers to estimate fair value measurements for all of our equity securities. These pricing services include FT Interactive Data and others.

We have categorized all of our equity securities as Level 1 investments as they are based on quoted prices in active markets for identical assets or liabilities.

Other Investments

For our investments in limited partnerships, limited liability companies and equity funds, we measure fair value by obtaining the most recently published net asset value as advised by the external fund manager or third party administrator. The financial statements of each fund generally are audited annually, using fair value measurement for the underlying investments. For all public companies within the funds, we have valued the investments based on the latest share price. Affirmative Investment LLC's value is based on the market value of the shares of Affirmative Insurance Holdings, Inc.

All of our other investments relating to our investments in limited partnerships and limited liability companies are subject to restrictions on redemptions and sales which are determined by the governing documents and limit our ability to liquidate those investments in the short term. We have classified our other investments as Level 3 investments as they reflect our own assumptions about assumptions that market participants might use.

For the three months ended September 30, 2008, we incurred a $24.3 million loss in fair value on our other investments. Any unrealized losses or gains on our other investments are included as part of our net investment income.

The following table summarizes all of our financial assets and liabilities measured at fair value at September 30, 2008, by FAS 157 hierarchy:

                                      Quoted Prices in           Significant           Significant
                                     Active Markets for        Other Observable       Unobservable
                                      Identical Assets              Inputs               Inputs           Total Fair
                                          (Level 1)               (Level 2)             (Level 3)           Value

Assets
Fixed maturity investments           $                 -      $          516,057      $         846      $    516,903
Equity securities                                  4,545                       -                  -             4,545
Other investments                                      -                       -             91,604            91,604

Total                                $             4,545      $          516,057      $      92,450      $    613,052

As a percentage of total assets                      0.1 %                  14.1 %              2.5 %            16.7 %

Net Reduction in Loss and Loss Adjustment Expense Liabilities:

The net reduction in loss and loss adjustment expense liabilities for the three months ended September 30, 2008 and 2007 was $3.5 million and $0.3 million, respectively. The change in the period was attributable to the reduction in estimates of net ultimate losses of $4.5 million, and a reduction in estimates of loss adjustment expense liabilities of $10.2 million, relating to 2008 run-off activity, partially offset by the amortization, over the estimated payout period, of fair value adjustments relating to companies acquired of $11.2 million.

. . .