<PAGE>   1

===============================================================================


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                          ___________________________


                                   FORM 10-Q


              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934


                 For the quarterly period ended March 31, 1997

                         Commission File Number 0-20995



                          EXSTAR FINANCIAL CORPORATION
             (Exact name of registrant as specified in its charter)




               Delaware                              77-0321240
      (State or other jurisdiction         (IRS Employer Identification No.)
      of incorporation or organization)



               2029 Village Lane, Solvang, California 93463-2275
             (Address of principal executive offices and zip code)


      Registrant's telephone number, including area code:  (805) 688-8013



     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      No  X
                                              -----   -----

     The aggregate number of shares of the Registrant's common stock 
outstanding, all of which constitute a single class, was 5,497,500 as of March
31, 1997.

===============================================================================

<PAGE>   2


                         EXSTAR FINANCIAL CORPORATION

                         QUARTER ENDED MARCH 31, 1997

                                    INDEX

<TABLE>
<S>                                                                                     <C>
                                                                                        Page
                                                                                        ----
PART I - FINANCIAL INFORMATION

   Item 1. Financial Statements

           Consolidated Balance Sheets as of March 31, 1997 (Unaudited)               
           and December 31, 1996....................................................      3

           Consolidated Statements of Operations (Unaudited) for the three months     
           ended March 31, 1997 and 1996............................................      5

           Consolidated Statement of Changes in Stockholders' Equity (Unaudited)      
           for the three months ended March 31, 1997................................      6

           Consolidated Statements of Cash Flows (Unaudited) for the three months     
           ended March 31, 1997 and 1996............................................      7

           Notes to the Consolidated Financial Statements...........................      8

   Item 2. Management's Discussion and Analysis of Financial Condition and            
           Results of Operations....................................................     13

SIGNATURE...........................................................................     19
</TABLE>













                                      -2-

<PAGE>   3

                       PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                EXSTAR FINANCIAL CORPORATION AND SUBSIDIARIES

                         CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                      March 31,    December 31,
                                                        1997          1996
                                                      --------     -----------
                                                    (Unaudited)     (Audited)
                                                      (Dollars in thousands)
<S>                                                   <C>            <C>
                   ASSETS
Fixed maturities available for sale, at market
  (amortized cost: 1997 - $32,895; 1996 - $39,330)    $ 31,812       $ 38,800 
Equity securities, at market (cost: 1997 - $1,250;                            
  1996 - $1,250)                                         1,566          1,531 
Mortgage loans - unaffiliated                            4,021          4,225 
Mortgage loans - affiliated                                905            908 
Real estate held for investment                          4,231          4,255 
Real estate held for sale                                6,251          6,391 
Real estate acquired through foreclosure                   493            493 
Short-term investments                                   2,732          4,944 
                                                      --------       --------
      Total investments                                 52,011         61,547 

Cash and cash equivalents - restricted                   1,175          1,129 
Cash and cash equivalents - unrestricted                 4,322          1,390 
Accounts receivable - affiliated                         2,320          2,443 
Reinsurance recoverable                                                       
  Paid losses and loss adjustment expenses               1,860          1,576 
  Unpaid losses and loss adjustment expenses            33,619         33,921 
Prepaid reinsurance premiums                                44            386 
Accrued investment income                                  569            822 
Deferred acquisition costs                                   0            307 
Property and equipment, net                                793            797 
Deferred income taxes                                    1,877          1,700 
Other assets                                             2,786          2,136 
                                                      --------       --------
      Total assets                                    $101,376       $108,154 
                                                      ========       ========
</TABLE>










  The accompanying notes are an integral part of these consolidated financial
statements.

                                      -3-

<PAGE>   4


                EXSTAR FINANCIAL CORPORATION AND SUBSIDIARIES

                         CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                      March 31,    December 31,
                                                        1997          1996
                                                      --------     -----------
                                                     (Unaudited)    (Audited)
                                                      (Dollars in thousands)
<S>                                                  <C>           <C>
                 LIABILITIES
Unpaid loss and loss adjustment expenses             $ 78,786       $ 86,927 
Unearned premium                                          172          1,365 
Reinsurance balances payable                            1,206          1,106 
                                                     --------       --------
     Total policy liabilities and accruals             80,164         89,398 
Notes payable                                           1,545          1,588 
Current income taxes                                      375            375 
Accumulated equity in losses of affiliates              3,476          3,020 
Other liabilities                                         804          1,247 
                                                     --------       -------- 
     Total liabilities                                 86,364         95,628 
                                                     --------       -------- 
                                                                             
            STOCKHOLDERS' EQUITY                                             
Common stock, $.01 par value, 30,000,000 shares                              
  authorized; issued and outstanding: 1997 and 1996 -                          
  5,497,500 shares                                         55             55 
Paid in capital                                        26,865         26,865 
Net unrealized investment losses                         (411)           (68)
Preferred stock investment - contra equity            (12,314)       (12,314)
Retained deficit                                          817         (2,012)
                                                     --------       -------- 
     Total equity                                      15,012         12,526 
                                                     --------       -------- 
     Total liabilities and stockholders' equity      $101,376       $108,154 
                                                     ========       ========
</TABLE>










  The accompanying notes are an integral part of these consolidated financial
statements.

                                     -4-

<PAGE>   5


                EXSTAR FINANCIAL CORPORATION AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (Unaudited)

<TABLE>
<CAPTION>
                                                    Three months ended March 31,
                                                    ---------------------------
                                                        1997           1996
                                                    -----------     -----------
                                            (Dollars in thousands except per share data)
<S>                                                      <C>           <C>
                    REVENUES
Premiums earned                                          $2,090        $15,224                     
Premiums ceded                                             (748)        (7,352)                    
                                                         ------        -------             
     Net premiums earned                                  1,342          7,872                     
Net investment income - unaffiliated                        719          1,004                     
Net investment income - affiliated                           25            151                     
Net realized investment gains                                 8            198                     
Other income                                              3,264             56                     
                                                         ------        -------                     
     Total revenue                                        5,358          9,281                     
                                                         ------        -------                     
                    EXPENSES                                                                       
Loss and loss adjustment expense                          1,267          9,156                     
Reinsurance ceded                                          (449)        (4,411)                    
                                                         ------        -------                     
     Net loss and loss adjustment expense                   818          4,745                     
Policy acquisition costs amortized                          469          2,692                     
Profit sharing - affiliated                                   0            627                     
Interest expense                                             61             17                     
Other expenses                                            1,428          1,286                     
                                                         ------        -------                     
     Total expenses                                       2,776          9,367                     
                                                         ------        -------                     
Income (loss) before equity in income of affiliates                                                
  and income tax expense                                  2,582            (86)                     
                                                         ------        -------                     
                                                                                                   
Equity in income of affiliates                              247            676                     
Income tax expense                                            0              0                     
                                                         ------        -------                     
     Net income                                          $2,829        $   590                     
                                                         ======        =======             
                                                                                                   
Net income per common share                              $ 0.51        $  0.11                     
                                                         ======        =======                     
                                                                                                   
Shares used in computation of net income per                                                       
  common share (in thousands)                             5,498          5,498                     
                                                         ======        =======
</TABLE>











  The accompanying notes are an integral part of these consolidated financial
statements.

                                     -5-

<PAGE>   6

                EXSTAR FINANCIAL CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CHANGES
                           IN STOCKHOLDERS' EQUITY
                                 (Unaudited)
<TABLE>
<CAPTION>
                                                                         Net        Preferred                         
                                                                     Unrealized      Stock                            
                                                                     Investment    Investment     Retained            
                                           Common      Paid in        (Losses)       Contra      (Deficit)    Total   
                                            Stock      Capital         Gains         Equity       Earnings   Earnings 
                                           ------      -------       ----------    ----------    ---------   --------         
                                                                      (Dollars in thousands)     

<S>                                        <C>         <C>           <C>           <C>           <C>         <C>
Balance at December 31, 1996                 $55       $26,865          $ (68)      $(12,314)     $(2,012)    $12,526

Change in net unrealized
 investment losses    
   Fixed maturities                                                      (552)                                $  (552)
   Equity securities                                                       32                                 $    32
   Deferred tax benefit                                                   177                                 $   177

Net income                                                                                          2,829     $ 2,829
                                             ---       -------          -----       --------      -------     -------

Balance at March 31, 1997                    $55       $26,865          $(411)      $(12,314)     $   817     $15,012
                                             ===       =======          =====       ========      =======     =======
</TABLE>















  The accompanying notes are an integral part of these consolidated financial
statements.

                                      -6-


<PAGE>   7


                EXSTAR FINANCIAL CORPORATION AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (Unaudited)
<TABLE>
<CAPTION>
                                                                           Three months ended March 31,
                                                                           ----------------------------
                                                                              1997              1996
                                                                           ---------         ----------
                                                                              (Dollars in thousands)
<S>                                                                        <C>               <C>
Cash flows (applied to) provided by operating activities:
 Premiums collected                                                        $   713           $  6,748 
 Investment income received                                                  1,079              1,343 
 Loss and loss adjustment expense paid, net                                 (8,657)            (7,366)
 Interest paid                                                                 (61)               (17)
 Policy acquisition and other expenses paid                                 (2,313)            (4,627)
 Other                                                                       2,979                  4 
                                                                           -------           --------
   Cash flows applied to operating activities                               (6,260)            (3,915)
                                                                           -------           -------- 
Cash flows provided by (applied to) investment activities:                                            
 Purchase of marketable securities                                               0            (10,742)
 Purchase of property, equipment and real estate                               (52)               (13)
 Sale or maturity of marketable securities                                   6,383             13,483 
 Sale of property, equipment and real estate                                   140                308 
 Short-term investments, net                                                 2,212              3,239 
 Mortgage loans funded                                                           0               (280)
 Repayment of mortgage loans                                                   207                227 
                                                                           -------           -------- 
   Net cash provided by investing activities                                 8,890              6,222 
                                                                           -------           -------- 
Cash flows provided by (applied to) financing activities                                              
 Repayment of notes payable                                                    (43)              (123)
 Transfers from affiliates                                                     703                448 
 Other                                                                        (312)               266 
 Transfers to restricted cash and cash equivalents                             (46)               (56)
                                                                           -------           -------- 
   Net cash provided by financing activities                                   302                535 
                                                                           -------           -------- 

 Net increase in unrestricted cash and cash equivalent                       2,932              2,842 
                                                                                                      
Unrestricted cash and cash equivalents - beginning of period                 1,390              4,028 
                                                                           -------           -------- 
Unrestricted cash and cash equivalents - end of period                     $ 4,322           $  6,870 
                                                                           =======           ========
</TABLE>









  The accompanying notes are an integral part of these consolidated financial
statements.

                                      -7-


<PAGE>   8

                EXSTAR FINANCIAL CORPORATION AND SUBSIDIARIES

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


1. BASIS OF PRESENTATION

   The consolidated financial statements of Exstar Financial Corporation and
   subsidiaries ("Exstar" if referring to the parent company only, or the
   "Company" if referring to Exstar and its direct and indirect subsidiaries)
   include the financial statements of Exstar, its direct subsidiary, Alpine
   Holdings, Inc., Exstar's indirect subsidiaries, Alpine Insurance Company
   ("Alpine"), a direct subsidiary of Alpine Holdings, Inc., Alpine Premium
   Finance Co., Inc. and Transco Premium Finance Co., Inc., both of which are
   direct subsidiaries of Alpine, and the equity in the income and losses of
   TCO Holdings, Inc. ("TCO Holdings") and subsidiaries (collectively "TCO"), 
   a group of companies affiliated with Exstar through common majority 
   ownership.

   The consolidated financial statements have been prepared in accordance with
   generally accepted accounting principles and accordingly include all normal
   recurring adjustments management considers necessary for fair presentation.
   These consolidated financial statements should be read in conjunction with
   audited financial statements included in the Form 10-K for the year ended
   December 31, 1996.

   The results of operations for the three months ended March 31, 1997 and 1996
   are not necessarily indicative of the results to be expected for the full
   year.

2. EQUITY IN INCOME OF AFFILIATES

   Although TCO is not a direct or indirect subsidiary of Exstar, its income or
   loss is included in the Company's consolidated financial statements in
   accordance with a form of equity accounting.














                                     -8-

<PAGE>   9

                EXSTAR FINANCIAL CORPORATION AND SUBSIDIARIES

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



The following sets forth the financial position and results of operations of    
TCO:

<TABLE>
<CAPTION>
                                                        March 31,  December 31,
                                                         1997        1996
                                                         ----        ----
                                                       (Dollars in thousands)

<S>                                                    <C>         <C>
ASSETS:
  Cash and investments ..............................   $ 4,360     $ 4,931
  Accounts receivable ...............................     4,279       4,915
  Property and equipment ............................        94         119
  Other assets ......................................       815         914
                                                        -------     -------
    Total assets ....................................     9,548      10,879
                                                        =======     ======= 
                                                                            
LIABILITIES:                                                                
  Premiums payable--affiliated ......................    18,771      19,304
  Notes payable .....................................     4,500       4,581
  Due to affiliates .................................       591         718
  Net unearned commission income ....................       -0-         659
  Other liabilities .................................     3,364       3,428
                                                        -------     -------
    Total liabilities ...............................    27,226      28,690
                                                        -------     -------

PREFERRED STOCK:
  Series A 11.3% cumulative redeemable, nonvoting, 
    stated value $10,000 per share, 3,500 shares 
    authorized; issued and outstanding - 1,075 ......    12,035      12,035

STOCKHOLDER'S EQUITY:
  Stockholder's accumulated deficiency ..............   (29,713)    (29,846)
                                                        -------     -------
Total liabilities, preferred stock, and 
  stockholder's accumulated deficiency ..............   $ 9,548     $10,879
                                                        =======     =======
</TABLE>










                                      -9-

<PAGE>   10

                EXSTAR FINANCIAL CORPORATION AND SUBSIDIARIES

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                                             For the
                                                           three months
                                                              ended
                                                             March 31,
                                                         -----------------
                                                         1997         1996
                                                         ----         ----
                                                       (Dollars in thousands)

 <S>                                                     <C>          <C>
 Revenues:
   Net commissions earned .........................      $   333      $ 2,921
   Other revenues .................................          153          430
                                                         -------      -------
     Total revenues ...............................          486        3,351
                                                         -------      -------
                                                                      
 Expenses:                                                            
   Personnel costs ................................           43        1,643
   Office and selling expenses ....................           48          706
   Depreciation ...................................           19           35
   Interest .......................................          132          206
   Other expenses .................................           (7)         277
                                                         -------      -------
     Total expenses ...............................          235        2,867
                                                         -------      -------
       Income before Federal income taxes .........          251          484
     Federal income tax expense ...................          -0-           25
                                                         -------      -------
       Net income .................................          251          459
                                                         =======      =======
                                                                      
 Beginning stockholder's accumulated deficiency ...       29,846       30,900
                                                         -------      -------
                                                                      
   Net income .....................................         (251)        (459)
   Increase in subscription note receivable .......          118          125
                                                         -------      -------
          Net change ..............................         (133)        (334)
                                                         -------      -------
                                                                      
 Ending stockholder's accumulated deficiency ......      $29,713      $30,566
                                                         =======      =======
</TABLE>









                                     -10-

<PAGE>   11

                EXSTAR FINANCIAL CORPORATION AND SUBSIDIARIES

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



The following sets forth the computation of the equity in income of affiliates
included in the Statement of Operations:


<TABLE>
<CAPTION>
                                                             For the
                                                           three months
                                                              ended
                                                             March 31,
                                                         -----------------
                                                         1997         1996
                                                         ----         ----
                                                       (Dollars in thousands)

<S>                                                    <C>          <C>
  Increase in net equity of TCO .....................  $  (133)     $  (334)

  Reclassification:
    Interest on advances ............................     (114)        (342)
                                                       -------      -------
      Equity in income of affiliates ................  $  (247)     $  (676)
                                                       ========     =======
</TABLE>


Accumulated equity in losses of affiliates comprises:

<TABLE>
<CAPTION>
                                                       March 31,   December 31,
                                                         1997         1996
                                                         ----         ----
                                                       (Dollars in thousands)

<S>                                                    <C>          <C>
  Cumulative adjusted losses ........................  $18,230      $18,363

  Amounts advanced by and other amounts due to the 
    Company from TCO ................................   14,754       15,343
                                                       -------      -------

      Accumulated equity in losses of affiliates ....  $ 3,476      $ 3,020
                                                       =======      =======

</TABLE>









                                     -11-

<PAGE>   12

                EXSTAR FINANCIAL CORPORATION AND SUBSIDIARIES

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


3. NET INCOME PER COMMON SHARE

   Net income per common share is computed by dividing net income by the
   weighted average number of shares of common stock and common stock
   equivalents outstanding.  The weighted average number of shares of common
   stock outstanding for the three months ended March 31, 1997 and 1996 was
   5,498,000.  There were no common stock equivalents.

4. STATUTORY INFORMATION

   The surplus as regards policyholders of Alpine determined in accordance with
   statutory accounting practices as of March 31, 1997 and 1996 was $13,367,000
   and $10,373,000, respectively.  The net income of Alpine determined in
   accordance with statutory accounting practices for the three months ended
   March 31, 1997 and 1996 was $36,000 and $419,000, respectively.















                                     -12-

<PAGE>   13


ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

GENERAL

     This discussion should be read in conjunction with management's discussion
and analysis included in the Form 10-K for the year ended December 31, 1996.

     The Company's operations and business have undergone fundamental changes
since the beginning of 1996.  Some of the most important changes include the
following:

     (i)   At the beginning of 1996, the Company was engaged principally in
"direct" underwriting ("direct" underwriting consists of issuing insurance
policies directly to insureds) -- since August 1996 the Company has ceased
issuing direct insurance as a consequence of A.M. Best Company ("Best") rating
downgrades and certain regulatory restrictions relating to the Company's
insurance company subsidiaries;

     (ii)  At the beginning of 1996, Alpine Insurance Company ("Alpine") had a
Best rating of A- (Excellent) and Transco Syndicate #1 Ltd. ("Syndicate") had a
Best rating of B+ (Very Good) -- in April 1996 both companies' Best ratings
were reduced to C's (Marginal) (under review) and both ratings have remained
unchanged since then;

     (iii) At the beginning of 1996, the Company's insurance company
subsidiaries were authorized to operate on a surplus lines basis in
approximately 45 states -- during the second half of 1996 these authorizations
were lost or restricted in nine jurisdictions, representing in excess of 80% of
the Company's historical premium revenues, and additionally Alpine was placed
under an order ("Illinois Order") requiring prior approval of all of its
significant expenditures and commitments by the Illinois Department of
Insurance ("Illinois DOI");

     (iv)  At the beginning of 1996, the Company's insurance business was
conducted through two insurance company subsidiaries, Alpine and Syndicate --
effective December 31, 1996, Syndicate's operations were merged into Alpine and
since then Alpine has been the Company's only significant operating subsidiary;
and

     (v)   At the beginning of 1996, almost all of the management,
underwriting, claims handling, investment and other functions of the Company
were performed by staff of TCO and compensation and general and administrative
costs associated with that performance were borne directly by TCO -- since
August 1996, most of the compensation expense and general administrative costs
have been borne directly by the Company.

     For more complete descriptions of these and other changes, see the
Company's Form 10-K for the year ended December 31, 1996.





                                     -13-


<PAGE>   14


     Because of the foregoing and other changes that are continuing in 1997,
differences in the Company's results of operations between 1996 and 1997 are
not necessarily indicative of trends or likely results of operations for 1997
or future periods.

     This Form 10-Q contains certain "forward looking statements" (within the
meaning of the Private Securities Litigation Reform Act of 1995) that involve
substantial risks and uncertainties.  When used in this Form 10-Q, the words
"anticipate," "believe," "estimate," and "expect" and similar expressions as
they relate to the Company and its management are intended to identify such
forward looking statements. A number of important factors could cause the
actual future results, performance and achievements of the Company to differ
materially from those expressed in such forward looking statements.  These
include, without limitation (i) any discontinuation or material adverse change
in the terms and conditions of the Company's and its affiliates' business
arrangements with third parties, including in particular Alpine's casualty
quota share reinsurance agreement ("Quota Share Arrangement") with United
Capitol Insurance Company (together with its affiliates, "UCIC"), which became
effective April 1, 1997, and pursuant to which Alpine assumes a portion of the
business placed with UCIC by Transre Insurance Services ("Transre") and Exstar
E&S Insurance Services ("Exstar E&S"), two entities affiliated with, but not
part of, the Company; (ii) any material adverse changes in UCIC's financial
condition or regulatory authorities; (iii) any material increase in
competition; and (iv) any material adverse changes in the Illinois DOI's
oversight of Alpine.

     The Company ceased issuing direct insurance in August 1996.  This directly
resulted in a sharp decline in the Company's earned premium revenue during the
second half of 1996, and has and will continue to cause a further decline in
the Company's earned premium from direct insurance during 1997.  The Company,
however, beginning in the second quarter of 1997, will earn premium revenue
through the Quota Share Arrangement with UCIC which became effective April 1,
1997.  The premium assumed by the Company initially will be 30% of the net
premiums accruing to UCIC on such business, including premiums unearned as of
April 1, 1997 (estimated to be approximately $13.6 million) and premiums on
policies issued after such date.  The Company has engaged in discussions with
UCIC concerning increasing the quota share percentage to as much as 50% later
in 1997.  No commitments have been made regarding the amount of, timing of, or
terms and conditions relating to any such increase, and the increase also would
have to be submitted for approval to appropriate regulatory authorities.

     The Company also will earn investment income on premium assumed by
Alpine under the Quota Share Arrangement.  Because most of the premium funds
initially will be held by UCIC, however, the Quota Share Arrangement will not
benefit the Company's cash flow to the same extent it is expected to benefit
the Company's net income (assuming the Quota Share Arrangement underwriting
results are as profitable as or more profitable than Alpine's underwriting
results have been over the last three years).  The Company has discussed with
UCIC modifying the Quota Share Arrangement to allow Alpine to receive some or
all of the premium funds that otherwise would be held by UCIC pursuant to the
current terms and conditions of the Quota Share Arrangement.  No commitments
have been 


                                     -14-


<PAGE>   15

made regarding the timing of or terms and conditions relating to any such
modification, and the modification also would have to be submitted for approval
to appropriate regulatory authorities.

     The Company reduced its underwriting expenses during 1996 by terminating
its insurance company subsidiaries' management agreements with TCO, thereby
terminating the Company's obligation to pay commissions and profit-sharing
amounts to TCO (subject to a final determination of obligations between the
parties, if any), and such expenses were virtually eliminated following the
Company's decision to cease issuing new and renewal insurance policies in
August 1996.  The Company, however, will incur significant underwriting
expenses under the Quota Share Arrangement.  Of the net premium assumed by
Alpine, Alpine will (i) allow UCIC to retain 30% as a ceding commission and
(ii) pay 3.75% to TCO Holdings as an override commission.  Additionally, during
the second half 1996 the Company began assuming a substantial amount of
personnel costs and operating expenses previously borne by TCO.  These
expenses, which previously would have been included in the Company's
underwriting expenses, have been included in the Company's other expenses since
August 1, 1996.  These expenses are being offset in part by reimbursements from
Transre and E&S.

RESULTS OF OPERATIONS

     Gross written premiums were $897,000 for the first quarter of 1997,
compared to $10.8 million for the first quarter of 1996.  The gross written
premiums for the first quarter of 1997 represent principally residual audit
premiums on direct insurance issued prior to the Company's ceasing to issue
direct insurance in August 1996.  No gross written premiums relating to the
Quota Share Arrangement were included in either first quarter's results as the
Quota Share Arrangement did not become effective until April 1, 1997.  The
Company expects gross written premiums to increase significantly during the
remainder of 1997 as a consequence of the Quota Share Arrangement, with a
proportionally greater increase if Alpine's participation is increased from the
current 30%.

     Net premiums earned, consisting of premiums earned less premiums ceded
(generally earned ratably over individual policy periods), for the first
quarter of 1997 were $1.3 million, compared to $7.9 million for the first
quarter of 1996.  The decrease directly resulted from the decrease in gross
written premiums.  No net premiums earned relating to the Quota Share
Arrangement were included in either first quarter's results as the Quota Share
Arrangement did not become effective until April 1, 1997.  The Company expects
net premiums earned to increase during the remainder of 1997 as a consequence
of the Quota Share Arrangement.  The increase will be greater than it would be
if Alpine were assuming premium only with respect to insurance policies written
on or after April 1, 1997 because under the Quota Share Arrangement Alpine also
will be assuming a 30% portion of premiums unearned as of April 1, 1997 on
policies issued prior to that date (estimated to be approximately $13.6
million).



                                     -15-

<PAGE>   16

     Net investment income for the first quarter of 1997 was $700,000, a
decrease of $400,000 or 35.6% from $1.1 million for the first quarter of 1996.
The decrease was caused principally by a 29.9% decrease in average investable
assets from $86.7 million as of December 31, 1996 to $60.8 million as of March
31, 1997, resulting from negative cash flow from operations as loss payments
and expenses have exceeded revenues since the Company ceased issuing direct
insurance in August, 1996.  The Company expects net investment income to
continue to decline during the remainder of 1997 as prior years' losses and
expenses continue to be paid, though the decline is expected to be offset to
some extent by investment income earned by Alpine on premium assumed by Alpine
under the Quota Share Arrangement effective April 1, 1997.

     Other income was $3.3 million for the first quarter of 1997, compared to
virtually nothing for the first quarter of 1996.  The income in 1997,
reflecting proceeds less certain related expenses, was principally a
consequence of a one-time settlement of a lawsuit against the Company's former
independent auditors.  The Company expects other income for the remainder of
1997 to be limited, though it anticipates resolving a disagreement over
payments due from an unaffiliated insurance company to TCO, which payments have
been assigned to Exstar, which could result in more than $1.0 million of
additional other income prior to the end of 1997.

     Net loss and loss adjustment expense incurred during the first quarter of
1997 totaled $800,000, down 82.8% from $4.7 million in the first quarter of
1996.  Net loss and loss adjustment expense as a portion of net premiums earned
was 61.0% in the first quarter of 1997 compared to 60.3% in the first quarter
of 1996.  The decrease in net loss and loss adjustment expense incurred between
the periods resulted from the decrease in net premiums earned.  No loss and
loss adjustment expense relating to the Quota Share Arrangement were included
in either first quarter's results, as the Quota Share Arrangement did not
become effective until April 1, 1997.  The Company expects net loss and loss
adjustment expense during the remainder of 1997 to increase in proportion to
the increase in net premiums earned as a consequence of the Quota Share
Arrangement, with the ratio of net loss and loss adjustment expense to net
premiums earned initially being in the 60% range.

     Other underwriting expenses historically have consisted of (i) policy
acquisition costs, which equaled a fixed percentage of gross written premiums
less reinsurance commissions, plus (ii) the allocated portion of profit sharing
payments to TCO.  Following termination of the management agreements between
the Company's insurance company subsidiaries and TCO in 1996, the fees and
commissions that otherwise would have been paid by the Company to TCO were
eliminated.

     The Company's other underwriting expenses for the first quarter of 1997
were $500,000, compared to $3.3 million in the first quarter of 1996.  The
ratio of the Company's other underwriting expenses to net premiums earned was
35.0% in the first quarter of 1997 compared to 42.2% in the first quarter of
1996.  The decrease in other underwriting expenses between the periods was
attributable to the decrease in net premiums earned and 


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<PAGE>   17

to reduced net expenses resulting from termination of the management agreements
with TCO.  No other underwriting expenses relating to the Quota Share
Arrangement are included in either first quarter's results, as the Quota Share
Arrangement did not become effective until April 1, 1997.  The Company expects
other underwriting expenses during the remainder of 1997 to increase in
proportion to the increase in net premiums earned, as under the Quota Share
Arrangement Alpine will (i) allow UCIC to retain a ceding commission of 30% of
the premiums assumed by Alpine and (ii) pay 3.75% of the premiums assumed by
Alpine to TCO Holdings as an override commission.

     Other expenses,  consisting of professional fees, personnel costs and
other costs, were $1.4 million in the first quarter of 1997, compared to $1.3
million in the first quarter of 1996.  The slight increase was principally due
to Alpine's assuming a portion of the personnel and general and administrative
costs previously borne by TCO, offset by a reduction in legal and professional
expenses.  The Company anticipates a continuing decrease in other expenses
during the remainder of 1997 as a consequence of (i) reduced fees and costs
resulting from settlement of the lawsuit against the Company's former
independent auditors, reduced fees resulting from a decrease in regulatory and
operational issues and a gradual shifting of personnel, general and
administrative costs to Transre and E&S, offset by (ii) an increase in overall
personnel and general and administrative costs (a) to pay bonuses for personnel
to compensate, in part, for compensation reductions during 1996, and otherwise
to provide incentives to personnel to continue with the Company, and (b) to
improve the Company's overall level of management experience and otherwise
replace certain employees and restore or improve certain operating
capabilities.

     Equity in income of affiliates, included in the Company's results due
to the Company's adoption of a form of equity accounting in 1995, generally
reflects TCO's net income for the period after certain adjustments.  Equity in
income of affiliates for the first quarter of 1997 was $200,000, compared to
$700,000 for the first quarter of 1996.  The smaller amount in 1997 reflects
the minimal revenues generated by TCO after Exstar's insurance company
subsidiaries ceased issuing direct insurance in August 1996 and the management
agreements with TCO were terminated.  The Company anticipates that equity in
income or losses of affiliates during the remainder of 1997 generally should be
minimal, as TCO will have virtually no revenues and no expenses relating to
operations.  The Company believes, however, that additional equity in income of
affiliates could be generated if TCO is successful in settling certain of its
existing liabilities (other than liabilities to the Company) at less than their
book values.

     Net income per common share was $0.51 for the first quarter of 1997,
compared to $0.11 for the first quarter of 1996.  This increase was almost
entirely a consequence of the settlement of the lawsuit against the Company's
former independent auditors, offset somewhat by the decrease in equity in
income of affiliates.

LIQUIDITY AND CAPITAL RESOURCES

     At March 31, 1997, cash and investments totaled $57.5 million compared to
$64.1 at December 31, 1996.  The decrease resulted from net cash applied to
operations which 

                                     -17-

<PAGE>   18

was $6.3 million for the first quarter of 1997 (after a cash inflow of $3.0
million of other income), compared to $3.9 million of cash applied to
operations for the first quarter of 1996.  The increase in net cash applied to
operations in the first quarter of 1997 resulted principally from an increase in
payments of loss and loss adjustment expenses (offset to some extent by a
decrease in payments of policy acquisition and other expenses), while premium
revenues were minimal as a consequence of the cessation of direct premium
writings in 1996.  The Quota Share Arrangement had no impact on the Company's
cash flows for either first quarter, as it did not become effective until April
1, 1997.

     In order to fund the cash applied to operations during the first quarter
of 1997, the Company continued to liquidate investments at more accelerated
rates than historically had been necessary.

     The Company currently does not anticipate that it will issue direct
insurance in 1997.  Additionally, under the Quota Share Arrangement, most of
the premiums ultimately due to Alpine will be withheld by UCIC for some time
(perhaps several years), unless the Quota Share Arrangement is modified to
allow Alpine to receive some or all of the premium funds that otherwise would
be held by UCIC pursuant to the current terms and conditions of the Quota Share
Arrangement (no commitments have been made or regulatory approvals sought
regarding any such modification), and the investment income payable to and
earned by Alpine initially will be relatively insignificant.  The Company's
cash available to fund operations, consequently, will be very limited.

     Management expects the Company will need, for at least the remainder of
1997, to continue to liquidate investments as the Company's principal source of
cash to fund its operations.  Based on historical loss payout patterns and
expected operating costs, the Company anticipates these liquidations could
result in realized losses on the liquidated investments, particularly if
interest rates rise significantly during the remainder of 1997. Notwithstanding
the foregoing, the Company has a substantial portion of its investments in
mid-term fixed maturities, and because the Company expects the cash required
for payments of loss and loss adjustment expenses to decline during the
remainder of 1997, the realized losses on liquidated investments are expected
to be relatively small (less than $500,000 for the year, depending on interest
rate movements).

     To satisfy the Company's cash needs beyond 1997, the Company is
considering a number of alternatives.  Such alternatives currently include (i)
issuing shares of its Common Stock in a private placement or a public offering;
(ii) seeking funding from or engaging in other transactions with UCIC (based on
the most recent discussions with UCIC, such funding, if any, could involve
Exstar's acquisitions of the TCO claims operations and the Transre and Exstar
E&S insurance brokerage operations); and (iii) merging with one or more other
insurance operations.  The Company has not yet determined which of these or
other courses of actions to pursue, or which would be likely to be successful,
and has not made any commitments with respect to any such or other courses of
action.



                                     -18-

<PAGE>   19


                                   SIGNATURE


     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized to sign on behalf of the Registrant as
well as in his capacity as Chief Financial Officer.

                                         EXSTAR FINANCIAL CORPORATION




Date: May 28, 1997                       By /s/ Mark Rosenberg
                                            --------------------------
                                            Mark Rosenberg
                                            Chief Financial Officer















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