ENSTAR GROUP INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO____________

COMMISSION FILE NUMBER 0-07477

THE ENSTAR GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

GEORGIA 63-0590560
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 MADISON AVENUE 36104
MONTGOMERY, ALABAMA (Zip Code)
(Address of principal executive offices)

(334) 834-5483
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

Securities registered pursuant to Section 12(g) of the Act:

Title of Class
COMMON STOCK, $.01 PAR VALUE
(including rights attached thereto)

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 [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]

The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of June 28, 2002, was $86,498,206 (Based on
the closing price on such date of the Registrant's Common Stock on the OTC
Bulletin Board maintained by the National Association of Securities Dealers,
Inc.).

The number of shares of the Registrant's Common Stock, $.01 par value per
share, outstanding at March 24, 2003 was 5,465,753.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2003 Annual Meeting of Shareholders
are incorporated herein by reference in Part III.
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TABLE OF CONTENTS

THIS FORM 10-K AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY THE
ENSTAR GROUP, INC. OR MEMBERS OF ITS MANAGEMENT TEAM CONTAIN STATEMENTS WHICH
MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES
ACT OF 1933, AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, 15 U.S.C.A. SECTIONS 77Z-2 AND 78U-5
(SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF
OR CURRENT EXPECTATIONS OF THE ENSTAR GROUP, INC. AND MEMBERS OF ITS MANAGEMENT
TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING
STATEMENTS ARE SET FORTH IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR
FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT 99.1 TO THIS FORM 10-K, AND ARE
HEREBY INCORPORATED HEREIN BY REFERENCE. THE ENSTAR GROUP, INC. UNDERTAKES NO
OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED
ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE
OPERATING RESULTS OVER TIME.

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PART I

ITEM 1. BUSINESS

GENERAL

The Enstar Group, Inc. (the "Company") through the operations of its
partially owned equity affiliates, Castlewood Holdings Limited ("Castlewood
Holdings") and B.H. Acquisition Limited ("B.H. Acquisition"), and their
subsidiaries, has acquired and manages books of reinsurance business from the
international markets. In general, reinsurance is an arrangement in which the
reinsurer agrees to indemnify an insurance or reinsurance company against all or
a portion of the risks underwritten by such insurance or reinsurance company
under one or more insurance or reinsurance contracts. For a discussion of
certain risks and uncertainties relating to the Company's participation in the
reinsurance industry, see "Safe Harbor Compliance Statement for Forward-Looking
Statements" included as Exhibit 99.1 to this Form 10-K.

The Company is also actively engaged in the search for one or more
additional operating businesses which meet the Company's acquisition criteria.
See "-- Strategy for Business Acquisitions."

ACTIVITIES RELATED TO THE REINSURANCE INDUSTRY

In July 2000, the Company, through B.H. Acquisition, a joint venture with
Castlewood Limited ("Castlewood") and an entity controlled by Trident II, L.P.
("Trident"), acquired as an operating business two reinsurance companies of
PetroFina S.A., a subsidiary of TotalFina Elf S.A. The reinsurance companies,
Brittany Insurance Company Ltd. ("Brittany") and Compagnie Europeenne
d'Assurances Industrielles S.A. ("CEAI"), were purchased by B.H. Acquisition for
$28.5 million. Brittany and CEAI are principally engaged in the active
management of books of reinsurance business from international markets. In
exchange for a capital contribution of approximately $9.6 million, the Company
received 50% of the voting stock and a 33% economic interest in B.H.
Acquisition. As part of the transaction, Castlewood received 33% of the voting
stock and a 45% economic interest in B.H. Acquisition.

In November 2001, the Company, together with Trident and the shareholders
and senior management (the "Castlewood Principals") of Castlewood, completed the
formation of a new venture, Castlewood Holdings, to acquire and manage insurance
and reinsurance companies, including companies in run-off, (insurance and
reinsurance companies that have ceased the underwriting of new policies), and to
provide management, consulting and other services to the insurance and
reinsurance industry (the "Castlewood Holdings Transaction"). The Castlewood
Principals contributed at closing all the shares of Castlewood to Castlewood
Holdings and received in exchange a 33 1/3% economic interest in the
newly-formed Castlewood Holdings, plus notes and cash totaling $4.275 million.
As part of the transaction, the Company and Trident made capital commitments of
$39.5 million each, totaling $79 million, in exchange for their 33 1/3% economic
interests in Castlewood Holdings. The Company received 50% of the voting stock
of Castlewood Holdings and the Castlewood Principals and Trident each received
25% of Castlewood Holdings' voting stock. Castlewood is a private Bermuda-based
firm, experienced in managing and acquiring reinsurance operations.

As a result of the contribution of Castlewood's outstanding stock to
Castlewood Holdings, the Company's 33% direct economic interest in B.H.
Acquisition increased by an additional 15% indirect economic interest through
Castlewood Holdings. The Company's combined voting interest in B.H. Acquisition
is limited to 50%.

Immediately following the closing of the Castlewood Holdings Transaction,
the Company and Trident each contributed $12.5 million to Castlewood Holdings.
The Company's capital contribution to Castlewood Holdings was derived from cash
on hand. In August 2002, the Company funded an additional $21 million to
Castlewood Holdings, which also was derived from cash on hand. The funds were
used, in part, to capitalize Fitzwilliam (SAC) Insurance Limited
("Fitzwilliam"), a wholly owned subsidiary of Castlewood Holdings. Fitzwilliam,
based in Bermuda, offers specialized reinsurance protections to related
companies, clients of Castlewood Holdings and other third-party companies. The
remaining commitment of approximately $7.2 million (which includes $6.0 million
of the original commitment amount plus an amount increasing annually at 5% on
the unfunded portion of the original commitment amount) was funded in March 2003
from

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cash on hand. The funds are to be used for the purchase of The Toa-Re Insurance
Company (UK) Limited ("Toa-UK"), a London-based subsidiary of The Toa
Reinsurance Company, Limited (described below).

In conjunction with the closing of the Castlewood Holdings Transaction, the
Company also transferred its shares in Revir Limited ("Revir"), a newly-formed
Bermuda holding company, at cost to Castlewood Holdings. Revir then completed
the acquisition of two reinsurance companies in run-off, River Thames Insurance
Company Limited ("River Thames"), based in London, England, and Overseas
Reinsurance Corporation Limited ("Overseas Reinsurance"), based in Bermuda,
(collectively, the "River Thames Transaction") from Rivers Group Limited and
Sedgwick Group Limited. The total purchase price of River Thames and Overseas
Reinsurance was approximately $15.2 million.

In August 2002, Castlewood Holdings purchased Hudson Reinsurance Company
Limited ("Hudson"), a Bermuda-based subsidiary of Amphion Holdings, Inc. for
approximately $4.1 million. Hudson reinsured risks relating to property,
casualty and workers' compensation, on a worldwide basis, and is now
administering the run-off of its claims.

In March 2003, the Company announced that Castlewood Holdings and Shinsei
Bank, Ltd. ("Shinsei") signed definitive agreements for the purchase of Toa-UK
for approximately $46 million. Toa-UK underwrote reinsurance business throughout
the world between 1986 and 1994, when it stopped writing new business, and is
currently operating in run-off. The acquisition will be effected through a newly
formed Bermuda company, which will be jointly owned by Castlewood Holdings and
Shinsei and is expected to close on or about March 31, 2003. Castlewood Holdings
will receive a 50.1% economic and voting interest and Shinsei will receive a
49.9% economic and voting interest in the newly formed Bermuda company.
Castlewood Holdings' share of the transaction will be funded from cash on hand.

OTHER ACTIVITIES

In November 2002, the Company received a commitment fee of approximately
$208,000 in connection with a standby purchase commitment entered into by the
Company through a newly-formed Canadian limited partnership with J.C. Flowers I
LP, Shinsei and Fitzwilliam. The Company's share of the commitment, in the
amount of approximately $10 million, was for the purchase of ordinary shares of
Zurich Financial Services ("Zurich"), a Swiss company engaged in providing
insurance based financial services, to be issued in connection with a rights
offering by Zurich to its existing shareholders. The commitment was never
required to be executed and no funds were contributed by the Company. J.C.
Flowers I LP is a fund managed by J. Christopher Flowers, Vice Chairman of the
Company's board of directors and the Company's largest shareholder. Mr. Flowers
also is a director of Shinsei.

In January 2003, the Company announced that it will contribute up to $10
million to JCF CFN LLC ("JCF CFN"), an entity controlled by JCF Associates I
LLC, the general partner of J.C. Flowers I LP, of which approximately $3 million
has been funded from cash on hand, in exchange for a 100% economic interest in
JCF CFN. JCF CFN has committed to invest in CFN Investment Holdings LLC ("CFN"),
a newly-formed limited liability company, together with J.C. Flowers I LP, FIT
CFN Holdings LLC (an affiliate of Fortress Investment Group LLC) and affiliates
of Cerberus Capital Management, L.P. The Company intends to use cash on hand to
fund its remaining capital commitment to JCF CFN.

In March 2003, CFN announced the acquisition in bankruptcy of substantially
all of the assets of Conseco Finance Corporation ("Conseco Finance") for
approximately $785 million. The acquisition was confirmed by the U.S. Bankruptcy
Court for the Northern District of Illinois. The assets consist primarily of a
portfolio of home equity and manufactured housing loan securities as well as the
associated servicing businesses. An unrelated party will simultaneously acquire
the assets of Mill Creek Bank, which houses Conseco Finance's credit card
operations, for approximately $310 million. JCF CFN has also invested in FPS DIP
LLC, a second limited liability company formed by the members of CFN to provide,
together with one of Conseco Finance's existing lenders, up to $125 million of
debtor-in-possession financing to Conseco Finance. The Company expects the
acquisition of substantially all of Conseco Finance's assets by CFN to close in
the second quarter of 2003, at which time the Company will fund its remaining
capital commitment to JCF CFN.

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ORGANIZATIONAL STRUCTURE

The Company's executive offices are located at 401 Madison Avenue,
Montgomery, Alabama 36104, and its telephone number is (334) 834-5483. The
Company has seven employees whose principal duties currently include managing
the assets of the Company, seeking and evaluating potential acquisition
candidates, fulfilling reporting requirements associated with being a publicly
traded company, and handling various other accounting and tax matters. The
Company is a Georgia corporation and successor by a 1996 merger to a Delaware
corporation of the same name.

SUBSIDIARIES

The Company has one wholly-owned subsidiary, Enstar Financial Services,
Inc., a Florida corporation, which currently is inactive.

STRATEGY FOR BUSINESS ACQUISITIONS

The Company's strategy for making a suitable acquisition is to utilize the
considerable experience, knowledge and business contacts of the Company's
executive officers and directors. Each of the Company's directors has been asked
by management to assist the Company actively in its pursuit of potential
acquisitions. Management follows up on the leads and meets with various
prospective targets. This pursuit occupies a significant amount of the time of
the Company's senior officers. The Company conducts rigorous financial and legal
due diligence with respect to any entity about which it has a strong interest.

The Company primarily focuses on potential acquisitions in the financial
services industry in a global market which complement its current operating
businesses, investigating acquisition opportunities both within and outside the
United States when management believes that such opportunities might be
attractive. The Company may pay consideration in the form of cash, securities of
the Company or some combination of both. The Company may also borrow money in
connection with an acquisition. In that event, the Company's shareholders would
be subject to the risks normally associated with leveraged transactions.
Depending upon the level of indebtedness, a leveraged transaction could have
important consequences to the Company, including the following: (i) if the
acquired business is unable to achieve satisfactory operating results, the
Company could prove unable to service such indebtedness; (ii) a substantial
portion of the Company's cash flow from operations may be dedicated to the
payment of principal and/or interest on its indebtedness and would not be
available for other purposes; (iii) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures or other
acquisitions may be limited; and (iv) the Company's level of indebtedness could
limit its flexibility in planning for, or reacting to, changes in its industry.

COMPETITION

The Company, along with its partially owned equity affiliates, Castlewood
Holdings and B.H. Acquisition, and their subsidiaries (collectively, with the
Company, "The Group"), compete in international markets with domestic and
international reinsurance companies to acquire reinsurance companies in run-off.
The acquisition of reinsurance companies in run-off is highly competitive. Some
of these competitors have greater financial resources than The Group, have been
operating for longer than The Group and have established long-term and
continuing business relationships throughout the reinsurance industry, which can
be a significant competitive advantage. As such, The Group may not be able to
compete successfully in the future for suitable acquisition candidates.

Additionally, the Company faces intense competition in its search for
operating businesses outside of the reinsurance industry. In this regard, the
Company competes with strategic buyers, financial buyers and others who are
looking to acquire suitable operating businesses, many of whom have greater
financial resources than the Company or have greater flexibility in structuring
acquisition transactions or strategic relationships.

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ITEM 2. PROPERTIES

The Company does not own any real property. In June 2002, the Company
signed a two year lease renewal option on an office building at 401 Madison
Avenue, Montgomery, Alabama which serves as the corporate headquarters.
Additionally, pursuant to an oral agreement, the Company leases space in a
warehouse at 703 Howe Street, Montgomery, Alabama on a month-to-month basis. The
Company leases the office building and warehouse space from unaffiliated third
parties for $2,750 and $350 per month, respectively. The Company believes the
rental amounts are competitive with market rates and that the cancellation or
termination of either of these leases would not have a material adverse effect
on the Company's results of operations. In February 2002, the Company entered
into an agreement with J.C. Flowers & Company, LLC running through November 2005
for the use of certain office space and administrative services from J.C.
Flowers & Company, LLC for an annual payment of $66,000. J.C. Flowers & Company,
LLC is managed by J. Christopher Flowers, Vice Chairman of the board of
directors and the Company's largest shareholder.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any pending litigation and no proceeding was
terminated during the fourth quarter of 2002.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of shareholders of the Company during
the quarter ended December 31, 2002.

SUPPLEMENTARY ITEM. CERTAIN RISK FACTORS

See "The Enstar Group, Inc. Private Securities Litigation Reform Act of
1995 Safe Harbor Compliance Statement For Forward-Looking Statements," included
as Exhibit 99.1 to this Form 10-K and incorporated herein by reference.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's common stock (the "Common Stock") is traded on The Nasdaq
National Market ("Nasdaq") under the ticker symbol ESGR. Prior to September 30,
2002, the Company's Common Stock was traded in the over-the-counter market on
the OTC Bulletin Board maintained by the National Association of Securities
Dealers, Inc. The following table reflects the range of high and low selling
prices of the Company's Common Stock by quarter for 2002 and 2001, as reflected
in the Nasdaq and the OTC Bulletin Board Daily Trade and Quote Summary Reports:

At March 24, 2003, there were approximately 3,001 holders of record of the
Company's Common Stock.

The Company has not declared or paid a cash dividend on any of its
securities since 1989. The Company currently intends to retain its earnings to
finance the growth and development of its future business and does not
anticipate paying cash dividends in the foreseeable future. The payment of cash
dividends in the future will depend upon such factors as the Company's earnings,
capital requirements, financial condition, contractual

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restrictions and other factors deemed relevant by the Board of Directors. See
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations."

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial information with respect
to the Company for each of the five years in the period ended December 31, 2002
and is derived in part from the audited consolidated financial statements of the
Company. The data set forth below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Item 7) and the audited consolidated financial statements, including
the related notes thereto.

5

The following tables set forth selected financial information of B.H.
Acquisition and Castlewood Holdings for each year since inception.

B.H. Acquisition:

Castlewood Holdings:

Net income for B.H. Acquisition for the year 2000 is reported for the
period from April 3, 2000 (date of incorporation) to December 31, 2000. Net
income for Castlewood Holdings for the year 2001 is reported for the period
August 16, 2001 (date of incorporation) to December 31, 2001.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the Selected
Financial Data (Item 6) and the audited consolidated financial statements,
including the related footnotes thereto. Historical results of operations and
the percentage relationships among any amounts included in the Consolidated
Statements of Income, and any trends which might appear to be inferable
therefrom, should not be taken as being necessarily indicative of trends in
operations or the results of operations for any future period.

OVERVIEW

Through the operations of the Company's partially owned equity affiliates,
Castlewood Holdings and B.H. Acquisition, and their subsidiaries, the Company
has acquired and manages books of reinsurance business from the international
markets. In general, reinsurance is an arrangement in which the reinsurer agrees
to indemnify an insurance or reinsurance company against all or a portion of the
risks underwritten by such insurance or reinsurance company under one or more
insurance or reinsurance contracts. For a discussion of certain risks and
uncertainties relating to the Company's participation in the reinsurance
industry see "Safe Harbor Compliance Statement for Forward-Looking Statements"
included as Exhibit 99.1 to this Form 10-K.

The Company is also actively engaged in the search for one or more
additional operating businesses which meet the Company's acquisition criteria.
See Item 1. "Business -- Strategy for Business Acquisitions."

LIQUIDITY AND CAPITAL RESOURCES

The Company's assets, aggregating approximately $128.6 million at December
31, 2002, consist primarily of approximately $55.4 million in cash and cash
equivalents, approximately $4.0 million in certificates of deposit and
approximately $68.0 million in partially owned equity affiliates. Total assets
at December 31, 2001 were approximately $99.6 million. The increase in total
assets from 2001 to 2002 was due primarily to earnings of partially owned equity
affiliates.

The Company's total liabilities were approximately $8.4 million at December
31, 2002 compared to approximately $2.0 million at December 31, 2001. The
increase in total liabilities was primarily due to an

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increase in income taxes payable resulting from a substantial increase in
earnings for 2002 compared to 2001 and insufficient remaining net operating loss
carryforwards ("NOLs") to fully offset 2002 income.

The Company is currently engaged in the active search for one or more
additional operating businesses which meet the Company's acquisition criteria.
The Company primarily focuses on potential acquisitions in the financial
services industry in a global market which complement its current operating
businesses, investigating acquisition opportunities both within and outside the
United States when management believes that such opportunities might be
attractive. The Company may pay consideration in the form of cash, securities of
the Company or some combination of both. The Company may also borrow money in
connection with an acquisition.

With the exception of various expenses incurred in connection with the
Company's search for one or more suitable acquisitions, its only needs are to
fund normal operating expenses and its remaining commitment to JCF CFN. See
"-- Contractual Obligations and Commitments."

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Pursuant to the Castlewood Holdings Transaction, the Company made a capital
commitment of $39.5 million in exchange for its 33 1/3% economic interest in
Castlewood Holdings. Following the closing of the Castlewood Holdings
Transaction, the Company contributed $12.5 million to Castlewood Holdings from
cash on hand. In August 2002, the Company funded an additional $21 million to
Castlewood Holdings, which was also derived from cash on hand. The funds were
used, in part, to capitalize Fitzwilliam, a wholly owned subsidiary of
Castlewood Holdings. Fitzwilliam, based in Bermuda, offers specialized
reinsurance protections to related companies, clients of Castlewood Holdings and
other third-party companies. The remaining commitment of approximately $7.2
million (which includes $6.0 million of the original commitment amount plus an
amount increasing annually at 5% on the unfunded portion of the original
commitment amount) was funded in March 2003 from cash on hand. The funds are to
be used for the purchase of The Toa-Re Insurance Company (UK) Limited
("Toa-UK"), a London-based subsidiary of The Toa Reinsurance Company, Limited.
See "-- Recent Developments."

The Company also has made a capital commitment of $10 million to JCF CFN in
exchange for a 100% economic interest in JCF CFN. In January 2003, the Company
funded approximately $3 million of this commitment from cash on hand. The
Company expects to fund the remaining $7 million commitment in the second
quarter of 2003 in connection with the acquisition by CFN (of which JCF CFN is
an investor) of substantially all of the assets of Conseco Finance. The Company
intends to use cash on hand to fund its remaining capital commitment to JCF CFN.
See "-- Recent Developments."

In June 1999, the Company signed a three year lease on an office building
which serves as the corporate headquarters. At the expiration of this lease in
May 2002, the Company exercised an option to renew for an additional 24 months.
Additionally, pursuant to an oral agreement, the Company leases space in a
warehouse at 703 Howe Street, Montgomery, Alabama on a month-to-month basis. The
Company leases the office building and warehouse space from unaffiliated third
parties for $2,750 and $350 per month, respectively. The Company believes the
rental amounts are competitive with market rates and that the cancellation or
termination of either of these leases would not have a material adverse effect
on the Company's results of operations. In February 2002, the Company entered
into an agreement with J.C. Flowers & Company, LLC running through November 2005
for the use of certain office space and administrative services from J.C.
Flowers & Company, LLC for an annual payment of $66,000. J.C. Flowers & Company,
LLC is managed by J. Christopher Flowers, Vice Chairman of the board of
directors and the Company's largest shareholder.

RESULTS OF OPERATIONS

2002 Compared to 2001

Interest income was approximately $1.5 million in 2002 compared to
approximately $3.3 million in 2001. Interest income was earned from cash, cash
equivalents and certificates of deposit. Interest income decreased due to a
reduction of interest rates earned on the Company's cash, cash equivalents and
certificates of deposit

7

and a reduction in cash and cash equivalents resulting from a capital
contribution of $21 million to Castlewood Holdings in August 2002.

Earnings of partially owned equity affiliates were approximately $28.6
million in 2002 compared to $2.1 million in 2001. The Company recorded equity in
earnings of $7.4 million and $1.6 million from B.H. Acquisition in 2002 and
2001, respectively. The Company's equity in earnings from B-Line LLC ("B-Line")
was approximately $1.0 million in 2002 compared to $657,000 in 2001. The Company
recorded equity in earnings of approximately $20.2 million in 2002 from
Castlewood Holdings compared to losses of $136,000 in 2001. The Company reported
its proportionate share of Castlewood Holdings' loss in 2001 for the period
November 29, 2001 (the Company's initial date of ownership in Castlewood
Holdings) to December 31, 2001. In addition, the Company reported income of
$967,000, net of income taxes, as its proportionate share of a cumulative effect
of a change in accounting principle incurred by B.H. Acquisition associated with
the implementation of Statement of Financial Accounting Standards ("SFAS") 142
in the first quarter of 2002. For further discussion of Castlewood Holdings' and
B.H. Acquisition's results of operations, see "-- Results of
Operations -- Partially Owned Equity Affiliates".

Other income consists of a $400,000 investment management fee from
Castlewood Holdings and a commitment fee of $208,000 in connection with a
standby purchase commitment entered into by the Company.

General and administrative expenses were approximately $3.1 million in 2002
compared to approximately $3.5 million in 2001. In 2002, the Company paid
$107,000 in entry fees for the Company's initial inclusion on Nasdaq. The
Company recorded $424,000 in non-cash compensation expense in 2002 relating to
stock option agreements. The Company recorded approximately $1.1 million in
non-cash compensation expense in 2001. Of this amount, $855,000 related to stock
purchase agreements and $232,000 related to stock option agreements (the Company
will incur additional non-cash compensation expense of $199,000 through June
2004 relating to these stock option agreements). In addition, the Company
incurred a substantial decrease in the expense for Alabama shares tax in 2002
due to a change in Alabama tax law. General and administrative expenses also
include legal and professional fees as well as travel expenses incurred in
connection with the Company's search for one or more additional operating
companies. Most variances in legal and professional fees and travel expenses can
be attributed to the number of potential acquisition candidates the Company
locates as well as the degree of interest the Company may have in such
candidates. The stronger the interest in a candidate, the more rigorous
financial and legal due diligence the Company will incur with respect to that
candidate.

Income tax expense, including $13,000 recorded as a result of the
cumulative effect of a change in accounting principle in the first quarter of
2002, was approximately $6.1 million and $299,000 for 2002 and 2001,
respectively. The significant increase from 2001 to 2002 was primarily a result
of increased earnings from partially owned equity affiliates and insufficient
remaining NOLs to fully offset 2002 income. The Company's effective tax rate
remains substantially less than statutory rates primarily due to the utilization
of NOLs for federal tax purposes.

Consolidated net income was approximately $22.5 million in 2002 compared to
approximately $1.6 million in 2001. The substantial increase in net income for
2002 compared to 2001 is primarily a result of an increase in earnings from
partially owned equity affiliates, offset by a decrease in interest income and
an increase in income tax expense.

2001 Compared to 2000

Interest income was approximately $3.3 million in 2001 compared to
approximately $4.6 million in 2000. Interest income was earned from cash, cash
equivalents, certificates of deposit and in 2000, a note receivable from Mr. J.
Christopher Flowers, Vice Chairman of the Board of Directors of the Company
(described below). Interest income decreased due to a reduction in 2001 of
interest rates earned on the Company's cash, cash equivalents and certificates
of deposit.

8

Earnings of partially owned equity affiliates were approximately $2.1
million in 2001 compared to $6.7 million in 2000. The Company recorded equity in
earnings of $1.6 million and $6.3 million from B.H. Acquisition in 2001 and
2000, respectively. The Company's equity in earnings from B-Line was $657,000 in
2001 compared to $393,000 in 2000. In addition, the Company recorded equity in
losses of $136,000 from Castlewood Holdings in 2001. For further discussion of
Castlewood Holdings' and B.H. Acquisition's results of operations, see
"-- Results of Operations -- Partially Owned Equity Affiliates".

General and administrative expenses were approximately $3.5 million in 2001
compared to approximately $2.5 million in 2000. The Company recorded
approximately $1.1 million in non-cash compensation expense in 2001 relating to
stock purchase and stock option agreements. This increase was partially offset
by a substantial decrease in the expense for Alabama shares tax in 2001 due to a
change in Alabama tax law. In addition, 2000 reflects a $411,000 decrease in
general and administrative expenses resulting from the reversal of the
unamortized portion of the discount recorded on a note receivable from Mr.
Flowers. The note resulted from the Company's sale of 1,158,860 newly issued
shares of the Company's Common Stock to Mr. Flowers in December 1998. The early
repayment of the note in March 2000 triggered the reversal of the discount.
General and administrative expenses also include legal and professional fees as
well as travel expenses incurred in connection with the Company's search for one
or more additional operating companies. Most variances in legal and professional
fees and travel expenses can be attributed to the number of potential
acquisition candidates the Company locates as well as the degree of interest the
Company may have in such candidates. The stronger the interest in a candidate,
the more rigorous financial and legal due diligence the Company will incur with
respect to that candidate.

Income tax expense was $299,000 in 2001 compared to $530,000 in 2000. The
Company's effective tax rate was substantially less than statutory rates
primarily due to the utilization of NOLs for federal tax purposes.

Consolidated net income was approximately $1.6 million in 2001 compared to
approximately $8.3 million in 2000. The decrease in 2001 from 2000 can primarily
be attributed to reduced interest rates in 2001, resulting in a decrease in
interest income; a decrease in earnings of partially owned equity affiliates;
and an increase in general and administrative expenses resulting primarily from
non-cash compensation in 2001.

RESULTS OF OPERATIONS -- PARTIALLY OWNED EQUITY AFFILIATES

Since a substantial portion of the Company's results of operations are
comprised of the results of operations of Castlewood Holdings and B.H.
Acquisition, the following additional summary information is provided with
respect to those companies' results of operations:

Castlewood Holdings

Castlewood Holdings reported consolidated net earnings of approximately
$60.6 million in 2002 compared to a net loss of $407,000 in 2001. Comparative
analysis of 2002 to 2001 would not be meaningful as Castlewood Holdings was
formed in November 2001.

Underwriting income for the year ended December 31, 2002 was $48.8 million.
The underwriting income earned for the year was attributable to the settlement
of losses in the year below carried reserve balances and the re-evaluation of
required insurance reserves for loss and loss adjustment expenses in its
subsidiaries. This re-evaluation was made based on an independent actuarial
review.

Castlewood Holdings earned consulting fees of approximately $20.6 million
for the year ended December 31, 2002. Castlewood Holdings generates its
consulting fees based on a combination of fixed and success based fee
arrangements. Consulting income will vary dependent on the success and timing of
completion of success based fee arrangements. Included in this amount was
approximately $1.3 million in consulting fees charged to B.H. Acquisition, a
related party.

Castlewood Holdings recorded approximately $10.1 million of net income from
a partly-owned company. This amount represents its proportionate share of equity
in earnings of B.H. Acquisition for the year ended December 31, 2002.
9

Net investment income, excluding unrealized gains and losses, for the year
ended December 31, 2002 was $8.9 million. Interest income was earned from cash,
cash equivalents and debt securities. Castlewood Holdings earned net realized
gains of $0.5 million from the sale of debt securities in the year.

Salaries, benefits and accrued bonuses were $24.2 million for the year
ended December 31, 2002. Castlewood Holdings is a service based company and as
such employee salaries and benefits is its largest cost. Castlewood Holdings has
in place a discretionary bonus scheme. Included as part of the salary cost is an
accrual relating to this scheme.

General and administrative expenses were $8.0 million for the year ended
December 31, 2002. General and administrative expenses include, for example,
rent and rent related costs, professional fees (legal, investment, audit and
actuarial) and travel expenses. Castlewood Holdings operates in both the UK and
Bermuda and staff travel frequently in connection with Castlewood Holdings
search for acquisition opportunities and in the general management of the
business.

Castlewood Holdings has recorded foreign exchange gains of $4.9 million for
the year ended December 31, 2002. Through its subsidiaries, Castlewood Holdings
conducts business in a variety of foreign (non-U.S.) currencies, the principal
exposures being Euros and British pounds. At each balance sheet date, recorded
balances that are denominated in a currency other than the functional currency
of Castlewood Holdings are adjusted to reflect the current exchange rate.
Revenue and expense items are translated into U.S. dollars at average rates of
exchange for the years. The resulting exchange gains or losses are included in
net income.

Income taxes of $518,000 were recorded for the year ended December 31,
2002. Under current Bermuda law, Castlewood Holdings and its Bermuda
subsidiaries are not required to pay taxes in Bermuda on either income or
capital gains. Castlewood Holdings and its Bermuda subsidiaries have received an
undertaking from the Bermuda government that, in the event of income or capital
gains taxes being imposed, Castlewood Holdings and its Bermuda subsidiaries will
be exempted from such taxes until the year 2016. United Kingdom subsidiaries
record income taxes based on their graduated statutory rates, net of tax
benefits arising from tax loss carryforwards.

B.H. Acquisition

2002 Compared to 2001

Net underwriting income for the year ended December 31, 2002 was $19.8
million compared to a loss of $2.4 million for the year ended December 31, 2001.
The underwriting income earned for the current year was attributable primarily
to the re-evaluation of required insurance reserves for loss and loss adjustment
expenses in one of its subsidiaries. This re-evaluation was made based on an
independent actuarial review.

Net investment income, excluding unrealized gains and losses, for the year
ended December 31, 2002 was $2.2 million compared to $4.7 million for the year
ended December 31, 2001. Interest income was earned primarily from cash, cash
equivalents and debt securities. The reduction in net investment income in 2002
was attributable to lower interest rates earned on the cash, cash equivalents
and investments held.

General and administrative expenses were $3.2 million for the year ended
December 31, 2002 compared to $2.9 million for the year ended December 31, 2001.
General and administrative expenses include, for example, professional fees
(legal, audit and actuarial) management and consulting expenses.

B.H. Acquisition has recorded foreign exchange gains of $1.3 million for
the year ended December 31, 2002 compared to $2.2 million for the year ended
December 31, 2001. Through one of its subsidiaries, B.H. Acquisition conducts
business in a variety of foreign (non-U.S.) currencies, the principal exposures
being Euros and British pounds. At each balance sheet date, recorded balances
that are denominated in a currency other than the functional currency of B.H.
Acquisition are adjusted to reflect the current exchange rate. Revenue and
expense items are translated into U.S. dollars at average rates of exchange for
the years. The resulting exchange gains or losses are included in net income.

10

During the year SFAS 142 changed the accounting for goodwill from an
amortization method to an impairment-only approach. B.H. Acquisition had
negative goodwill of approximately $3.0 million, net of accumulated
amortization, recorded on its financial statements as of December 31, 2001. In
accordance with SFAS 142, B.H. Acquisition reversed this negative goodwill into
earnings upon adoption of SFAS 142 and presented it as a cumulative effect of a
change in accounting principle. B.H. Acquisition recorded amortization of
negative goodwill of $848,000 in 2001.

Net earnings for the year ended December 31, 2002 were $25.4 million
compared to $4.8 million for the year ended December 31, 2001.

2001 Compared to 2000

Net underwriting loss for the year ended December 31, 2001 was $2.4 million
compared to income of $13.8 million for the period ended December 31, 2000. The
reduction in underwriting income earned from 2001 to 2000 was attributable
primarily to the re-evaluation of required insurance reserves for loss and loss
adjustment expenses in one of its subsidiaries. This re-evaluation was made,
based on an independent actuarial review.

Net investment income, excluding unrealized gains and losses, for the year
ended December 31, 2001 was $4.7 million compared with $3.7 million for the
period ended December 31, 2000. Interest income was earned primarily on cash,
cash equivalents and mutual funds. The reduction in net investment income in
2001 was attributable to lower cash balances along with a decrease in interest
rates earned on balances held of cash, cash equivalents and investments.

General and administrative expenses were $2.9 million for the year ended
December 31, 2001 compared to $1.8 million for the period ended December 31,
2000. General and administrative expenses include, for example, professional
fees (legal, audit and actuarial) management expenses and provisions against
receivable balances.

The Company recorded foreign exchange gains of $2.2 million for the year
ended December 31, 2001 compared to $1.3 million for the period ended December
31, 2000. Through its subsidiaries, B.H. Acquisition conducts business in a
variety of foreign (non-U.S.) currencies, the principal exposures being Euros
and British pounds. Assets and liabilities denominated in foreign currencies are
exposed to changes in currency exchange rates.

Net earnings for the year ended December 31, 2001 were $4.8 million
compared to $19.1 million for the period ended December 31, 2000.

RELATED PARTY TRANSACTIONS

In February 2002, the Company entered into an agreement with J.C. Flowers &
Company, LLC running through November 2005 for the use of certain office space
and administrative services from J.C. Flowers & Company, LLC for an annual
payment of $66,000. J.C. Flowers & Company, LLC is managed by J. Christopher
Flowers, Vice Chairman of the board of directors and the Company's largest
shareholder.

In November 2002, the Company received a commitment fee of approximately
$208,000 in connection with a standby purchase commitment entered into by the
Company through a newly-formed Canadian limited partnership with J.C. Flowers I
LP, Shinsei and Fitzwilliam. The Company's share of the commitment, in the
amount of approximately $10 million, was for the purchase of ordinary shares of
Zurich, a Swiss company engaged in providing insurance based financial services,
to be issued in connection with a rights offering by Zurich to its existing
shareholders. The commitment was never required to be executed and no funds were
contributed by the Company. The commitment fee has been included in the
Company's consolidated statement of income as a component of other income. J.C.
Flowers I LP is a private investment fund managed by Mr. Flowers. Mr. Flowers
also is a director of Shinsei.

In January 2003, the Company announced that it will contribute up to $10
million to JCF CFN, an entity controlled by JCF Associates I LLC, the general
partner of J.C. Flowers I LP, of which approximately

11

$3 million has been funded from cash on hand, in exchange for a 100% interest in
JCF CFN. JCF CFN has committed to invest in CFN, a newly-formed limited
liability company, together with J.C. Flowers I LP, FIT CFN Holdings LLC (an
affiliate of Fortress Investment Group LLC) and affiliates of Cerberus Capital
Management, L.P. In March 2003, CFN announced the acquisition in bankruptcy of
substantially all of the assets of Conseco Finance. JCF CFN has also invested in
FPS DIP LLC, a second limited liability company formed by the members of CFN to
provide, together with one of Conseco Finance's existing lenders, up to $125
million of debtor-in-possession financing to Conseco Finance. See "-- Recent
Developments."

No fees were paid by the Company or will be payable by the Company to J.C.
Flowers I LP, JCF Associates I LLC, or Mr. Flowers in connection with the
Company's standby purchase commitment to Zurich or the Company's investment in
JCF CFN.

In March 2003, the Company announced that Castlewood Holdings and Shinsei
signed definitive agreements for the purchase of Toa-UK, a London-based
subsidiary of The Toa Reinsurance Company, Limited, for approximately $46
million. The acquisition, which is subject to regulatory approval in the United
Kingdom, will be effected through a newly formed Bermuda company, which will be
jointly owned by Castlewood Holdings and Shinsei and is expected to close on or
about March 31, 2003. Castlewood Holding will receive a 50.1% economic and
voting interest and Shinsei will receive a 49.9% economic and voting interest in
the newly formed Bermuda company. See "-- Recent Developments."

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
142, "Goodwill and Other Intangible Assets." This statement is effective for
fiscal years beginning after December 15, 2001 and prescribes that goodwill
should no longer be amortized upon adoption of the standard. Instead, goodwill
will be tested annually for impairment, and on an interim basis if certain
impairment indicators are present.

The Company had approximately $552,000 of unamortized goodwill related to
B-Line classified as a component of partially owned equity affiliates at
December 31, 2002. Upon adoption of SFAS 142 on January 1, 2002, the Company
ceased amortization of this goodwill. In addition, B.H. Acquisition had negative
goodwill of approximately $3.0 million recorded on its financial statements as
of December 31, 2001. In accordance with SFAS 142, B.H. Acquisition reversed
this negative goodwill into earnings upon adoption of SFAS 142 and presented it
as a cumulative effect of a change in accounting principle. The Company's
proportionate share of this reversal was $967,000, net of income taxes, and has
been presented as a cumulative effect of a change in accounting principle in the
consolidated statement of income for the year ended December 31, 2002.

Also on January 1, 2002, the Company adopted SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment and disposition of long-lived
assets. The adoption of SFAS 144 did not have an impact on the Company's
financial position or results of operations.

In November 2002, the FASB issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" which elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee.

In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," which amends SFAS 123 to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company adopted SFAS 148 in December 2002.
Although the Company maintains usage of the intrinsic value method to account
for stock-based employee compensation, all additional disclosure requirements
concerning the pro form effects of using the

12

fair value based method have been incorporated in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.

In January 2003, the FASB issued Interpretation No 46, "Consolidation of
Variable Purpose Entities," which requires consolidation by a business
enterprise of variable interest entities if the enterprise is determined to be
the primary beneficiary. This interpretation is effective immediately for new
variable interests created or obtained after January 31, 2003 and for periods
beginning after June 15, 2003 for variable interests that were acquired before
February 1, 2003. The Company is currently assessing the impact of this
interpretation on its consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

Enstar

In the ordinary course of business, the Company has made a number of
estimates and assumptions relating to the reporting of results of operations and
financial condition in the preparation of its financial statements in conformity
with accounting principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates under different
assumptions and conditions. The most significant accounting estimates inherent
in the preparation of the Company's consolidated financial statements include
estimates associated with its evaluation of income tax reserves.

Income Tax Valuation Reserve -- The Company recognizes deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. The effect of
temporary differences on the financial statements includes certain operating
loss carryforwards and tax credit carryforwards. The Company has established a
valuation allowance for the uncertainty of the realization of these and any
other net deferred tax assets. However, utilization of the remaining deferred
tax assets at December 31, 2002 is based on management's assessment of the
Company's earnings history, expectations of future taxable income, and other
relevant considerations.

Castlewood Holdings and B.H. Acquisition

Certain amounts in Castlewood Holdings' and B.H. Acquisition's consolidated
financial statements are the result of transactions that require the use of best
estimates and assumptions to determine reported values. These amounts could
ultimately be materially different than what has been provided for in their
consolidated financial statements. The assessment of loss reserves and
reinsurance recoverable are considered to be the values requiring the most
inherently subjective and complex estimates. As such, the accounting policies
for these amounts are of critical importance to their consolidated financial
statements.

Loss and Loss Adjustment Expenses -- Because a significant amount of time
can lapse between the assumption of risk, the occurrence of a loss event, the
reporting of the event to an insurance or reinsurance company and the ultimate
payment of the claim on the loss event, Castlewood Holdings' and B.H.
Acquisition's liability for unpaid losses and loss expenses is based largely
upon estimates. Castlewood Holdings' and B.H. Acquisition's management must use
considerable judgment in the process of developing these estimates. The
liability for unpaid losses and loss expenses for property and casualty business
includes amounts determined from loss reports on individual cases and amounts
for losses incurred but not reported. Such reserves are estimated by management
based upon reports received from ceding companies and independent actuarial
estimates of ultimate unpaid losses. These estimates are continually reviewed
and Castlewood Holdings' and B.H. Acquisition's ultimate liability may be
significantly greater than or less than the amount estimated, with any
adjustments in such estimates being reflected in the periods in which they
become known.

Reinsurance Balances Receivable -- One of the ways loss exposure is managed
is through the use of reinsurance. While reinsurance arrangements are designed
to limit losses and to permit recovery of a portion of direct unpaid losses,
reinsurance does not relieve Castlewood Holdings or B.H. Acquisition of their
liabilities to their insureds. Accordingly, loss reserves represent total gross
losses, and reinsurance recoverable represents

13

anticipated recoveries of a portion of those unpaid losses as well as amounts
recoverable from reinsurers with respect to claims, which have already been
paid.

Goodwill -- On January 1, 2002, Castlewood Holdings and B.H. Acquisition
adopted SFAS 142. This statement requires that goodwill be assessed for
impairment on at least an annual basis and that negative goodwill be reversed
immediately upon adoption. In assessing the recoverability of Castlewood
Holdings' goodwill, Castlewood Holdings must make assumptions regarding
estimated future cash flows to determine the fair value of the respective
assets. If these estimates or their related assumptions change in the future,
Castlewood Holdings may be required to record impairment charges for these
assets. In accordance with SFAS 142, B.H. Acquisition reversed its negative
goodwill into earnings upon adoption of SFAS 142 and presented it as a
cumulative effect of a change in accounting principle.

RECENT DEVELOPMENTS

In January 2003, the Company announced that it will contribute up to $10
million to JCF CFN, an entity controlled by JCF Associates I LLC, the general
partner of J.C. Flowers I LP, of which approximately $3 million has been funded
from cash on hand, in exchange for a 100% economic interest in JCF CFN. JCF CFN
has committed to invest in CFN, a newly-formed limited liability company,
together with J.C. Flowers I LP, FIT CFN Holdings LLC (an affiliate of Fortress
Investment Group LLC) and affiliates of Cerberus Capital Management, L.P. The
Company intends to use cash on hand to fund its remaining capital commitment to
JCF CFN.

In March 2003, CFN announced the acquisition in bankruptcy of substantially
all of the assets of Conseco Finance for approximately $785 million. The
acquisition was confirmed by the U.S. Bankruptcy Court for the Northern District
of Illinois. The assets consist primarily of a portfolio of home equity and
manufactured housing loan securities as well as the associated servicing
businesses. An unrelated party will simultaneously acquire the assets of Mill
Creek Bank, which houses Conseco Finance's credit card operations, for
approximately $310 million. JCF CFN has also invested in FPS DIP LLC, a second
limited liability company formed by the members of CFN to provide, together with
one of Conseco Finance's existing lenders, up to $125 million of
debtor-in-possession financing to Conseco Finance. The Company expects the
acquisition of substantially all of Conseco Finance's assets by CFN to close in
the second quarter of 2003, at which time the Company will fund its remaining
capital commitment to JCF CFN.

In March 2003, the Company announced that Castlewood Holdings and Shinsei
signed definitive agreements for the purchase of Toa-UK, a London-based
subsidiary of The Toa Reinsurance Company, Limited, for approximately $46
million. Toa-UK underwrote reinsurance business throughout the world between
1986 and 1994, when it stopped writing new business and is currently operating
in run-off. The acquisition will be effected through a newly formed Bermuda
company, which will be jointly owned by Castlewood Holdings and Shinsei and is
expected to close on or about March 31, 2003. Castlewood Holding will receive a
50.1% economic and voting interest and Shinsei will receive a 49.9% economic and
voting interest in the newly formed Bermuda company. Castlewood Holdings' share
of the transaction is expected to be funded from cash on hand.

In March 2003, the Company received a cash dividend of approximately $20.8
million from Castlewood Holdings.

In March 2003, the Company funded its remaining capital commitment of
approximately $7.2 million to Castlewood Holdings.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk from changes in interest rates. The
Company had cash and cash equivalents of approximately $55.4 million in interest
bearing accounts (interest at floating rates) and approximately $4.0 million of
short-term certificates of deposit (interest at fixed rates) at December 31,
2002. Accordingly, each one percent change in market interest rates would change
interest income by approximately $594,000 per annum. However, any future
transactions affecting the Company's cash and cash equivalents and

14

certificates of deposit will change this estimate. Additionally, although
interest rate changes would affect the fair value of the Company's certificates
of deposits, the weighted average original term of certificates held by the
Company at December 31, 2002 was approximately six months. The short-term nature
of these certificates limits the Company's risk of changes in the fair value of
these certificates.

The Company is also exposed to foreign currency risk through its holdings
in partially owned equity affiliates and their subsidiaries. Foreign currency
risk is the risk that the Company will incur economic losses due to adverse
changes in foreign currency exchange rates. These entities conduct business in a
variety of foreign (non-U.S.) currencies, the principal exposures being in Euros
and British pounds. Assets and liabilities denominated in foreign currencies are
exposed to risk stemming from changes in currency exchange rates. Exchange rate
fluctuations impact the Company's and its partially owned equity affiliates'
reported consolidated financial condition, results of operations and cash flows
from year to year.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

15

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders of
The Enstar Group, Inc.:

We have audited the accompanying consolidated balance sheets of The Enstar
Group, Inc. and Subsidiary (the "Company") as of December 31, 2002 and 2001, and
the related consolidated statements of income, comprehensive income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
December 31, 2002 and 2001, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2002 in conformity
with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill
pursuant to Statement of Financial Accounting Standards No. 142.

/s/ Deloitte & Touche LLP

Atlanta, Georgia
March 25, 2003

16

THE ENSTAR GROUP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

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

17

THE ENSTAR GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

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

18

THE ENSTAR GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)

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

19

THE ENSTAR GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

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

20

THE ENSTAR GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

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

21

THE ENSTAR GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: NATURE OF BUSINESS

The Enstar Group, Inc. and Subsidiary, (the "Company"), is a publicly
traded company engaged in the operation of several equity affiliates in the
financial services industry. Enstar also continues its active search for one or
more additional operating businesses which meet its acquisition criteria.

In July 2000, the Company, through B.H. Acquisition Limited ("B.H.
Acquisition"), a joint venture, acquired as an operating business, two
reinsurance companies of Petrofina S.A., a subsidiary of TotalFina Elf S.A. The
two companies are principally engaged in the active management of books of
reinsurance business from the international markets. In November 2001, the
Company, together with Trident II, L.P. ("Trident") and the shareholders and
senior management (the "Castlewood Principals") of Castlewood Limited
("Castlewood"), completed the formation of a new venture, Castlewood Holdings
Limited ("Castlewood Holdings"), to acquire and manage insurance and reinsurance
companies, including companies in run-off, and provide management, consulting
and other services to the insurance and reinsurance industry (the "Castlewood
Holdings Transaction") (Note 3).

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

(a) Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary, Enstar
Financial Services, Inc., an inactive company. All significant intercompany
balances and transactions have been eliminated in consolidation.

(b) Use of Estimates -- The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The estimates susceptible to significant change are
those related to the valuation allowance for deferred tax assets and loss and
loss adjustment expenses included in earnings of partially owned equity
affiliates.

(c) Cash Equivalents -- Cash equivalents consist of short term, highly
liquid investments with original purchased maturities of three months or less.

(d) Partially Owned Equity Affiliates -- Partially owned equity affiliates
are accounted for under the equity method of accounting. Equity method
investments are recorded at cost and are adjusted periodically to recognize the
Company's proportionate share of the investee's income or loss, additional
contributions made and dividends and capital distributions received. In the
event any of the partially owned equity affiliates were to incur a loss and the
Company's cumulative proportionate share of the loss exceeded the carrying
amount of the equity method investment, application of the equity method would
be suspended and the Company's proportionate share of further losses would not
be recognized until the Company committed to provide further financial support
to the investee. The Company would resume application of the equity method once
the investee becomes profitable and the Company's proportionate share of the
investee's earnings equals the Company's cumulative proportionate share of
losses that were not recognized during the period the application of the equity
method was suspended.

(e) Property and Equipment -- Property and equipment is stated at cost less
accumulated depreciation and is depreciated using the straight line method over
the estimated useful lives of the related assets, principally 3 to 7 years.

(f) Financial Instruments -- The Company holds certificates of deposit
("CDs") offered by commercial banks. These certificates, which had a weighted
average maturity of approximately six months at December 31, 2002, are
classified by the Company as "held to maturity" securities. The estimated fair
value of CDs

22

THE ENSTAR GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

at December 31, 2002 and 2001, based on interest rates available on CDs of
comparable amounts, maturities, and credit quality, was approximately equal to
their carrying values.

(g) Income Taxes -- The Company computes deferred tax assets and
liabilities based on the differences between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the years
in which the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.

(h) Comprehensive Income -- The Company reports comprehensive income in
accordance with Statement of Financial Accounting Standards ("SFAS") 130,
"Reporting Comprehensive Income" which defines comprehensive income as certain
changes in equity from non-owner sources. The Company recorded other
comprehensive income from Castlewood Holdings, one of its partially owned equity
affiliates. This other comprehensive income arose from unrealized holding gains
and losses from debt and equity securities that are classified as
available-for-sale and are carried at fair value and currency translation
adjustments resulting from the translations of financial information of
subsidiaries into U.S. dollars.

(i) Deferred Compensation of Partially Owned Equity Affiliates -- The
Company recorded it proportionate share of deferred compensation reported by
Castlewood Holdings, one of its partially owned equity affiliates. The deferred
compensation arose from stock based compensation awards entered into during 2002
with certain senior employees of Castlewood Holdings.

(j) Recent Accounting Pronouncements -- In June 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS 142, "Goodwill and Other
Intangible Assets." This statement is effective for fiscal years beginning after
December 15, 2001 and prescribes that goodwill should no longer be amortized
upon adoption of the standard. Instead, goodwill will be tested annually for
impairment, and on an interim basis if certain impairment indicators are
present.

The Company had approximately $552,000 of unamortized goodwill related to
B-Line classified as a component of partially owned equity affiliates at
December 31, 2001. Upon adoption of SFAS 142 on January 1, 2002, the Company
ceased amortization of this goodwill. In addition, B.H. Acquisition had negative
goodwill of approximately $3.0 million recorded on its financial statements as
of December 31, 2001. In accordance with SFAS 142, B.H. Acquisition reversed
this negative goodwill into earnings upon adoption of SFAS 142 and presented it
as a cumulative effect of a change in accounting principle. The Company's
proportionate share of this reversal was $967,000, net of income taxes, and has
been presented as a cumulative effect of a change in accounting principle in the
consolidated statement of income for the year ended December 31, 2002.

SFAS 142 requires disclosure of what reported income before extraordinary
items and net income would have been in all periods presented exclusive of
amortization expense (including any related tax effects) recognized in those
periods related to goodwill, any deferred credit related to an excess over cost
(negative goodwill) and equity method goodwill. Additionally, adjusted per-share
amounts are required to be disclosed for all periods presented. The table below
reconciles reported net income and earnings per share amounts to adjusted net
income and per share amounts exclusive of amortization expense for the years
ending December 31, 2002, 2001 and 2000.

23

THE ENSTAR GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Also on January 1, 2002, the Company adopted SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment and disposition of long-lived
assets. The adoption of SFAS 144 did not have an impact on the Company's
financial position or results of operations.

In November 2002, the FASB issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" which elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee.

In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," which amends SFAS 123, "Accounting
for Stock-Based Compensation," to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
adopted SFAS 148 in December 2002. Although the Company maintains usage of the
intrinsic value method to account for stock-based employee compensation, all
additional disclosure requirements concerning the pro form effects of using the
fair value based method have been incorporated in the Company's financial
statements for the year ended December 31, 2002.

In January 2003, the FASB issued Interpretation No 46, "Consolidation of
Variable Purpose Entities," which requires consolidation by a business
enterprise of variable interest entities if the enterprise is determined to be
the primary beneficiary. This interpretation is effective immediately for new
variable interests created or obtained after January 31, 2003 and for periods
beginning after June 15, 2003 for variable interests that were acquired before
February 1, 2003. The Company is currently assessing the impact of this
interpretation on its consolidated financial statements.

(k) Revenue Recognition -- Revenue consists of interest income earned from
cash, cash equivalents and certificates of deposit and the Company's
proportionate share of earnings from partially owned equity affiliates. Interest
income is recorded when earned. The Company's proportionate share of earnings
from partially owned equity affiliates is recorded as such earnings are
recognized by the partially owned equity affiliate with the exception of B-Line
LLC ("B-Line") which is recorded three months in arrears.

24

THE ENSTAR GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(l) Stock-Based Compensation -- For the years ending December 31, 2002,
2001 and 2000, the Company utilized various stock-based compensation plans for
the benefit of non-employee directors and certain officers. In 1997, the Company
adopted the Deferred Compensation and Stock Plan for Non-Employee Directors and
a long-term incentive program made up of three stock option/incentive plans.
Additionally, in 2001, the Company adopted the 2001 Outside Directors' Stock
Option Plan (the "2001 Directors' Plan") and amended certain provisions of an
existing plan. All of these plans are described more fully in Note 7. The
Company accounts for these plans under the intrinsic value recognition and
measurement principles of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations. Compensation expense for the Deferred Compensation and Stock
Plan for Non-Employee Directors is recognized at the first of every quarter for
retainer fees and upon the occurrence of various Board of Director and committee
meetings. There is no compensation expense recognized in net earnings for stock
option/incentive plans that had an exercise price equal to the market value of
the Company's underlying common stock on the date of grant. In connection with
options granted in November 2001, the market value of the Company's common stock
on the date of grant exceeded the exercise price, resulting in a charge to
earnings for that year. In addition, compensation expense is being recognized
over the vesting life of these options through June 2004. Had compensation costs
for grants under the Company's stock option/incentive plans been determined
based on the fair value recognition provision of SFAS 123, the Company's pro
forma net income and net income per share for 2002, 2001 and 2000 would have
been as follows:

(m) Reclassifications -- Certain prior year amounts have been reclassified
in the financial statements to conform with the current year presentation.

NOTE 3: PARTIALLY OWNED EQUITY AFFILIATES

(a) B-Line -- In November 1998, the Company purchased membership units of
B-Line for $965,000 including $15,000 in expenses. Based in Seattle, Washington,
B-Line provides services to credit card issuers and other holders of similar
receivables. B-Line also purchases credit card receivables and recovers payments
on these accounts. At December 31, 2002, the Company's ownership percentage was
approximately 8.34%.

The Company's B-Line membership units are accounted for under the equity
method. The operations of B-Line are reported by the Company three months in
arrears. Approximately $803,000 of the original $950,000 paid was recorded as
goodwill and was being amortized over a period of 10 years. Since the adoption

25

THE ENSTAR GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

by the Company of SFAS 142 in January 2002, goodwill is no longer being
amortized. At December 31, 2002 the Company has approximately $552,000 of
unamortized goodwill.

(b) B.H. Acquisition -- In July 2000, the Company, through B.H.
Acquisition, a joint venture with Castlewood and an entity controlled by
Trident, acquired as an operating business two reinsurance companies of
Petrofina S.A., a subsidiary of TotalFina Elf S.A. The reinsurance companies,
Brittany Insurance Company Ltd. ("Brittany") and Compagnie Europeenne
d'Assurances Industrielles S.A. ("CEAI") were purchased by B.H. Acquisition for
$28.5 million and were accounted for by B.H. Acquisition using the purchase
method of accounting. Brittany and CEAI are principally engaged in the active
management of books of reinsurance business from international markets. In
exchange for a capital contribution of approximately $9.6 million, the Company
received 50% of the voting stock and a 33% economic interest in B.H.
Acquisition. As part of the transaction, Castlewood received 33% of the voting
stock and a 45% economic interest in B.H. Acquisition. In October 2000, the
Company received $3.9 million representing the Company's proportionate share of
a capital distribution from B.H. Acquisition. In March 2001, the Company
received approximately $6.3 million from B.H. Acquisition representing the
Company's proportionate share of a dividend from B.H. Acquisition. In May 2002,
the Company received $3.3 million from B.H. Acquisition representing the
Company's proportionate share of a dividend from B.H. Acquisition. The Company's
ownership in B.H. Acquisition is accounted for using the equity method of
accounting.

(c) Castlewood Holdings Limited -- In November 2001, the Company, together
with Trident and the Castlewood Principals, completed the formation of a new
venture, Castlewood Holdings, to acquire and manage insurance and reinsurance
companies, including companies in "run-off" (insurance and reinsurance companies
that have ceased the underwriting of new policies), and to provide management,
consulting and other services to the insurance and reinsurance industry. The
Castlewood Principals contributed at closing all the shares of Castlewood to
Castlewood Holdings and received in exchange a 33 1/3% economic interest in the
newly incorporated Castlewood Holdings, plus notes and cash totaling $4.275
million. As part of the transaction, the Company and Trident made capital
commitments of $39.5 million each, totaling $79 million, in exchange for their
33 1/3% economic interests in Castlewood Holdings. The Company received 50% of
the voting stock of Castlewood Holdings and the Castlewood Principals and
Trident each received 25% of Castlewood Holdings' voting stock. Castlewood is a
private Bermuda-based firm, experienced in managing and acquiring reinsurance
operations.

As a result of the contribution of Castlewood's outstanding stock to
Castlewood Holdings, the Company's 33% direct economic interest in B.H.
Acquisition increased by an additional 15% indirect economic interest through
Castlewood Holdings. The Company's combined voting interest in B.H. Acquisition
is limited to 50%. The Company's ownership in Castlewood Holdings is accounted
for using the equity method of accounting.

Immediately following the closing of the Castlewood Holdings Transaction,
the Company and Trident each contributed $12.5 million to Castlewood Holdings.
The Company's capital contribution to Castlewood Holdings was derived from cash
on hand. In August 2002, the Company funded an additional $21 million to
Castlewood Holdings, which also was derived from cash on hand. The funds were
used, in part, to capitalize Fitzwilliam (SAC) Insurance Limited
("Fitzwilliam"), a wholly owned subsidiary of Castlewood Holdings. Fitzwilliam,
based in Bermuda, offers specialized reinsurance protections to related
companies, clients of Castlewood Holdings and other third-party companies. The
remaining commitment of approximately $7.2 million (which includes $6.0 million
of the original commitment amount plus an amount increasing annually at 5% on
the unfunded portion of the original commitment amount) was funded in March 2003
from cash on hand. The funds are to be used for the purchase of The Toa-Re
Insurance Company (UK) Limited ("Toa-UK"), a London-based subsidiary of The Toa
Reinsurance Company, Limited. (Note 11)

In conjunction with the closing of the Castlewood Holdings Transaction, the
Company also transferred its shares in Revir Limited ("Revir"), a newly formed
Bermuda holding company, at cost to Castlewood Holdings. Revir then completed
the acquisition of two reinsurance companies, River Thames Insurance
26

THE ENSTAR GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company Limited ("River Thames"), based in London, England, and Overseas
Reinsurance Corporation Limited ("Overseas Reinsurance"), based in Bermuda,
(collectively, the "River Thames Transaction") from Rivers Group Limited and
Sedgwick Group Limited. The total purchase price of River Thames and Overseas
Reinsurance was approximately $15.2 million. The acquisition of the two
reinsurance companies has been accounted for by Revir using the purchase method
of accounting.

In August 2002, Castlewood Holdings purchased Hudson Reinsurance Company
Limited ("Hudson"), a Bermuda-based subsidiary of Amphion Holdings Inc. for
approximately $4.1 million.

(d) Summarized Financial Information -- In accordance with APB No. 18, "The
Equity Method of Accounting for Investments in Common Stock", the Company
prepared summarized financial information for B-Line, B.H. Acquisition and
Castlewood Holdings as of December 31, 2002 and 2001 and for each of the three
years ended December 31, 2002. The summarized financial information presented
below for B.H. Acquisition and Castlewood Holdings is derived from their audited
financial statements. The Company accounts for its investment in B-Line three
months in arrears. The summarized information presented below for B-Line has
been derived from the unaudited quarterly financial statements as of and for the
twelve months ended September 30.

27

THE ENSTAR GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

This summarized financial information reflects the results of B-Line for
all years presented. The results of B.H. Acquisition and Castlewood Holdings are
presented from their respective dates of ownership. The purchase of Brittany and
CEAI by B.H. Acquisition are recorded as purchases in accordance with APB
Opinion No. 16, "Business Combinations." The acquisition of River Thames,
Overseas Reinsurance and Hudson by Castlewood Holdings are recorded as purchases
in accordance with SFAS 141, "Business Combinations."

NOTE 4: COMMITMENTS AND CONTINGENCIES

Pursuant to the Castlewood Holdings Transaction, the Company made a capital
commitment of $39.5 million in exchange for its 33 1/3% economic interest in
Castlewood Holdings. Following the closing of the Castlewood Holdings
Transaction, the Company contributed $12.5 million to Castlewood Holdings from
cash on hand. In August 2002, the Company funded an additional $21 million to
Castlewood Holdings, which was also derived from cash on hand. The funds were
used, in part, to capitalize Fitzwilliam, a wholly owned subsidiary of
Castlewood Holdings. Fitzwilliam, based in Bermuda, offers specialized
reinsurance protections to related companies, clients of Castlewood Holdings and
other third-party companies. The remaining commitment of approximately $7.2
million (which includes $6.0 million of the original commitment amount plus an
amount increasing annually at 5% on the unfunded portion of the original
commitment amount) was funded in March 2003 from cash on hand. The funds are to
be used for the purchase of Toa-UK, a London-based subsidiary of The Toa
Reinsurance Company, Limited. (Notes 3 and 11).

The Company also has made a capital commitment of $10 million to JCF CFN in
exchange for a 100% economic interest in JCF CFN. In January 2003, the Company
funded approximately $3 million of this commitment from cash on hand. The
Company expects to fund the remaining $7 million commitment in the second
quarter of 2003 in connection with the acquisition by CFN (of which JCF CFN is
an investor) of substantially all of the assets of Conseco Finance. The Company
intends to use cash on hand to fund its remaining capital commitment to JCF CFN.
(Note 11)

In June 1999, the Company signed a three year lease on an office building
which serves as the corporate headquarters. At the expiration of this lease in
May 2002, the Company exercised an option to renew for an additional 24 months.
Additionally, pursuant to an oral agreement, the Company leases space in a
warehouse at 703 Howe Street, Montgomery, Alabama on a month-to-month basis. The
Company leases the office building and warehouse space from unaffiliated third
parties for $2,750 and $350 per month, respectively. The Company believes the
rental amounts are competitive with market rates and that the cancellation or
termination of either of these leases would not have a material adverse effect
on the Company's results of operations. In February 2002, the Company entered
into an agreement with J.C. Flowers & Company, LLC running through November 2005
for the use of certain office space and administrative services from J.C.
Flowers & Company, LLC for an annual payment of $66,000. J.C. Flowers & Company,
LLC is managed by J. Christopher Flowers, Vice Chairman of the board of
directors and the Company's largest shareholder.

28

THE ENSTAR GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5: INCOME TAXES

The provision for income taxes consists of the following components:

The reconciliation of income taxes computed at statutory rates to the
actual tax provision is as follows:

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts reported for income tax purposes. The following items
comprise the Company's deferred taxes at December 31, 2002 and 2001:

The Company has established a valuation allowance for the uncertainty of
the realization of deferred tax assets which is dependent on future taxable
income of sufficient amounts to utilize the net operating loss carryforwards
("NOLs"), tax credit carryforwards, losses of partially owned equity affiliates,
and other deferred tax assets. During 2002, 2001 and 2000, the Company decreased
the valuation allowance by approximately $3.6 million, $1.9 million and $4.9
million, respectively, to approximately $10.0 million, $13.6 million and $15.5
million, respectively.

29

THE ENSTAR GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6: SHAREHOLDERS' EQUITY

(a) Note Receivable -- In October 1998, the Company and J. Christopher
Flowers ("Flowers") entered into an agreement whereby the Company agreed to sell
to Flowers 1,158,860 newly issued shares of the Company's common stock at a
price of $12.94375 per share, for a total purchase price of $15.0 million, in
exchange for a full recourse promissory note from Flowers (the "Flowers
Transaction"). In December 1998, the Company consummated the sale of the shares
to Flowers, resulting in Flowers owning approximately 23% of the outstanding
common stock of the Company at that time. Since the interest rate on the note
was less than the rate an independent lender would have charged Flowers, the
note was recorded at a discount so as to yield a then current "market rate" of
interest. The discount was being amortized over the term of the note. The note
was repaid in full with accrued interest in March 2000. In connection with the
repayment, the Company reversed the unamortized discount on the note of
approximately $411,000.

(b) Share Purchase Rights Plan -- In January 1997, the Board of Directors
of the Company adopted a Share Purchase Rights Plan (the "Rights Plan"). The
Rights Plan entitles shareholders to a right to purchase one share of common
stock for each outstanding share of common stock of the Company (a "Right").

Until the occurrence of a "Distribution Triggering Event" as described
below, all future issuances of common stock by the Company will also carry the
Rights. The Rights will have no dividend or voting rights and will expire on the
tenth anniversary of their issuance unless exercised or redeemed prior to that
time.

Rights may not be exercised and are not detached from the common stock
until ten days after the occurrence of a Distribution Triggering Event. The
exercise price of the Rights is fixed at $40. The Rights generally are
redeemable by the Board of Directors of the Company at a nominal price of $.01
per Right at any time prior to the time that they are detached from the common
stock and separate certificates evidencing the Rights are delivered. As of
December 31, 2002, no Rights were exercised.

Distribution Triggering Events. Shortly after a person or group acquires
beneficial ownership of a fifteen percent (15%) interest or announces its
intention to commence a tender or exchange offer, the consummation of which
would result in beneficial ownership of fifteen percent (15%) of the Company's
common stock (a "Distribution Triggering Event"), the Rights will separate from
the common stock. Upon distribution of the Rights, they become exercisable and
are transferable separately from the Company's common stock. Each Right (other
than Rights beneficially owned by the acquiror) is then immediately converted
into the right to buy that number of shares of common stock of the Company (or
in certain circumstances, shares of stock of the acquiring company) that has a
market value of two times the exercise price of the Right.

In connection with the Flowers Transaction described above, the Board of
Directors approved an amendment to the Rights Plan for the sole purpose of
exempting the Flowers Transaction from being a Distribution Triggering Event.

(c) Treasury Stock -- In April 1998, the Company announced a stock
repurchase program under which the Company could repurchase up to $5.0 million
of its common stock in the open market at prices per share deemed favorable from
time to time by the Company. The Company has repurchased 54,525 shares of its
common stock for approximately $815,000 as part of this plan. Through this plan
and a similar plan completed in the first quarter of 1998, the Company has
repurchased a total of 442,351 shares for approximately $5.8 million as of
December 31, 2002.

(d) Deferred Compensation of Partially Owned Equity Affiliates -- The
Company recorded it proportionate share of deferred compensation reported by
Castlewood Holdings, one of its partially owned equity affiliates. The deferred
compensation arose from stock based compensation awards entered into during 2002
with certain senior employees of Castlewood Holdings.

30

THE ENSTAR GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7: STOCK COMPENSATION

(a) Deferred Compensation and Stock Plan for Non-Employee Directors -- In
September 1997, the Company adopted a Deferred Compensation and Stock Plan for
Non-Employee Directors. The purposes of this plan are to enable the Company to
attract and retain qualified persons to serve as non-employee directors, to
solidify the common interests of its non-employee directors and shareholders by
enhancing the equity interest of non-employee directors in the Company, and to
encourage the highest level of non-employee director performance by providing
such non-employee directors with a proprietary interest in the Company's
performance and progress by permitting 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.

All non-employee directors have elected to receive 100% of their
compensation in stock units in lieu of cash payments for the retainer and
meeting fees. Approximately $561,000 and $464,000 in stock compensation has been
deferred under this plan as of December 31, 2002, and 2001, respectively.

(b) Long-Term Incentive Program -- In January 1997, the Company adopted a
long-term incentive program made up of three stock option/incentive plans. Under
the program, the Company established the 1997 Amended CEO Stock Option Plan (the
"CEO Plan"), the 1997 Amended Outside Directors' Stock Option Plan (the "1997
Directors' Plan"), and the 1997 Amended Omnibus Incentive Plan (the "Incentive
Plan"). In May 2001, the Company adopted the 2001 Directors' Plan and amended
certain provisions of the Incentive Plan. (Note 2).

Under the CEO Plan, Nimrod T. Frazer, the Company's Chief Executive Officer
and Chairman, was granted options for 150,000 shares of common stock with an
exercise price of $10.50 in 1997. The options granted under the CEO Plan vested
in four equal installments of 37,500 options through January 1, 2000, and expire
in January 2007.

Under the 1997 Directors' Plan, each of the Company's four outside
directors was granted options for 25,000 shares of common stock in 1997. The
options have an exercise price of $10.8125 and vested in five equal installments
of 5,000 options through January 1, 2001. The options granted under the 1997
Directors' Plan expire in January 2007.

The Incentive Plan was established for the benefit of key employees and
directors which provides generally for stock appreciation awards, incentive
stock options and nonqualified stock options. In March 2000, John J. Oros, the
Company's President and Chief Operating Officer, was granted options for 100,000
shares of common stock with an exercise price of $12.75. These options vest in
three installments: 50,000 on March 2, 2001 and 25,000 each on March 2, 2002 and
2003. These options expire in February 2010.

In connection with the consummation of the River Thames Transaction in
November 2001, Messrs. Frazer and Oros were granted options under the Incentive
Plan to purchase a total of 100,000 shares (50,000 per individual) at $18.00 per
share. These options vest on various dates through July 2004 and will expire in
June 2011. Since the market price per share of the Company's common stock on the
date of grant exceeded the exercise price, the Company recognized a charge to
earnings in 2002 and 2001 of $243,000 and $133,000, respectively. The Company
will recognize additional charges to earnings totaling approximately $114,000
through July 2004 relating to these options.

In connection with the consummation of the Castlewood Holdings Transaction
in November 2001, Messrs. Frazer and Oros were granted options under the
Incentive Plan to purchase a total of 100,000 shares (50,000 per individual) at
$19.25 per share. These options vest on various dates through July 2004 and will
expire in September 2011. Since the market price per share of the Company's
common stock on the date of grant exceeded the exercise price, the Company
recognized a charge to earnings in 2002 and 2001 of $181,000 and $99,000,
respectively. The Company will recognize additional charges to earnings totaling
approximately $85,000 through July 2004 relating to these options.

31

THE ENSTAR GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Under the 2001 Directors' Plan, the Company's three current outside
(non-employee) directors were each granted options in June 2001 for 15,000
shares of common stock with an exercise price of $18.90 per share. Options
granted to each of the three outside directors under the plan vest in three
equal installments of 5,000 shares in each of January 2002, January 2003 and
January 2004; provided, however, that such shares will vest only so long as the
recipient remains a director of the Company. The options granted under this plan
must be exercised no later than January 2011, or 60 days after the director
ceases to be a director of the Company other than by reason of death, mandatory
retirement or disability.

As of December 31, 2002, a total of 595,000 options have been issued or
reserved for issuance under the long-term incentive program, none of which have
been exercised.

The fair values for options granted under the Company's stock option plans
were calculated using the Black-Scholes option pricing model, as modified. The
fair values, along with the assumptions used in their calculation are as
follows:

(c) Stock Purchase Agreements -- In June 2001, the Company entered into
agreements with Messrs. Frazer and Oros to sell a total of 100,000 shares
(50,000 per individual) of the Company's common stock at $18.00 per share, the
closing trading price on the date of the agreements, to Messrs. Frazer and Oros,
subject to the consummation of the River Thames Transaction on or before
December 31, 2001. After the closing of the River Thames Transaction in November
2001, the Company received $900,000 each from Messrs. Frazer and Oros in payment
of their shares. Since the market price per share of the Company's common stock
on the closing date of the transaction exceeded the selling price, the Company
recognized a charge to earnings in 2001 of approximately $490,000 relating to
these shares.

In addition, the Company entered into stock purchase agreements with
Messrs. Frazer and Oros relating to the Castlewood Holdings Transaction. The
agreements proposed to sell a total of 100,000 shares (50,000 per individual) of
the Company's common stock at $19.25 per share, the closing trading price on
September 28, 2001, to Messrs. Frazer and Oros, subject to the consummation of
the Castlewood Holdings Transaction on or before December 31, 2001. After the
closing of the Castlewood Holdings Transaction in November 2001, the Company
received $962,500 each from Messrs. Frazer and Oros in payment of their shares.
Since the market price per share of the Company's common stock on the closing
date of the transaction exceeded the selling price, the Company recognized a
charge to earnings in 2001 of approximately $365,000 relating to these shares.

NOTE 8: INCOME PER SHARE

The table below illustrates the reconciliation between net income per
common share -- basic and net income per common share -- assuming dilution for
2002, 2001 and 2000. Net income per common share -- basic is computed by
dividing net income by the weighted average shares outstanding. Net income per
common share -- assuming dilution is computed by dividing net income by the sum
of the weighted average shares outstanding and common share equivalents. Common
share equivalents consist of stock units deferred under the Deferred
Compensation and Stock Plan for Non-Employee Directors and stock options granted
under the Company's stock option/incentive plans (Note 7).
32

THE ENSTAR GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9: SEGMENT INFORMATION

The Company separately evaluates the performance of each of its partially
owned equity affiliates based on the different services provided by each of the
entities, and such evaluation is based on 100% of the entities' results of
operations. The Company also reviews separate financial results for Enstar's
corporate activity.

B-Line provides services to credit card issuers and other holders of
similar receivables. B-Line also purchases credit card receivables and recovers
payments on these accounts. B.H. Acquisition, through its wholly owned
subsidiaries, Brittany and CEAI, is principally engaged in the active management
of books of reinsurance business from international markets. Castlewood Holdings
was formed to acquire and manage insurance and reinsurance companies, including
companies in "run-off," and provide management, consulting and other services to
the insurance and reinsurance industry.

The consolidated financial information for B-Line is reported for all years
presented. The consolidated financial information for B.H. Acquisition and
Castlewood Holdings are reported from July 3, 2000 and November 29, 2001, their
respective dates of acquisition by the Company. The Company accounts for its
investment in B-Line three months in arrears. The summarized information
presented below for B-Line has been derived from the unaudited quarterly
financial statements as of and for the twelve months ended September 30. A
reconciliation of the consolidated financial information by segment to the
Company's

33

THE ENSTAR GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

consolidated financial statements as of December 31, 2002 and 2001 and for each
of the three years ended December 31, 2002 is as follows:

The income tax amount of $6,085,000 included in the corporate segment for
the year ended December 31, 2002 includes $13,000 which is netted against the
Company's proportionate share of a cumulative effect of a change in accounting
principle in the Company's consolidated statement of income.

34

THE ENSTAR GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

35

THE ENSTAR GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's ownership percentage in B-Line has varied between 7.99% and
8.77% from October 1, 1999 to September 30, 2002, the periods reported in the
above tables. The Company's ownership percentage for B-Line used in the above
tables for 2001 and 2000 represents weighted averages. The Company's ownership
percentage in B-Line was 8.34% at December 31, 2002 and 2001.

NOTE 10: UNAUDITED QUARTERLY FINANCIAL INFORMATION

A summary of the Company's unaudited quarterly results of operations for
the years ended December 31, 2002 and 2001 are as follows:

36

THE ENSTAR GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In the first quarter of 2002, the Company reported income of $967,000, net
of income taxes, as its proportionate share of a cumulative effect of a change
in accounting principle incurred by B.H. Acquisition associated with the
implementation of SFAS 142.

The Company reported a significant increase in earnings of partially owned
equity affiliates in the second and fourth quarters of 2002. In the second
quarter of 2002, CEAI, a wholly owned subsidiary of B.H. Acquisition, recorded a
reserve reduction based on a re-evaluation of required insurance reserves as
conducted by an independent actuarial review. In the fourth quarter of 2002
certain insurance subsidiaries of Castlewood Holdings recorded reserve
reductions based on re-evaluations of required insurance reserves also conducted
by independent actuarial reviews.

The Company incurred a substantial increase in income taxes in the fourth
quarter of 2002 as a result of an increase in earnings from partially owned
equity affiliates and insufficient remaining NOLs to offset 2002 income.

General and administrative expenses for the fourth quarter of 2001 include
non-cash compensation expense of approximately $1.1 million.

NOTE 11: SUBSEQUENT EVENTS

In January 2003, the Company announced that it will contribute up to $10
million to JCF CFN, an entity controlled by JCF Associates I LLC, the general
partner of J.C. Flowers I LP, of which approximately $3 million was funded from
cash on hand in exchange for a 100% economic interest in JCF CFN. JCF CFN has
committed to invest in CFN, a newly-formed limited liability company, together
with J.C. Flowers I LP, FIT CFN Holdings LLC (an affiliate of Fortress
Investment Group LLC) and affiliates of Cerberus Capital Management, L.P. The
Company intends to use cash on hand to fund its remaining capital commitment to
JCF CFN.

In March 2003, CFN announced the acquisition in bankruptcy of substantially
all of the assets of Conseco Finance for approximately $785 million. The
acquisition was confirmed by the U.S. Bankruptcy Court for the Northern District
of Illinois. The assets consist primarily of a portfolio of home equity and
manufactured housing loan securities as well as the associated servicing
businesses. An unrelated party will simultaneously acquire the assets of Mill
Creek Bank, which houses Conseco Finance's credit card operations, for
approximately $310 million. JCF CFN has also invested in FPS DIP LLC, a second
limited liability company formed by the members of CFN to provide, together with
one of Conseco Finance's existing lenders, up to $125 million of
debtor-in-possession financing to Conseco Finance. The Company expects the
acquisition of substantially all of Conseco Finance's assets by CFN to close in
the second quarter of 2003, at which time the Company will fund its remaining
capital commitment to JCF CFN.

In March 2003, the Company announced that Castlewood Holdings and Shinsei
signed definitive agreements for the purchase of Toa-UK, a London-based
subsidiary of The Toa Reinsurance Company, Limited, for approximately $46
million. Toa-UK underwrote reinsurance business throughout the world between
1986 and 1994, when it stopped writing new business and is currently operating
in run-off. The acquisition, which is subject to regulatory approval in the
United Kingdom, will be effected through a newly formed Bermuda company, which
will be jointly owned by Castlewood Holdings and Shinsei and is expected to
close on or about March 31, 2003. Castlewood Holding will receive a 50.1%
economic and voting interest and Shinsei will receive a 49.9% economic and
voting interest in the newly formed Bermuda company. Castlewood Holdings' share
of the transaction will be funded from cash on hand.

In March 2003, the Company received a cash dividend of approximately $20.8
million from Castlewood Holdings.

In March 2003, the Company funded its remaining capital commitment of
approximately $7.2 million to Castlewood Holdings.
37

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item with respect to directors and
executive officers of the Registrant is included under the sections entitled
"Election of Directors", "Executive Officers" and "Other Matters -- Section
16(a) Beneficial Ownership Reporting Compliance" of the Proxy Statement for the
2003 Annual Meeting of Shareholders and such sections are deemed incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is included under the sections
entitled "Employment Agreements", "Executive Compensation", "Stock Option
Grants", "Stock Option Exercises", "Election of Directors -- Compensation of
Directors", and "Compensation Committee Interlocks and Insider Participation" of
the Proxy Statement for the 2003 Annual Meeting of Shareholders and such
sections are deemed incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required by this Item is included under the sections
entitled "Common Stock Ownership by Management", "Principal Shareholders" and
"Equity Compensation Plan Information" appearing in the Proxy Statement for the
2003 Annual Meeting of Shareholders and such sections are deemed incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is included under the sections
entitled "Employment Agreements", "Certain Transactions", "Election of
Directors -- Compensation of Directors" and "Executive Compensation" appearing
in the Proxy Statement for the 2003 Annual Meeting of Shareholders and such
sections are deemed incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

Based on their evaluation of the Company's disclosure controls and
procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange
Act of 1934), as of a date within 90 days of the filing of this Form 10-K, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that these controls and procedures are effective. There have been no significant
changes in internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, nor have there been
any significant deficiencies or material weaknesses. As a result, no corrective
actions were required or undertaken.

38

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial Statements

The following financial statements included in Item 8 of this Annual
Report are for the fiscal period ended December 31, 2002 and are
incorporated herein by reference.

Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 2002 and 2001.
Consolidated Statements of Income for the years ended December 31, 2002,
2001 and 2000.
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2002, 2001 and 2000.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2002, 2001 and 2000.
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000.
Notes to Consolidated Financial Statements.

2. Financial Statement Schedules

The following financial statements of Castlewood Holdings included in this
Annual Report are for the fiscal period ended December 31, 2002.

The following financial statements of B.H. Acquisition included in this
Annual Report are for the fiscal period ended December 31, 2002.

39

3. Exhibits

(b) Reports on Form 8-K

There were no reports filed on Form 8-K for the quarter ended December 31,
2002.

41

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

THE ENSTAR GROUP, INC.

By: /s/ NIMROD T. FRAZER
------------------------------------
Nimrod T. Frazer
Chairman of the Board of Directors,
and Chief Executive Officer

March 31, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

/s/ NIMROD T. FRAZER Chairman of the Board of March 31, 2003
---------------------------------------------------- Directors, and Chief
Nimrod T. Frazer Executive Officer

/s/ CHERYL D. DAVIS Chief Financial Officer, Vice March 31, 2003
---------------------------------------------------- President and Secretary
Cheryl D. Davis (Principal Accounting
Officer)

/s/ JOHN J. OROS President and Chief Operating March 31, 2003
---------------------------------------------------- Officer
John J. Oros

/s/ J. CHRISTOPHER FLOWERS Vice Chairman of the Board of March 31, 2003
---------------------------------------------------- Directors
J. Christopher Flowers

/s/ T. WHIT ARMSTRONG Director March 31, 2003
----------------------------------------------------
T. Whit Armstrong

/s/ T. WAYNE DAVIS Director March 31, 2003
----------------------------------------------------
T. Wayne Davis

/s/ JEFFREY S. HALIS Director March 31, 2003
----------------------------------------------------
Jeffrey S. Halis

42

CERTIFICATIONS

I, Nimrod T. Frazer, Chairman of the Board of Directors and Chief Executive
Officer, certify that:

1. I have reviewed this annual report on Form 10-K of The Enstar Group,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

By: /s/ NIMROD T. FRAZER
------------------------------------
Nimrod T. Frazer
Chairman of the Board of Directors
and Chief Executive Officer

Date: March 31, 2003

43

I, Cheryl D. Davis, Chief Financial Officer, Vice President of Corporate Taxes
and Secretary, certify that:

1. I have reviewed this annual report on Form 10-K of The Enstar Group,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

By: /s/ CHERYL D. DAVIS
------------------------------------
Cheryl D. Davis
Chief Financial Officer,
Vice President of Corporate Taxes,
Secretary

Date: March 31, 2003

44

CASTLEWOOD HOLDINGS LIMITED

CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT

FOR THE YEAR ENDED DECEMBER 31, 2002 AND THE PERIOD FROM AUGUST 16, 2001
(DATE OF INCORPORATION) TO DECEMBER 31, 2001

INDEPENDENT AUDITORS' REPORT

To the Shareholders of
Castlewood Holdings Limited

We have audited the accompanying consolidated balance sheets of Castlewood
Holdings Limited and subsidiaries as at December 31, 2002 and 2001, and the
related consolidated statements of earnings and retained earnings, comprehensive
income, shareholders' equity and cash flows for the year ended December 31, 2002
and for the period from August 16, 2001 (date of incorporation) to December 31,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Castlewood Holdings Limited and
subsidiaries as at December 31, 2002 and 2001 and the results of their
operations and their cash flows for the year ended December 31, 2002 and for the
period from August 16, 2001 (date of incorporation) to December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America.

/s/ Deloitte & Touche
Hamilton, Bermuda
March 25, 2003

F-1

CASTLEWOOD HOLDINGS LIMITED

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-2

CASTLEWOOD HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND
FOR THE PERIOD FROM AUGUST 16, 2001 (DATE OF INCORPORATION) TO DECEMBER 31, 2001
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-3

CASTLEWOOD HOLDINGS LIMITED

STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2002 AND
FOR THE PERIOD FROM AUGUST 16, 2001 (DATE OF INCORPORATION) TO DECEMBER 31, 2001
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-4

CASTLEWOOD HOLDINGS LIMITED

STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2002 AND
FOR THE PERIOD FROM AUGUST 16, 2001 (DATE OF INCORPORATION) TO DECEMBER 31, 2001
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-5

CASTLEWOOD HOLDINGS LIMITED

CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND
FOR THE PERIOD FROM AUGUST 16, 2001 (DATE OF INCORPORATION) TO DECEMBER 31, 2001
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-6

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

1. DESCRIPTION OF BUSINESS

Castlewood Holdings Limited ("Castlewood Holdings") was incorporated under
the laws of Bermuda on August 16, 2001, and on November 29, 2001, acquired 100%
of the common shares of Castlewood Limited ("Castlewood"), for consideration of
$46,637 in shares, cash and notes payable. Castlewood Holdings did not operate
prior to November 29, 2001 (see note 3).

Castlewood Holdings and its subsidiaries (the "Company") acquire and manage
insurance and reinsurance companies in run-off, and provide management,
consultancy and other services to the insurance and reinsurance industry.

2. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PREPARATION

The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The major estimates reflected
in the Company's financial statements include, but are not limited to, the
reserves for losses and loss adjustment expenses and reinsurance balances
receivable.

BASIS OF CONSOLIDATION

The consolidated financial statements include the assets, liabilities and
results of operations of Castlewood Holdings for the year ended December 31,
2002 and from its incorporation date of August 16, 2001 to December 31, 2001,
and for its wholly owned subsidiaries for the year ended December 31, 2002 and
from November 29, 2001 to December 31, 2001, except for Hudson Reinsurance
Company Limited ("Hudson"). The results of operations of Hudson are included
from the date of its acquisition by the Company. From its incorporation date of
August 16, 2001 to November 29, 2001, the Company did not engage in any
significant activities. Intercompany transactions are eliminated on
consolidation.

CASH AND CASH EQUIVALENTS

For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid debt instruments purchased with an initial maturity
of three months or less to be cash and cash equivalents.

INVESTMENTS

Debt and equity securities are classified as available-for-sale securities
and are carried at fair value, with unrealized holding gains and losses excluded
from net earnings and reported as a separate component of accumulated other
comprehensive income.

Investments are reviewed on a regular basis to determine if they have
sustained an impairment of value that is considered to be other than temporary.
The identification of potentially impaired investments involves significant
management judgment. Any unrealized depreciation in value considered by
management to be other than temporary is charged to income in the period that it
is determined.

Realized gains and losses on sales of securities classified as
available-for-sale are recognized in net investment income on the specific
identification basis.

F-7

INVESTMENT IN PARTLY-OWNED COMPANY

Investment in partly-owned company is carried on the equity basis whereby
the investment is initially recorded at cost and adjusted to reflect the
Company's share of after-tax earnings or losses and reduced by dividends
received. Investment in partly-owned company is reviewed on a regular basis to
determine if they have sustained an impairment of value that is considered to be
other than temporary.

PREMIUMS

Premiums are recognized as revenue on a pro-rata basis over the periods of
the respective policies and contracts of reinsurance. Premiums which are subject
to adjustments are estimated based upon available information. Any variances
from the estimates are recorded in the periods in which they become known.

LOSSES AND LOSS ADJUSTMENT EXPENSES

The liability for losses and loss adjustment expenses includes an amount
determined from loss reports and individual cases and an amount, based on
historical loss experience and industry statistics, for losses incurred but not
reported. These estimates are continually reviewed and are necessarily subject
to the impact of future changes in such factors as claim severity and frequency.
While the directors and management believe that the amount is adequate, the
ultimate liability may be significantly in excess of, or less than, the amounts
provided. Any adjustments will be reflected in the periods in which they become
known.

REINSURANCE

Reinsurance premiums ceded are accounted for on a pro-rata basis over the
terms of the respective reinsurance contracts. Commissions on reinsurance ceded
are deferred and amortized over the terms of the contracts of reinsurance to
which they relate.

CONSULTING FEES

Fixed fees are recognized on a straight-line basis over the term of the
agreement. Fees based on hourly charge rates are recognized as services are
provided. Performance fees are recognized upon completion of all the
requirements as specified in the agreement.

TRANSLATION OF FOREIGN CURRENCIES

At each balance sheet date, recorded balances that are denominated in a
currency other than the functional currency of the Company are adjusted to
reflect the current exchange rate. Revenue and expense items are translated into
U.S. dollars at average rates of exchange for the years. The resulting exchange
gains or losses are included in net earnings.

Assets and liabilities of subsidiaries are translated into U.S. dollars at
the year-end rates of exchange. Revenues and expenses of subsidiaries are
translated into U.S. dollars at the average rates of exchange for the years. The
resultant translation adjustment for self-sustaining subsidiaries is classified
as a separate component of other comprehensive income, and for integrated
operations is included in net earnings.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Estimated fair value of financial instruments held by the Company
approximates carrying value. The estimated value of the investments is based on
quoted market value.

RECLASSIFICATIONS

Certain 2001 amounts have been reclassified to conform to the 2002
presentation.

F-8

GOODWILL

Goodwill represents the excess of the purchase price over the fair value of
the net assets received related to the acquisition of Castlewood. SFAS No. 142
"Goodwill and Other Intangible Assets" (SFAS 142) requires that, upon adoption,
the Company perform an initial valuation of its goodwill assets. The Company is
then required to update this analysis on an annual basis. If, as a result of the
assessment, the Company determines the value of its goodwill asset is impaired,
goodwill is to be written down in the period in which the determination is made.
Neither the Company's initial valuation nor its subsequent valuation has
indicated any impairment of the Company's goodwill asset.

On January 1, 2002 the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). This statement changes the accounting for
goodwill and indefinite-lived intangibles in two significant ways. SFAS 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Thus, amortization of goodwill, including goodwill
recorded in past business combinations, ceases upon adoption of that statement.
An annual impairment valuation has concluded that there is no impairment to the
value of the Company's goodwill asset. In connection with the transitional
goodwill impairment test, the Company has (i) identified its reporting units,
(ii) determined the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill and intangible assets to
those reporting units, and (iii) determined the fair value of each reporting
unit. If the carrying value of any reporting unit had exceeded its fair value,
then detailed fair values for each of the assigned assets (excluding goodwill)
and liabilities would have been determined to calculate the amount of goodwill
impairment, if any.

STOCK BASED COMPENSATION

The Company has elected to follow Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock awards. The intrinsic value
method has been used to account for stock based employee compensation.

During 2002, the Company entered into an agreement with senior employees
that provided for stock awards. Employee stock awards for 153 Class C common
shares and 1,007,552 Class E common shares were granted to the senior employees.

Pursuant to APB Opinion No. 25, compensation expense for employee stock
awards is measured at the fair value of the shares at the date of grant and
recognized as the awards vest.

The shares vest over a period of 4 years. The Company has charged
compensation expense of $150 relating to these restricted share awards in 2002.
Had the Company applied SFAS No. 123 "Accounting for Stock-Based Compensation"
in accounting for its restricted share awards, its compensation expense and net
earnings would not have changed.

VARIABLE INTEREST ENTITIES

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. A
variable interest entity is a corporation, partnership, trust, or any other
legal structures used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity may be essentially passive or it may engage in research
and development of other activities on behalf of another company. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply to all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company has identified one variable
interest entity, subject to consolidation under

F-9

FIN 46. Under terms of a management agreement with Lansdowne Insurance Company
Ltd. ("Lansdowne"), the net income of Lansdowne is paid to the Company as a
management fee.

Lansdowne is licensed as a Class 3 Insurer under the Bermuda Insurance Act,
1978 and related regulations, as amended. Lansdowne acts as a reinsurer in
respect of property and casualty lines. Under its Act of Incorporation,
Lansdowne may establish separate accounts where directed by the related
insurance policy or reinsurance agreements. Creditors of separate accounts
established to date have no claim upon the assets of other separate accounts or
upon Lansdowne's general assets. Separate accounts assets and liabilities are
shown separately on the balance sheet of Lansdowne as assets held in, and
liabilities related to, separate accounts. As at December 31, 2002 Lansdowne's
assets and liabilities were $97,115 and $96,975, respectively, both of which
include $95,868 relating to separate accounts. Shareholders' equity was $140.
Lansdowne's assets and liabilities, and the results of its operations are not
currently included in the Company's financial statements.

3. ACQUISITIONS

Castlewood -- The acquisition of Castlewood by Castlewood Holdings has 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 are as follows:

Purchase price
Castlewood Holdings Class C voting shares................... $ 6
Castlewood Holdings Class E non-voting redeemable shares.... 39,494
Notes payable bearing interest at 5%, payable after May 1,
2002...................................................... 3,000
Cash........................................................ 1,275
Direct costs of the acquisition............................. 2,862
-------
Total purchase price.............................. 46,637
-------
Net tangible assets acquired at fair value.................. 25,415
-------
Excess of purchase price over net tangible assets
(Goodwill)................................................ $21,222
=======

River Thames -- Immediately after the acquisition of Castlewood, a wholly
owned subsidiary of Castlewood Holdings, Revir Limited ("Revir") completed the
acquisition of two reinsurance companies, River Thames Insurance Company
Limited, ("River Thames") based in London, England, and Overseas Reinsurance
Corporation Limited, ("Overseas Re") based in Bermuda and an underwriting
agency, Regis Agencies Limited ("Regis"), from Sedgwick Group Limited.

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 are as follows:

Purchase price.............................................. $15,075
Direct costs of the acquisition............................. 148
-------
Total purchase price.............................. $15,223
=======
Net tangible assets (liabilities) acquired at fair value:
River Thames................................................ $37,753
Overseas Re................................................. (22,570)
Regis....................................................... 40
-------
Total net tangible assets acquired at fair
value............................................ $15,223
=======

Hudson -- On August 19, 2002, a wholly owned subsidiary of Castlewood
Holdings, Kenmare Holdings Limited completed the acquisition of Hudson, a
reinsurance company, based in Bermuda.

F-10

The acquisition has 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 are as follows:

Purchase price.............................................. $4,000
Direct costs of the acquisition............................. 108
------
Total purchase price........................................ $4,108
======
Net tangible assets acquired at fair value.................. $4,108
======

4. PLEDGED ASSETS

Cash and cash equivalents in the amount of $6,558 and $5,189 as of December
31, 2002 and 2001, respectively are pledged as collateral against letters of
credit in the same amounts. Letters of credit are issued to ceding insurers as
security for the obligations of insurance subsidiaries under reinsurance
agreements with those ceding insurers. Loss and loss adjustment expense
liabilities are provided on those contracts in amounts at least equal to related
letters of credit.

5. INVESTMENTS

The amortized cost and estimated fair value of investments in debt
securities available-for-sale are as follows:

Mutual funds invest in fixed income and money market securities denominated
in U.S. dollars, with average target duration of nine months.

F-11

The amortized cost and estimated fair values of debt securities classified
as available-for-sale by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.

Major categories of net investment income are summarized as follows:

During the year ended December 31, 2002, gross realized gains on sale of
debt securities were $544 and gross realized losses on sale of debt securities
were $11.

6. REINSURANCE BALANCES RECEIVABLE

The Company uses retrocessional agreements to reduce its exposure to the
risk of reinsurance assumed. The Company remains liable to the extent the
retrocessionaires do not meet their obligations under these agreements, and
therefore the Company evaluates and monitors concentration of credit risk.
Provisions are made for amounts considered potentially uncollectable. The
allowance for uncollectable reinsurance recoverable was $38,908 and $30,573 at
December 31, 2002 and 2001, respectively.

At December 31, 2002 and 2001, reinsurance receivables with a carrying
value of $45,053 and $40,269 respectively were associated with a single
reinsurer which represented 10% or more of total reinsurance balances
receivable. In the event that all or any of the reinsuring companies are unable
to meet their obligations under existing reinsurance agreements, the Company
will be liable for such defaulted amounts.

7. INVESTMENT IN PARTLY-OWNED COMPANY

Castlewood Holdings holds 45% of the common shares of BH Acquisition Ltd.
("BH"). The common shares held by Castlewood Holdings have 33% of BH's voting
rights. BH wholly owns two insurance companies in run-off, Brittany Insurance
Company Ltd., incorporated in Bermuda, and Compagnie Europeenne d'Assurances
Industrielles S.A., incorporated in Belgium.

F-12

As of December 31, 2002 and 2001, consolidated retained earnings include
$5,968 and $389, respectively of undistributed earnings of companies accounted
for by the equity method.

8. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:

The Company's liability for unpaid losses and loss adjustment expenses as
of December 31, 2002 and 2001 included $45,994 and $66,067, respectively that
represents an estimate of its net ultimate liability for asbestos and
environmental claims. The gross liability for such claims as at December 31,
2002 and 2001 was $154,856 and $194,069, respectively.

In establishing the liability for loss claims and loss adjustment expenses
related to asbestos and environmental claims, management considers facts
currently known and the current state of the law and coverage litigation.
Liabilities are recognized for known claims (including the cost of related
litigation) when sufficient information has been developed to indicate the
involvement of a specific insurance policy, and management can reasonably
estimate its liability. In addition, liabilities have been established to cover
additional exposures on both known and unasserted claims. Estimates of the
liabilities are reviewed and updated continually. Developed case law and
adequate claim history do not exist for such claims, especially because
significant uncertainty exists about the outcome of coverage litigation and
whether past claim experience will be representative of future claim experience.
Reductions in estimates of ultimate losses arise from loss settlements below
carried reserves and reductions in actuarial estimates of losses incurred but
not reported.

9. REINSURANCE BALANCES PAYABLE

Under the terms of certain of the Company's acquisitions, distributions
from certain acquired companies in excess of their purchase price are shared
with the sellers, subject to aggregate caps. The financial statements reflect a
provision of $17,239 in this regard.

10. NOTES PAYABLE TO SHAREHOLDERS

Notes payable, bearing interest of 5% per annum, were issued as part of the
purchase consideration for Castlewood (see Note 1), and were repaid during 2002.

F-13

11. DUE TO SHAREHOLDERS

Due to shareholders represents pre-acquisition costs and structuring fees
in relation to the acquisition of Castlewood, and were repaid during 2002.

12. SHARE CAPITAL

Authorized shares of par value $1 each

Issued and fully paid shares of par value $1 each

Class E non-voting redeemable shares are held by Class C shareholders and
will be redeemed based upon distributions to Class A and Class B shareholders.

On March 18, 2003 the Company designated 15,282,000 Class E shares as
redeemable.

13. ADDITIONAL PAID-IN CAPITAL

During the periods ended December 31, 2002 and 2001, shareholders of the
Company have made contributions in the amount of $42,000 and $24,988,
respectively.

As part of the acquisition of Castlewood (see note 3), certain of the
shareholders of the Company made commitments to contribute capital of $79,000
upon request of the Board of Directors of the Company. As of December 31, 2002
and 2001, the undrawn capital commitments of these shareholders were to $12,012
and $54,012, respectively.

14. UNDERWRITING INCOME

Underwriting income is summarized as follows:

Net underwriting income primarily arises from settlement of losses below
carried reserves and reductions in actuarial estimates of losses incurred but
not reported.

F-14

15. RELATED PARTY TRANSACTIONS

During the periods ended December 31, 2002 and 2001, Castlewood earned
consulting fees of $1,250 and $104, respectively from subsidiaries of its
partly-owned company (see note 7).

16. TAXATION

Under current Bermuda law, the Company and its Bermuda subsidiaries are not
required to pay taxes in Bermuda on either income or capital gains. The Company
and its Bermuda subsidiaries have received an undertaking from the Bermuda
government that, in the event of income or capital gains taxes being imposed,
the Company and its Bermuda subsidiaries will be exempted from such taxes until
the year 2016.

United Kingdom subsidiaries have recorded income taxes based upon their
graduated statutory rate of 30%. Deferred income taxes arise from the
recognition of temporary differences between income determined for financial
reporting purposes and income tax purposes. Such differences result from
differing bases of depreciation and amortization for tax and book purposes.

River Thames' effective tax rate is approximately 30%. As of December 31,
2002 and 2001 River Thames has tax loss carry-forwards, which do not expire, of
approximately $62,133 and $43,750, respectively. River Thames had taxable losses
during 2002 and 2001 and management cannot determine whether tax loss carry-
forwards will be realized. Accordingly, a valuation allowance has been provided
for the tax benefit of these loss carry-forwards as follows:

17. STATUTORY REQUIREMENTS

The reinsurance subsidiaries are required to file annual statements with
insurance regulatory authorities prepared on an accounting basis prescribed or
permitted by such authorities ("statutory basis"), and maintain minimum levels
of solvency and liquidity. As at December 31, 2002 and 2001, the reinsurance
subsidiaries' solvency and liquidity were in excess of the minimum levels
required.

Retained earnings of reinsurance subsidiaries are not restricted as minimum
capital solvency margins are covered by share capital and additional paid-in
capital. Retained earnings of $6,605 of the partly-owned company requires
regulatory approval prior to distribution.

18. COMMITMENTS

The Company leases office space under operating leases expiring in various
years through 2011. The leases are renewable at the option of the lessee under
certain circumstances. The following is a schedule of future minimum rental
payments, exclusive of escalation clauses, on non-cancelable leases as of
December 31, 2002:

2003........................................................ $ 788
2004........................................................ 788
2005........................................................ 788
2006........................................................ 788
2007........................................................ 566
2008 through 2012........................................... 1,174
------
$4,892
======

Rent expense for the periods ended December 31, 2002 and 2001 was $708 and
$50, respectively.

F-15

19. PENSIONS

The Company provides pension benefits to eligible employees through various
plans sponsored by the Company. All pension plans are structured as defined
contribution plans. Pension expense for the periods ended December 31, 2002 and
2001 was $550 and $64, respectively

20. SUBSEQUENT EVENTS

Subsequent to December 31, 2002, a 50.1% owned subsidiary of Castlewood
Holdings reached agreement to purchase Toa-Re Insurance (UK) Limited, a
reinsurance company based in London, England for L29,000. The purchase is
scheduled to close by March 31, 2003.

On March 18, 2003 the Company declared a dividend to its Class A and B
shareholders of $53,801.

F-16

B.H. ACQUISITION LTD.

CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT

DECEMBER 31, 2002 AND 2001

F-17

INDEPENDENT AUDITORS' REPORT

To the Shareholders of
B.H. Acquisition Ltd.

We have audited the accompanying consolidated balance sheets of B.H. Acquisition
Ltd. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of earnings and retained earnings and cash flows for the
years ended December 31, 2002, December 31, 2001 and for the period from April
3, 2000 (date of incorporation) to December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of B.H. Acquisition Ltd. as of
December 31, 2002 and 2001, and the results of their operations and their cash
flows for the years ended December 31, 2002, December 31, 2001 and for the
period from April 3, 2000 (date of incorporation) to December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America.

As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill
pursuant to Statement of Financial Accounting Standards No. 142.

/s/ Deloitte & Touche
Hamilton, Bermuda
March 25, 2003

F-18

B.H. ACQUISITION LTD.

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
(EXPRESSED IN U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-19

B.H. ACQUISITION LTD.

CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 AND
FOR THE PERIOD FROM APRIL 3, 2000 (DATE OF INCORPORATION) TO DECEMBER 31, 2000
(EXPRESSED IN U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-20

B.H. ACQUISITION LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001 AND
FOR THE PERIOD FROM APRIL 3, 2000 (DATE OF INCORPORATION) TO DECEMBER 31, 2000
(EXPRESSED IN U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-21

B.H. ACQUISITION LTD.

NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
(EXPRESSED IN U.S. DOLLARS)

1. DESCRIPTION OF BUSINESS

B.H. Acquisition Ltd. ("B.H.") was incorporated under the laws of Bermuda
on April 3, 2000, and on July 3, 2000, acquired 100% of the common shares of
Brittany Insurance Company Ltd. ("Brittany") and Compagnie Europeenne
d'Assurances Industrielles S.A. ("CEAI") (collectively "the Company") for cash
consideration of $20,500,000 and $8,000,000, respectively. B.H. did not operate
prior to July 3, 2000.

Brittany is incorporated under the laws of Bermuda and is in run-off. Prior
to run-off, its principal activity was to reinsure property, casualty and excess
liability risks, such as environmental and health exposures, of its former
affiliates and third parties. Brittany novated its entire book of related party
business prior to the acquisition.

CEAI is incorporated under the laws of Belgium and is in run-off. Its
principal activity is the run-off of its insurance and reinsurance risks
throughout the world.

Both 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 at the date of acquisition.

Negative goodwill on the purchase of Brittany and CEAI is calculated as
follows:

Purchase price of Brittany and CEAI......................... $28,500,000
Direct costs of the acquisitions............................ 441,931
-----------
28,941,931
Fair value of net assets acquired........................... 33,183,925
-----------
Negative goodwill at acquisition............................ $(4,241,994)
===========

2. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PREPARATION

The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The major estimates reflected
in the Company's financial statements include, but are not limited to, losses
and loss adjustment expenses recoverable from reinsurers and losses and loss
adjustment expenses.

BASIS OF CONSOLIDATION

The accompanying consolidated financial statements include the assets,
liabilities and results of operations of B.H. and its wholly owned subsidiaries,
Brittany and CEAI. Intercompany transactions are eliminated on consolidation.

CASH AND CASH EQUIVALENTS

For purposes of the consolidated statements of cash flows, the Company
considers all money market funds and highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.

F-22

B.H. ACQUISITION LTD.

NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)

INVESTMENTS

Debt and equity securities are classified as trading securities and are
carried at fair value, with unrealized holding gains and losses included in net
earnings. Realized gains and losses on sales of securities are recognized in net
earnings on the specific identification basis.

RUN-OFF PROVISION

Run-off provision is amortized over the five year period estimated to
complete the run-off.

PREMIUMS

Premiums are recognized as revenue on a pro-rata basis over the periods of
the respective policies and contracts of reinsurance.

Premiums which are subject to adjustments are estimated based upon
available information. Any variances from the estimates are recorded in the
periods in which they become known.

LOSSES AND LOSS ADJUSTMENT EXPENSES

The liability for losses and loss adjustment expenses includes an amount
determined from loss reports and individual cases and an amount, based on
historical loss experience and industry statistics, for losses incurred but not
reported. These estimates are continually reviewed and are necessarily subject
to the impact of future changes in such factors as claim severity and frequency.
While the directors and management believe that the amount is adequate, the
ultimate liability may be significantly in excess of, or less than, the amounts
provided and any adjustments will be reflected in the periods in which they
become known.

TRANSLATION OF FOREIGN CURRENCIES

At each balance sheet date, recorded balances that are denominated in a
currency other than the functional currency of the company are adjusted to
reflect the current exchange rate. Revenue and expense items are translated into
U.S. dollars at average rates of exchange for the years. The resulting exchange
gains or losses are included in net earnings.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Estimated fair value of financial instruments held by the Company
approximates carrying value. The estimated fair value of investments is based on
quoted market value.

ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instrument
and Hedging Activities" (SFAS 133). SFAS 133, which became effective in the
first quarter of 2001, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The adoption of SFAS 133
did not have a material impact on the Company's financial position or results
from operations.

On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 141 "Business Combinations" (SFAS
141) and Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" (SFAS 142). The statements changed the accounting for
business combinations and goodwill in two significant ways.

F-23

B.H. ACQUISITION LTD.

NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)

SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is prohibited.

SFAS 142 changed the accounting for goodwill from an amortization method to
an impairment-only approach. Further, the accounting for negative goodwill
changed from an amortization method to immediate recognition as an extraordinary
gain.

The excess of the fair value of the net assets over the purchase price,
negative goodwill, was previously being amortized to net earnings. The
unamortized balance was recorded in net earnings and recognized as an effect of
a change in accounting principle upon adoption of SFAS 142 on January 1, 2002.
The adoption of SFAS 142 resulted in the recognition of a gain of $2,969,384 on
January 1, 2002.

3. PLEDGED ASSETS

Cash equivalents and investments in the amount of $11,667,838 and
$13,854,925 as of December 31, 2002 and 2001, respectively, are pledged as
collateral against letters of credit and trust funds in the amount of
$10,717,862 and $12,389,762 as of December 31, 2002 and 2001, respectively.
Letters of credit are issued to ceding insurers as security for the obligations
of insurance subsidiaries under reinsurance agreements with those ceding
insurers. The Company set up a trust fund of $5,000,000 as of December 31, 2002
and 2001 for the benefit of ceding insurers that generally takes the place of
letters of credit requirements.

4. INVESTMENTS

Trading investments with estimated fair values of $28,273,859 and
$11,037,927 as of December 31, 2002 and 2001, respectively, consist of mutual
funds.

The mutual funds invest in U.S. Treasury, U.S. Government Agency, corporate
debt, asset backed securities and money market instruments.

Major categories of net investment income are summarized as follows:

5. LOSSES AND LOSS ADJUSTMENT EXPENSES RECOVERABLE FROM REINSURERS

The fair value adjustment, determined based upon the estimated timing of
loss and loss adjustment expense recoveries and an assumed interest rate of
3.5%, is amortized over the estimated recovery period using the constant yield
method.

F-24

B.H. ACQUISITION LTD.

NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)

The Company used retrocessional agreements to reduce its exposure to the
risk of reinsurance assumed. The Company remains liable to the extent the
retrocessionaires do not meet their obligations under these agreements, and
therefore the Company evaluates and monitors concentration of credit risk.
Provisions are made for amounts considered potentially uncollectable. The
allowance for uncollectable reinsurance recoverable was $7,212,267 and
$4,594,491 at December 31, 2002 and 2001, respectively.

At December 31, 2002 and 2001, reinsurance receivables with a carrying
value of $13,368,151 and $16,232,587, respectively, were associated with one
reinsurer, who represented 10% or more of total reinsurance recoverables. In the
event that all or any of the reinsuring companies are unable to meet their
obligations under existing reinsurance agreements, the Company will be liable
for such defaulted amounts.

6. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

Activity in the liability for losses and loss adjustment expenses is
summarized as follows:

The fair value adjustment, determined based on the estimated timing of loss
and loss adjustment expense payments and an assumed interest rate of 3.5%, is
amortized over the estimated payout period using the constant yield method.

Run-off costs provision represents the Company's estimate of the future
administrative costs of managing the run-off of Brittany and CEAI.

The Company's reserve for unpaid losses and loss adjustment expenses as of
December 31, 2002 and 2001 included $12,403,209 and $13,091,270, respectively,
that represents an estimate of its net ultimate liability for asbestos and
environmental claims. The gross liability for such claims as at December 31,
2002 and 2001 was $21,066,311 and $22,864,268, respectively.

In establishing the liability for unpaid losses and loss adjustment
expenses related to asbestos and environmental claims, management considers
facts currently known and the current state of the law and coverage litigation.
Liabilities are recognized for known claims (including the cost of related
litigation) when sufficient information has been developed to indicate the
involvement of a specific insurance policy, and management can reasonably
estimate its liability. In addition, liabilities have been established to cover
additional exposures on both known and unasserted claims. Estimates of the
liabilities are reviewed and

F-25

B.H. ACQUISITION LTD.

NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)

updated continually. Developed case law and adequate claim history do not exist
for such claims, especially because significant uncertainty exists about the
outcome of coverage litigation and whether past claim experience will be
representative of future claim experience.

7. RELATED PARTY TRANSACTIONS

The Company was charged administration fees and expenses for the years
ended December 31, 2002 and 2001 amounting to $1,250,000 and $1,250,000,
respectively, by one of the shareholders.

8. CONTINGENCIES

On or about July 8, 1997, Brittany was informed by correspondence that an
underwriting agency company who provided underwriting agency and run-off
services has claimed that they are owed run-off remuneration totaling $2,321,000
for the period January 1, 1984 to December 31, 1996. The parent of the
underwriting agency is currently in liquidation. Brittany continues to deny any
liability under this claim, and will vigorously defend this position.

9. TAXATION

Under current Bermuda law, B.H. and Brittany are not required to pay taxes
in Bermuda on either income or capital gains. B.H. and Brittany have received an
undertaking from the Bermuda government that, in the event of income or capital
gains taxes being imposed, they will be exempted from such taxes until the year
2016.

CEAI's effective tax rate is approximately 41%. CEAI has tax loss
carry-forwards at December 31, 2002 and 2001 of approximately $18,500,000 and
$30,800,000, respectively, which do not expire. A valuation allowance has been
provided for the tax benefit of these loss carry-forwards as follows:

10. STATUTORY REQUIREMENTS

B.H.'s ability to pay dividends and its operating expenses is dependent on
cash dividends from its reinsurance subsidiaries Brittany and CEAI.

The reinsurance subsidiaries are required to file annual statements with
insurance regulatory authorities prepared on an accounting basis prescribed or
permitted by such authorities ("statutory basis") and maintain minimum levels of
solvency and liquidity. As of December 31, 2002 and 2001, the reinsurance
subsidiaries' solvency and liquidity amounts were in excess of the minimum
levels required.

Retained earnings of reinsurance subsidiaries are not restricted as minimum
capital solvency margins are covered by share capital and additional paid-in
capital. Retained earnings of $14,678,000 requires regulatory approval prior to
distribution.

F-26