ENSTAR GROUP INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

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, 2003
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 30, 2003, was $140,053,276 (based on
the closing price on such date of the Registrant's Common Stock on The Nasdaq
National Market).

The number of shares of the Registrant's Common Stock, $.01 par value per
share, outstanding at March 15, 2004 was 5,465,753.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2004 Annual Meeting of Shareholders
are incorporated herein by reference in Part III.

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. 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") 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 certain acquisition criteria. See "-- Strategy
for Business Acquisitions." 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, the Company
has acquired and manages property and casualty insurance and reinsurance
companies. The management of such companies includes claims administration,
adjustment and settlement together with the collection of reinsurance
recoveries. Castlewood Holdings, a Bermuda-based company, also provides
management, consulting and other services to the insurance and reinsurance
industry for both fixed and success-based fee arrangements. 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. For business segment information,
see Note 9 of the Notes to Consolidated Financial Statements.

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.

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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 were 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, 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, Castlewood Holdings and Shinsei Bank, Limited ("Shinsei")
completed the acquisition of all of the outstanding capital stock 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 1980 and 1994, when it stopped writing new business and is
currently operating in run-off. The acquisition was effected through Hillcot
Holdings Ltd. ("Hillcot"), a newly formed Bermuda company, in which Castlewood
Holdings has a 50.1% economic interest and a 50% voting interest. Subsequent to
the acquisition, Toa-UK's name was changed to Hillcot Re Limited. Castlewood
Holdings' share of the transaction was funded from cash on hand. Hillcot is
included in Castlewood Holdings' consolidated financial statements, with the
remaining 49.9% interest reflected as minority interest. J. Christopher Flowers
("Mr. Flowers"), a member of the Company's board of directors and the Company's
largest shareholder, is a director of Shinsei.

RECENT DEVELOPMENTS

In January 2003, the Company announced a $10 million commitment to JCF CFN
LLC and related entities (collectively, the "JCF CFN Entities"). The JCF CFN
Entities are controlled by JCF Associates I LLC, the managing member of which is
Mr. Flowers, a member of the Company's board of directors and the Company's
largest shareholder. Approximately $3 million of the Company's commitment was
funded in January 2003 from cash on hand. In June 2003, the Company increased
its commitment to $15.3 million, resulting in the Company holding a 60% interest
in the JCF CFN Entities. In addition, in June, 2003 Castlewood Holdings became a
member of the JCF CFN Entities and made a $10.2 million commitment, in exchange
for a 40% interest. Both the Company and Castlewood Holdings have fully funded
their commitments to the JCF CFN Entities.

In June 2003, the JCF CFN Entities invested in Green Tree Investment
Holdings LLC (formerly known as CFN Investment Holdings LLC) and related
entities (collectively, "Green Tree"), together with affiliates of J.C. Flowers
I LP, affiliates of Fortress Investment Group LLC and affiliates of Cerberus
Capital Management, L.P. The JCF CFN Entities invested approximately $25.1
million in exchange for a 3.995% interest in Green Tree. Green Tree completed
the purchase of certain assets of Conseco Finance Corp. ("Conseco Finance") for
approximately $630 million in cash plus certain assumed liabilities. The assets
consist primarily of a portfolio of home equity and manufactured housing loan
securities as well as the associated servicing businesses. The JCF CFN Entities
also invested in FPS DIP LLC, a second limited liability company formed by the
members of Green Tree to provide, together with one of Conseco Finance's
existing lenders, up to $125 million of debtor-in-possession financing to
Conseco Finance. J.C. Flowers I LP is

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a private investment fund, the general partner of which is JCF Associates I LLC.
The JCF CFN Entities account for these investments under the equity method of
accounting.

In 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities,"
as amended by FIN 46R issued in December 2003. FIN 46 requires consolidation by
a business enterprise of variable interest entities ("VIE") if the enterprise is
determined to be the primary beneficiary. The Company believes that each of the
JCF CFN Entities qualifies as a VIE and that the Company is the primary
beneficiary of each such entity. As such, the JCF CFN Entities are included in
the accompanying consolidated financial statements, with Castlewood Holdings'
40% interest reflected as minority interest. See "-- Subsidiaries." Because the
JCF CFN Entities are consolidated, Green Tree is treated as a partially owned
equity affiliate of the Company.

In March 2004, the JCF CFN Entities, along with certain affiliates of J.C.
Flowers I LP, signed a definitive agreement for the sale of their entire
interests in Green Tree for cash to FIT CFN Holdings LLC, an affiliate of
Fortress Investment Group LLC., or its assigns. In exchange for their entire
interest, the JCF CFN Entities will receive approximately $40 million in cash.
Of this amount, the Company will receive approximately $24 million and
Castlewood Holdings will receive approximately $16 million. A partial
distribution of approximately $6.2 million has been received by the JCF CFN
Entities. This and any additional distributions which may be made by Green Tree
prior to closing of the sale will reduce the amount to be received at closing.
The sale is expected to close in the third quarter of 2004. The Company
anticipates a realized gain on the sale. Enstar owns a one-third economic
interest in Castlewood Holdings and 50% of its voting stock. The Company and
Castlewood Holdings expect to receive approximately $3.7 million and
approximately $2.5 million, respectively, as their proportionate shares of the
$6.2 million partial distribution.

OTHER ACTIVITIES

In November 1998, the Company purchased membership units of B-Line LLC
("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. In December 2003, the Company sold its membership
units in B-Line for approximately $7.8 million in cash, resulting in a gain of
approximately $3.3 million.

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 private investment fund, indirectly controlled by Mr. Flowers.
Mr. Flowers is a member of the Company's board of directors and the Company's
largest shareholder.

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 six 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.

3

SUBSIDIARIES

At December 31, 2003, the Company had one wholly-owned subsidiary, Enstar
Financial Services, Inc., a Florida corporation, which currently is inactive. In
addition, the Company consolidates the JCF CFN Entities, recording a minority
interest for Castlewood Holdings' 40% interest.

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 pursuing 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 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. If debt is involved, 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.

WHERE YOU CAN FIND MORE INFORMATION

The Company makes its annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and all amendments to these reports filed
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") available (free of charge) on or through its
Internet website located at http://www.enstargroup.com, as soon as reasonably
practicable after they are filed with or furnished to the Securities and
Exchange Commission.

4

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. The
Company expects to renew this lease for an additional two year period in June
2004. 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 Mr. Flowers, a member of the Company's 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 2003.

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, 2003.

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 2003 and 2002, as reflected
in the Nasdaq and the OTC Bulletin Board Daily Trade and Quote Summary Reports:

At March 5, 2004, there were approximately 2,977 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 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."

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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, 2003
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.

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

B.H. Acquisition:

Castlewood Holdings:

Green Tree:

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. Net income for
Green Tree for the year 2003 is reported from the date of inception to December
31, 2003. The 2002 accounting change for B.H. Acquisition relates to the
adoption of Statements of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets.

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

7

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."

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued Statements of Financial Accounting Standards
("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.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities," as amended by FIN 46R issued in December 2003, which
requires consolidation by a business enterprise of variable interest entities
("VIE") if the enterprise is determined to be the primary beneficiary. The
Company believes that each of the JCF CFN Entities qualifies as a VIE and that
the Company is the primary beneficiary of each such entity. As such, the JCF CFN
Entities are included in the accompanying consolidated financial statements,
with Castlewood Holdings' 40% interest reflected as minority interest.

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
losses of partially owned foreign subsidiaries 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, 2003, 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

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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, supplemented by Castlewood
Holdings' and B.H. Acquisition's own estimates of reserves for which ceding
company reports have not been received 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 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 a $10 million commitment to JCF CFN
LLC and related entities (collectively, the "JCF CFN Entities"). The JCF CFN
Entities are controlled by JCF Associates I LLC, the managing member of which is
J. Christopher Flowers ("Mr. Flowers"), a member of the Company's board of
directors and the Company's largest shareholder. Approximately $3 million of the
Company's commitment was funded in January 2003 from cash on hand. In June 2003,
the Company increased its commitment to $15.3 million, resulting in the Company
holding a 60% interest in the JCF CFN Entities. In addition, in June, 2003
Castlewood Holdings became a member of the JCF CFN Entities and made a $10.2
million commitment, in exchange for a 40% interest. Both the Company and
Castlewood Holdings have fully funded their commitments to the JCF CFN Entities.

In June 2003, the JCF CFN Entities invested in Green Tree Investment
Holdings LLC (formerly known as CFN Investment Holdings LLC) and related
entities (collectively, "Green Tree"), together with affiliates of J.C. Flowers
I LP, affiliates of Fortress Investment Group LLC and affiliates of Cerberus
Capital Management, L.P. The JCF CFN Entities invested approximately $25.1
million in exchange for a 3.995% interest in Green Tree. Green Tree completed
the purchase of certain assets of Conseco Finance Corp. ("Conseco Finance") for
approximately $630 million in cash plus certain assumed liabilities. The assets
consist primarily of a portfolio of home equity and manufactured housing loan
securities as well as the associated servicing businesses. The JCF CFN Entities
also invested in FPS DIP LLC, a second limited liability company formed by the
members of Green Tree to provide, together with one of Conseco Finance's
existing lenders, up to $125 million of debtor-in-possession financing to
Conseco Finance. J.C. Flowers I LP is

9

a private investment fund, the general partner of which is JCF Associates I LLC.
The JCF CFN Entities account for these investments under the equity method of
accounting.

In March 2004, the JCF CFN Entities, along with certain affiliates of J.C.
Flowers I LP, signed a definitive agreement for the sale of their entire
interests in Green Tree for cash to FIT CFN Holdings LLC, an affiliate of
Fortress Investment Group LLC, or its assigns. In exchange for their entire
interest, the JCF CFN Entities will receive approximately $40 million in cash.
Of this amount, the Company will receive approximately $24 million and
Castlewood Holdings will receive approximately $16 million. A partial
distribution of approximately $6.2 million has been received by the JCF CFN
Entities. This and any additional distributions which may be made by Green Tree
prior to closing of the sale will reduce the amount to be received at closing.
The sale is expected to close in the third quarter of 2004. The Company
anticipates a realized gain on the sale. Enstar owns a one-third economic
interest in Castlewood Holdings and 50% of its voting stock. The Company and
Castlewood Holdings expect to receive approximately $3.7 million and
approximately $2.5 million, respectively, as their proportionate shares of the
$6.2 million partial distribution.

In March 2003, Castlewood Holdings and Shinsei Bank, Limited ("Shinsei")
completed the acquisition of all of the outstanding capital stock 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 1980 and 1994, when it stopped writing new business and is
currently operating in run-off. The acquisition was effected through Hillcot
Holdings Ltd. ("Hillcot"), a newly formed Bermuda company, in which Castlewood
Holdings has a 50.1% economic interest and a 50% voting interest. Subsequent to
the acquisition, Toa-UK's name was changed to Hillcot Re Limited. Castlewood
Holdings' share of the transaction was funded from cash on hand. Hillcot is
included in Castlewood Holdings' consolidated financial statements, with the
remaining 49.9% interest reflected as minority interest. Mr. Flowers is a
director of Shinsei.

In December 2003, the Company sold its entire interest in B-Line to B-Line
Holdings LLC, an affiliate of Golden Gate Capital, for cash of approximately
$7.8 million, net of expenses. The Company recorded a gain of approximately $3.3
million on the sale.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary uses of liquidity include, but are not limited to,
funding normal operating expenses as well as various expenses incurred in
connection with the Company's search for one or more suitable acquisitions. In
addition, the Company uses cash on hand to fund commitments made in connection
with the purchase of its partially owned equity affiliates. The primary sources
of the Company's liquidity include the receipt of dividends and distributions
from partially owned equity affiliates and proceeds from the sale of one of its
partially owned equity affiliates.

Net cash provided by operating activities increased from approximately $3.0
million in 2002 to approximately $14.6 million in 2003 primarily due to the
receipt of approximately $20.8 million in dividends from Castlewood Holdings.
This increase was partially offset by lower net income in 2003 resulting
primarily from a reduction of approximately $12.8 million in earnings from
partially owned equity affiliates. In addition, the Company recorded a gain of
approximately $3.3 million on the sale of B-Line. During 2003, the Company paid
approximately $5.3 million in income taxes.

Net cash used in investing activities increased from approximately $21.0
million in 2002 to approximately $24.2 million in 2003 primarily due to the
funding of capital contributions to partially owned equity affiliates in 2003 of
approximately $31.9 million (including the JCF CFN Entities contribution to
Green Tree) compared to approximately $21.0 million in 2002. This increase was
partially offset by the receipt of approximately $7.8 million in proceeds from
the sale of B-Line. In connection with the acquisition of Toa-UK in 2003, the
Company funded its remaining capital commitment to Castlewood Holdings of
approximately $7.2 million (which included $6.0 million of the original
commitment amount plus an amount increasing annually at 5% on the unfunded
portion of the original commitment amount) from cash on hand. Also in 2003, the
Company funded its total commitment of approximately $15.3 million from cash on
hand in exchange for a 60% interest in each of the JCF CFN Entities. Castlewood
Holdings funded its total commitment of approximately
10

$10.2 million for the remaining 40% interest in the JCF CFN Entities. The JCF
CFN Entities in turn invested approximately $24.7 million, net of subsequent
distributions, in exchange for a 3.995% interest in Green Tree.

Net cash provided by financing activities was approximately $10.0 million
in 2003. This amount represents Castlewood Holdings' capital contribution of
approximately $10.2 million to the JCF CFN Entities net of distributions
received of $194,000.

The Company's assets, aggregating approximately $152.4 million at December
31, 2003, include approximately $55.8 million in cash and cash equivalents and
approximately $4.1 million in short-term certificates of deposit. The Company
believes its current liquidity is adequate to fund any foreseeable cash
requirements.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

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. The Company expects to renew this lease for an
additional two year period in June 2004. 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 Mr.
Flowers, a member of the Company's board of directors and the Company's largest
shareholder.

RESULTS OF OPERATIONS

2003 Compared to 2002

Interest income was $821,000 in 2003 compared to approximately $1.5 million
in 2002. 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.

Earnings of partially owned equity affiliates were approximately $15.9
million in 2003 compared to $28.6 million in 2002. The Company recorded equity
in earnings of $293,000 and approximately $7.4 million from B.H. Acquisition in
2003 and 2002, respectively. The Company's equity in earnings from B-Line was
approximately $1.7 million in 2003 compared to $1.0 million in 2002. The Company
recorded equity in earnings of approximately $9.6 million in 2003 from
Castlewood Holdings compared to $20.2 million in 2002. The Company recorded
approximately $4.2 million in earnings from Green Tree for 2003, with
approximately $1.1 million reported as a minority interest. 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 SFAS 142 in the first
quarter of 2002. The substantial decrease in the Company's equity in earnings
from B.H. Acquisition and Castlewood Holdings from 2002 to 2003 is attributable
primarily to the annual 2002 re-evaluation of required insurance reserves. For
further discussion of the reasons underlying the changes in earnings of
partially owned equity affiliates, see "-- Results of Operations -- Partially
Owned Equity Affiliates".

In December 2003, the Company sold its entire interest in B-Line to B-Line
Holdings LLC, an affiliate of Golden Gate Capital, for cash of approximately
$7.8 million, net of expenses. The Company recorded a gain of approximately $3.3
million on the sale.

Other income was $484,000 in 2003 compared to $608,000 in 2002. The Company
recorded a quarterly investment management fee of $100,000 from Castlewood
Holdings in 2003 and 2002. In addition, the Company received commitment fees of
$82,000 and $208,000 in 2003 and 2002, respectively, in connection with standby
purchase commitments entered into by the Company.

11

General and administrative expenses were approximately $3.1 million in 2003
and 2002. Of these amounts, approximately $1.4 million and $1.5 million,
including non-cash compensation, related to employee expenses in 2003 and 2002,
respectively. 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. Additionally,
the Company incurs legal and professional fees in connection with reporting
requirements associated with being a publicly traded company, and in connection
with handling various other accounting and tax matters. Legal and professional
fees and travel expenses were $950,000 in 2003 and approximately $1.1 million in
2002.

Income tax expense was approximately $3.0 million and approximately $6.1
million in 2003 and 2002, respectively, including $13,000 recorded as a result
of the cumulative effect of a change in accounting principle in the first
quarter of 2002. The Company's effective tax rate for 2003 differs from the
statutory rate primarily due to changes in the valuation allowance, state income
taxes and minority interest. For 2002, the effective tax rate differs from the
statutory rate primarily due to the utilization of net operating loss
carryforwards ("NOLs").

Consolidated net income was approximately $13.2 million in 2003 compared to
approximately $22.5 million in 2002. The decrease in net income for 2003
compared to 2002 is primarily a result of a decrease in earnings from partially
owned equity affiliates of approximately $12.8 million and a decrease in
interest income of $678,000, offset by a $3.3 million gain on the sale of
B-Line.

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 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 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 SFAS 142 in the first quarter of 2002. For further
discussion of the reasons underlying the changes in earnings of partially owned
equity affiliates, 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
12

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.

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, we have provided the following additional summary information with
respect to those companies' results of operations. The following is a discussion
and analysis of Castlewood Holdings' results of operations for the year ended
December 31, 2003 compared to the year ended December 31, 2002. This discussion
and analysis should be read in conjunction with the audited consolidated
financial statements and related notes that are included in this Annual Report.

Castlewood Holdings

2003 Compared to 2002

Castlewood Holdings reported consolidated net earnings of approximately
$30.6 million in 2003 compared to approximately $60.6 million in 2002. The
decrease in 2003 from 2002 was primarily a result of a substantial decrease in
underwriting income.

Underwriting income for the years ended December 31, 2003 and 2002 was
$24.0 and $48.8 million, respectively. The underwriting income earned for both
2003 and 2002 was attributable to the settlement of losses for amounts 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 $24.7 million
and $20.6 million for the years ended December 31, 2003 and 2002, respectively.
Castlewood Holdings generates its consulting fees based on a combination of
fixed and success-based fee arrangements. Consulting income will vary depending
on the success and timing of completion of success-based fee arrangements.
Included in these amounts were approximately $1.3 million in consulting fees
charged to B.H. Acquisition, a related party, in 2003 and 2002.

Castlewood Holdings share of equity in earnings of partly-owned companies
for the years ended December 31, 2003 and 2002, was $1.6 and $10.1 million,
respectively. This amount represents Castlewood Holdings' proportionate share of
equity in the earnings of B.H. Acquisition in 2003 and 2002 and JCF CFN in 2003.

Net investment income, excluding unrealized gains and losses, for the years
ended December 31, 2003 and 2002, was $7.1 million and $8.5 million,
respectively. Included in net investment income for 2003 and 2002 was interest
income earned from cash, cash equivalents, debt securities and mutual funds of
$8.9 million and $10.3 million, respectively. In 2003, Castlewood Holdings
recognized a realized loss on derivative instruments of $862,000. Castlewood
Holdings sold a currency option for 14.6 million British pounds as an economic
hedge of Castlewood Holdings' portion of the purchase price of Toa Re.
Castlewood Holdings

13

completed the transaction at an exchange rate of 1.6474. The pound weakened to a
rate of 1.58 to the U.S. dollar, resulting in Castlewood Holdings recognizing
the realized loss.

Salaries and benefits, which include accrued bonuses, were $15.7 million
and $24.2 million for the years ended December 31, 2003 and 2002, respectively.
Castlewood Holdings is a service based company and, as such, employee salaries
and benefits are 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. The decrease in salaries and benefits for 2003 was
attributable primarily to a lower bonus accrual recorded as a result of lower
income earned for the year ended December 31, 2003.

General and administrative expenses were $7.0 million and $7.6 million for
the years ended December 31, 2003 and 2002. General and administrative expenses
include 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 $2.4 million and
$4.9 million for the years ended December 31, 2003 and 2002, respectively.
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 year. The resulting
exchange gains or losses are included in net income. The foreign exchange gain
in 2003 arose primarily as a result of the Company disposing of its British
pound available for sale investment portfolio. For 2002, the gain was
attributable to the company, at various points in the year, having a surplus
British pound position.

Income taxes of $1.5 million and $518,000 were recorded for the years ended
December 31, 2003 and 2002, respectively. 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.

2002 Compared to 2001

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.

B.H. Acquisition

2003 Compared to 2002

B.H. Acquisition reported an underwriting loss of $230,000 for the year
ended December 31, 2003 compared to income of $19.8 million for the year ended
December 31, 2002. The substantial decrease can be attributable primarily to the
2002 annual re-evaluation 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, 2003 was $1.3 million compared to $2.2 million for the year
ended December 31, 2002. Investment income consists primarily of interest income
earned from cash, cash equivalents, debt securities and mutual funds. The
reduction in net investment income in 2003 was attributable to lower interest
rates earned on the cash, cash equivalents and investments held.

General and administrative expenses were $1.6 million for the year ended
December 31, 2003 compared to $3.2 million for the year ended December 31, 2002.
General and administrative expenses include

14

professional fees (legal, audit and actuarial) management and consulting
expenses and provisions for doubtful accounts. The decrease in general and
administrative expenses in 2003 is a result of the positive movement of $1.8
million in the provision for doubtful accounts between this year and that
established last year.

B.H. Acquisition has recorded foreign exchange gains of $927,000 for the
year ended December 31, 2003 compared to $1.3 million for the year ended
December 31, 2002. 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.
The gains generated in both years were attributable to the company, at various
points in the year, having a surplus Euro position.

Amortization of the run-off provision was $500,000 and $2.3 million for the
years ended December 31, 2003 and 2002, respectively. The Company established a
provision at the date of acquisition equal to the anticipated expenses to be
incurred over the expected life of the run-off. This provision is amortized on a
straight-line basis over this period. For the year ended 2003 an additional
provision was established of $2.1 million and the expected life of the run-off
was extended two years.

Net earnings for the year ended December 31, 2003 were $888,000 compared to
$25.4 million for the year ended December 31, 2002. The decrease in 2003 from
2002 was primarily a result of a substantial decrease in underwriting income and
a reduction in net investment income resulting from lower interest rates earned
on the cash, cash equivalents and investments held.

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.

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.

15

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 Mr. Flowers, a
member of the Company's 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, indirectly controlled by Mr. Flowers.
Mr. Flowers also is a director of Shinsei.

During 2003, the Company invested approximately $15.3 million in the JCF
CFN Entities. Each of the JCF CFN Entities is controlled by JCF Associates I
LLC, the managing member of which is Mr. Flowers. 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, Castlewood Holdings and Shinsei completed the acquisition of
all of the outstanding capital stock of Toa-UK, a London-based subsidiary of The
Toa Reinsurance Company, Limited, for approximately $46 million. See "-- Recent
Developments."

FORWARD-LOOKING STATEMENTS

Certain statements made in this report, and other written or oral
statements made by or on behalf of the Company, may constitute "forward-looking
statements" under the federal securities laws. Forward-looking statements are
only predictions and are not guarantees of performance. These statements are
based on beliefs and assumptions of our management, which in turn are based on
currently available information. The forward-looking statements also involve
risks and uncertainties, which could cause actual results to differ materially
from those contained in any forward-looking statement. Many of these factors are
beyond our ability to control or predict. Such factors include, but are not
limited to, the following:

- the success of recently completed acquisitions;

- our ability to locate suitable acquisition targets to complement the
Company's current operating businesses;

- risks associated with the reinsurance industry, including fluctuations in
interests rates and inflation that impact insurance investment returns,
changes in the nature of claims, legal developments broadening the scope
of insurer's liability;

- the adequacy of loss reserves;

- our dependence on key executive officers and directors;

- changes in laws and regulations governing the insurance industry;

- fluctuations in foreign exchange rates; and

- other Risk Factors discussed in Exhibit 99.1 to this Annual Report on
Form 10-K.

We believe these forward-looking statements are reasonable. However, you
should not place undue reliance on any forward-looking statements, which are
based on current expectations. Furthermore, forward-

16

looking statements reflect information as of the date they are made, and we
undertake no obligation to publicly update them in light of new information or
future events.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk from changes in interest rates. At
December 31, 2003, the Company had cash and cash equivalents of approximately
$55.8 million in interest bearing accounts (interest at floating rates) and
approximately $4.1 million of short-term certificates of deposit (interest at
fixed rates). Accordingly, each one percent change in market interest rates
would change interest income by approximately $599,000 per year. However, any
future transactions affecting the Company's cash and cash equivalents and
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, 2003 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

17

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 Subsidiaries (the "Company") as of December 31, 2003 and 2002,
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, 2003. 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 did
not audit the financial statements of Green Tree Investment Holdings II, LLC and
Green Tree Investment Holdings III, LLC, the Company's investment in which is
accounted for by use of the equity method. The Company's equity of $29,731,799
in Green Tree Investment Holdings II, LLC and Green Tree Investment Holdings
III, LLC's net assets at December 31, 2003, and of $4,235,824 in those
companies' net income for the year ended December 31, 2003, are included in the
accompanying consolidated financial statements. The financial statements of
Green Tree Investment Holdings II, LLC and Green Tree Investment Holdings III,
LLC were audited by other auditors whose reports have been furnished to us, and
our opinion, insofar as it relates to the amounts included for such companies,
is based solely on the reports of such other auditors.

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 and the reports of
the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of the Company at December 31, 2003 and 2002, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2003 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 12, 2004

18

REPORT OF INDEPENDENT AUDITORS

The Members
Green Tree Investment Holdings II, LLC

We have audited the accompanying consolidated balance sheet of Green Tree
Investment Holdings II, LLC (the Company) as of December 31, 2003, and the
related consolidated statements of operations, members' equity, and cash flows
for the period from March 26, 2003 (inception) through December 31, 2003. 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 audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 2003, and the consolidated results of its operations and its cash
flows for the period from March 26, 2003 (inception) through December 31, 2003,
in conformity with accounting principles generally accepted in the United
States.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
February 13, 2004

19

REPORT OF INDEPENDENT AUDITORS

The Members
Green Tree Investment Holdings III, LLC

We have audited the accompanying consolidated balance sheet of Green Tree
Investment Holdings III, LLC (the Company) as of December 31, 2003, and the
related consolidated statements of operations, members' equity, and cash flows
for the period from May 20, 2003 (inception) through December 31, 2003. 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 audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 2003, and the consolidated results of its operations and its cash
flows for the period from May 20, 2003 (inception) through December 31, 2003, in
conformity with accounting principles generally accepted in the United States.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
February 13, 2004

20

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

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

21

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

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

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

22

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)

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

23

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

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

24

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

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

25

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: NATURE OF BUSINESS

The Enstar Group, Inc. and Subsidiaries, (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.

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.

The Company consolidates JCF CFN LLC and related entities (collectively,
the "JCF CFN Entities"). The JCF CFN Entities were formed to serve as a member
of Green Tree Investment Holdings LLC ("Green Tree"), which, in turn, was formed
to effect the acquisition of a portfolio of home equity and manufactured housing
loan securities and the associated servicing businesses from Conseco Finance
Corp. ("Conseco Finance").

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. In addition, the Company
consolidates the JCF CFN Entities, recording a minority interest for Castlewood
Holdings' 40% interest. 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 affiliate'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 affiliate. The Company would resume application of the equity method once
the affiliate becomes profitable and the Company's proportionate share of the
affiliate'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.

26

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(f) Financial Instruments -- The Company holds certificates of deposit
("CDs") offered by commercial banks. These certificates had a weighted average
maturity of approximately six months at December 31, 2003. The estimated fair
value of CDs at December 31, 2003 and 2002, 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 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, unrealized gains on hedge assets 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 its 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

27

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

adjusted net income and per share amounts exclusive of amortization expense for
the years ended December 31, 2003, 2002 and 2001.

In January 2003, the FASB issued Interpretation No 46, "Consolidation of
Variable Interest Entities," as amended by FIN 46R issued in December 2003,
which requires consolidation by a business enterprise of variable interest
entities if the enterprise is determined to be the primary beneficiary. This
interpretation was effective 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
believes that each of the JCF CFN Entities qualifies as a VIE and that the
Company is the primary beneficiary of each such entity. As such, the JCF CFN
Entities are included in the accompanying consolidated financial statements,
with Castlewood Holdings' 40% interest reflected as minority interest.

(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"). Prior to the fourth quarter of 2003, the Company accounted for
its investment in B-Line three months in arrears. In 2003, the Company recorded
the results of operations of B-Line through the date of the sale in December
2003.

(l) Stock-Based Compensation -- For the three years ended December 31,
2003, 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 the
1997 Amended Omnibus Incentive Plan (the "Incentive Plan"). The Incentive Plan
was further amended by shareholder approval at the Annual Meeting of
Shareholders in May 2003. All of these

28

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 2003, 2002 and 2001 would have been as follows:

The fair values for options granted under the Company's stock option plans
were calculated at the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions:

Based on these assumptions, the estimated weighted average fair value at
the date of grant for options vesting during the years ended December 31, 2003,
2002 and 2001 were $5.14, $4.82 and $4.39, respectively.

(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

29

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and other holders of similar receivables. B-Line also purchases credit card
receivables and recovers payments on these accounts. In December 2003, the
Company sold its entire interest in B-Line to B-Line Holdings LLC, an affiliate
of Golden Gate Capital, for cash of approximately $7.8 million, net of expenses.
The Company recorded a gain of approximately $3.3 million on the sale.

(b) B.H. Acquisition -- 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 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 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 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

30

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

cash on hand. The funds were 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, 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. 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. The acquisition of Hudson has been accounted for by
Castlewood Holdings using the purchase method of accounting.

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

In March 2003, Castlewood Holdings and Shinsei Bank, Limited ("Shinsei")
completed the acquisition of all of the outstanding capital stock 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 1980 and 1994, when it stopped writing new business and is
currently operating in run-off. The acquisition was effected through Hillcot
Holdings Ltd. ("Hillcot"), a newly formed Bermuda company, in which Castlewood
Holdings has a 50.1% economic interest and a 50% voting interest. Upon
completion of the transaction, Toa-UK's name was changed to Hillcot Re Limited.
Castlewood Holdings' share of the transaction was funded from cash on hand.
Hillcot is included in Castlewood Holdings' consolidated financial statements,
with the remaining 49.9% interest reflected as minority interest. Mr. Flowers is
a director of Shinsei.

(d) Green Tree -- In January 2003, the Company announced a $10 million
commitment to the JCF CFN Entities. The JCF CFN Entities are controlled by JCF
Associates I LLC, the managing member of which is J. Christopher Flowers ("Mr.
Flowers"), a member of the Company's board of directors and the Company's
largest shareholder. Approximately $3 million of the Company's commitment was
funded in January 2003 from cash on hand. In June 2003, the Company increased
its commitment to $15.3 million, resulting in the Company holding a 60% interest
in the JCF CFN Entities. In addition, in June, 2003 Castlewood Holdings became a
member of the JCF CFN Entities and made a $10.2 million commitment, in exchange
for a 40% interest. Both the Company and Castlewood Holdings have fully funded
their commitments to the JCF CFN Entities.

In June 2003, the JCF CFN Entities invested in Green Tree (formerly known
as CFN Investment Holdings LLC), together with affiliates of J.C. Flowers I LP,
affiliates of Fortress Investment Group LLC and affiliates of Cerberus Capital
Management, L.P. The JCF CFN Entities invested approximately $25.1 million in
exchange for a 3.995% interest in Green Tree. Green Tree completed the purchase
of certain assets of Conseco Finance for approximately $630 million in cash plus
certain assumed liabilities. The assets consist primarily of a portfolio of home
equity and manufactured housing loan securities as well as the associated
servicing businesses. The JCF CFN Entities also invested in FPS DIP LLC, a
second limited liability company formed by the members of Green Tree to provide,
together with one of Conseco Finance's existing lenders, up to $125 million of
debtor-in-possession financing to Conseco Finance. J.C. Flowers I LP is a
private investment fund, the general partner of which is JCF Associates I LLC.
The JCF CFN Entities account for these investments under the equity method of
accounting. Because the JCF CFN Entities are

31

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

consolidated, Green Tree is treated as a partially owned equity affiliate of the
Company.

(e) 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.H. Acquisition and Castlewood
Holdings as of December 31, 2003 and 2002 and for each of the three years ended
December 31, 2003. Summarized financial information for B-Line is presented as
of December 2002, for the years ended December 31, 2002 and 2001, and from
January 1, 2003 through December 23, 2003 (date of sale). The summarized
financial information presented below for B.H. Acquisition and Castlewood
Holdings is derived from their audited financial statements. Prior to the fourth
quarter of 2003, the Company accounted for its investment in B-Line three months
in arrears. In 2003, the Company recorded the results of operations of B-Line
through the date of the sale. The summarized information presented below for
B-Line has been derived from the unaudited quarterly financial statements. The
summarized financial information presented below for Green Tree is derived from
its 2003 audited financial statements.

32

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The results of B.H. Acquisition, Castlewood Holdings and Green Tree are
presented from their respective dates of ownership. The acquisitions of River
Thames, Overseas Reinsurance, Hudson and Hillcot by Castlewood Holdings are
recorded as purchases in accordance with SFAS 141, "Business Combinations."

The Company's consolidated accumulated deficit includes undistributed
earnings of its partially owned equity affiliates of approximately $22.7 million
and approximately $28.8 million at December 31, 2003 and 2002, respectively.

NOTE 4: COMMITMENTS AND CONTINGENCIES

In June 2002, the Company signed a two year lease renewal option on an
office building which serves as the corporate headquarters. The Company expects
to renew this lease for an additional two year period in June 2004.
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 Mr. Flowers, a member of the Company's board of directors and
the Company's largest shareholder.

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:

33

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2003 and 2002:

The company provides U.S. taxes for the anticipated repatriation of certain
earnings of foreign subsidiaries. A valuation allowance is recorded when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of the deferred tax assets depends on
the ability to generate sufficient taxable income in the future in the
appropriate jurisdictions. The Company has provided a valuation allowance for
operating losses of partially owned foreign subsidiaries and tax credits for the
years 2003 and 2002, respectively. During 2003, 2002 and 2001, the Company
decreased the valuation allowance by approximately $2.8 million, $3.6 million
and $1.9 million, respectively to approximately $7.2 million, $10.0 million and
$13.6 million, respectively, to reflect the utilization of credits.

NOTE 6: SHAREHOLDERS' EQUITY

(a) 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 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, 2003, 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.

34

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(b) 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 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,
2003.

(c) Deferred Compensation of Partially Owned Equity Affiliates -- The
Company recorded its 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.

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. Approximately
$695,000 and $561,000 in stock compensation have been deferred under this plan
as of December 31, 2003, and 2002, 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 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 vested 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 2003, 2002 and 2001 of $95,000,

35

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$243,000 and $133,000, respectively. The Company will recognize an additional
charge to earnings totaling approximately $19,000 in 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 2003, 2002 and 2001 of $71,000, $181,000 and
$99,000, respectively. The Company will recognize an additional charge to
earnings totaling approximately $14,000 in 2004 relating to these options.

Under the 2001 Directors' Plan, the Company's then 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. 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.

In May 2003, the Company's shareholders approved certain amendments to the
Company's Incentive Plan. The amendments increased the total number of shares of
common stock available to be granted under the plan from 322,500 to 522,500, and
increased the aggregate number of shares of common stock that may be granted to
any individual participant from 200,000 to 300,000.

In August 2003, under the Incentive Plan, the Company granted 60,000
options to Mr. Frazer, 100,000 options to Mr. Oros, and 5,000 options to Gregory
L. Curl, the Company's recently elected director. The options granted to Messrs.
Frazer and Oros vest in four equal annual installments starting January 1, 2005.
The options granted to Mr. Curl vest on August 19, 2004. All options have an
exercise price of $40.00, the closing market price on the date of grant, and
expire in August 2013.

Transactions under the Company's stock option/incentive plans as of and for
the three years ended December 31, 2003 are as follows:

Stock options outstanding and exercisable under these plans as of December
31, 2003 were:

36

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(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 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 $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
2003, 2002 and 2001. 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).

37

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

There were 165,000 antidilutive common stock equivalents for the year ended
December 31, 2003. There were no antidilutive common stock equivalents for the
years ended December 31, 2002 and 2001.

NOTE 9: SEGMENT INFORMATION

The Company separately evaluates the performance of Castlewood Holdings,
B.H. Acquisition and B-Line 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 JCF CFN and
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
acquires and manages insurance and reinsurance companies, including companies in
"run-off," and provides management, consulting and other services to the
insurance and reinsurance industry. The JCF CFN Entities were formed to serve as
a member of Green Tree which, in turn, was formed to effect the acquisition of a
portfolio of home equity and manufactured housing loan securities and associated
servicing businesses from Conseco Finance.

The consolidated results of operations for B-Line are reported for all
years presented through the date of the sale of the Company's membership units
in December 2003. Prior to the fourth quarter of 2003, the Company accounted for
its investment in B-Line three months in arrears. In 2003 the Company recorded
the results of operations of B-Line through the date of the sale in December
2003 to properly reflect the gain on that sale. The consolidated financial
information for B.H. Acquisition is reported for all years presented. The
consolidated financial information for Castlewood Holdings is reported from
November 29, 2001, the date of acquisition by the Company. The summarized
information presented below for B-Line has been derived from unaudited quarterly
financial statements. A reconciliation of the consolidated financial information
by segment to the Company's consolidated financial statements as of December 31,
2003 and 2002 and for each of the three years ended December 31, 2003 is as
follows:

38

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's ownership percentage in the JCF CFN Entities changed from
100% to 60% in June 2003 when Castlewood Holdings became a 40% member. A
minority interest for Castlewood Holdings' portion of earnings from the JCF CFN
Entities is reported in the Corporate column.

39

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

40

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's ownership percentage in B-Line has varied between 7.99% and
8.34% from October 1, 2000 to the date of sale in December 2003, the periods
reported in the above tables. The Company's ownership percentage for B-Line used
in the above table for 2001 represents a weighted average.

41

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10: UNAUDITED QUARTERLY FINANCIAL INFORMATION

A summary of the Company's unaudited quarterly results of operations for
the years ended December 31, 2003 and 2002 is as follows:

42

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company recorded a minority interest for Castlewood Holdings' portion
of earnings from the JCF CFN Entities in the second, third and fourth quarters
of 2003.

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 and
2003 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.

NOTE 11: SUBSEQUENT EVENTS

In March 2004, the JCF CFN Entities, along with certain affiliates of J.C.
Flowers I LP, signed a definitive agreement for the sale of their entire
interests in Green Tree for cash to FIT CFN Holdings LLC, an affiliate of
Fortress Investment Group LLC, or its assigns. In exchange for their entire
interest, the JCF CFN Entities will receive approximately $40 million in cash.
Of this amount, the Company will receive approximately $24 million and
Castlewood Holdings will receive approximately $16 million. A partial
distribution of approximately $6.2 million has been received by the JCF CFN
Entities. This and any additional distributions which may be made by Green Tree
prior to closing of the sale will reduce the amount to be received at closing.
The sale is expected to close in the third quarter of 2004. The Company
anticipates a realized gain on the sale. Enstar owns a one-third economic
interest in Castlewood Holdings and 50% of its voting stock. The Company and
Castlewood Holdings expect to receive approximately $3.7 million and
approximately $2.5 million, respectively, as their proportionate shares of the
$6.2 million partial distribution.

43

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

As required by Securities and Exchange Commission ("SEC") rules, the
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures as of the end of the period covered by this
annual report. This evaluation was carried out under the supervision and with
the participation of the Company's management, including its principal executive
officer and principal financial officer. Based on this evaluation, these
officers have concluded that the design and operation of the Company's
disclosure controls and procedures are effective. There were no changes to the
Company's internal controls over financial reporting during the period covered
by this report that materially affected, or are reasonably likely to materially
affect, the Company's internal controls over financial reporting subsequent to
the date of their evaluation.

Disclosure controls and procedures are the Company's controls and other
procedures that are designed to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act,
is recorded, processed, summarized and reported, within the time periods
specified in SEC rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act are accumulated and communicated to the Company's
management, including its principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.

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
2004 Annual Meeting of Shareholders (the "Proxy Statement") and such sections
are deemed incorporated herein by reference.

CODE OF ETHICS

In March 2004, the Company adopted a Code of Ethics for Senior Executive
and Financial Officers (the "Code of Ethics") that applies to our chief
executive officer, chief financial officer and chief accounting officer and
persons performing similar functions. The Code of Ethics is filed as an exhibit
to this annual report on Form 10-K.

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 and such sections are deemed incorporated herein by
reference.

44

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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 and such sections are deemed incorporated herein by
reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is included under the section
entitled "Principal Accountant Fees and Services" appearing in the Proxy
Statement and such section is deemed incorporated herein by reference.

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, 2003 and are
incorporated herein by reference.

Independent Auditors' Reports.
Consolidated Balance Sheets as of December 31, 2003 and 2002.
Consolidated Statements of Income for the years ended December 31, 2003,
2002 and 2001.
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2003, 2002 and 2001.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001.
Notes to Consolidated Financial Statements.

45

2. Financial Statement Schedules

The following financial statements of Castlewood Holdings included in this
Annual Report are for the fiscal period ended December 31, 2003.

The following financial statements of B.H. Acquisition included in this
Annual Report are for the fiscal period ended December 31, 2003.

3. Exhibits

(b) Reports on Form 8-K

There were no reports filed on Form 8-K for the quarter ended December 31,
2003.

48

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 Director,
and Chief Executive Officer

March 15, 2004

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 15, 2004
---------------------------------------------------- Directors and Chief Executive
Nimrod T. Frazer Officer (Principal Executive
Officer)

/s/ CHERYL D. DAVIS Chief Financial Officer, Vice March 15, 2004
---------------------------------------------------- President and Secretary
Cheryl D. Davis (Principal Financial and
Accounting Officer)

/s/ JOHN J. OROS President and Chief Operating March 15, 2004
---------------------------------------------------- Officer
John J. Oros

/s/ T. WHIT ARMSTRONG Director March 15, 2004
----------------------------------------------------
T. Whit Armstrong

/s/ GREGORY L. CURL Director March 15, 2004
----------------------------------------------------
Gregory L. Curl

/s/ T. WAYNE DAVIS Director March 15, 2004
----------------------------------------------------
T. Wayne Davis

/s/ J. CHRISTOPHER FLOWERS Director March 15, 2004
----------------------------------------------------
J. Christopher Flowers

/s/ JEFFREY S. HALIS Director March 15, 2004
----------------------------------------------------
Jeffrey S. Halis

49

CASTLEWOOD HOLDINGS LIMITED

CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
AND THE PERIOD FROM AUGUST 16, 2001 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 (the "Company") as of December 31, 2003 and
2002, and the related consolidated statements of earnings and comprehensive
income, changes in shareholders' equity and cash flows for the years ended
December 31, 2003 and 2002 and the period from August 16, 2001 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 of December 31, 2003 and 2002 and the results of their
operations and their cash flows for the years ended December 31, 2003 and 2002
and the period from August 16, 2001 to December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche

Hamilton, Bermuda
March 3, 2004
March 11, 2004 as to Note 7

F-1

CASTLEWOOD HOLDINGS LIMITED

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003 AND 2002
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)

See accompanying notes to the consolidated financial statements

F-2

CASTLEWOOD HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
AND FOR THE PERIOD FROM AUGUST 16, 2001 TO DECEMBER 31, 2001
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-3

CASTLEWOOD HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
AND FOR THE PERIOD FROM AUGUST 16, 2001 TO DECEMBER 31, 2001
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-4

CASTLEWOOD HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
AND FOR THE PERIOD FROM AUGUST 16, 2001 TO DECEMBER 31, 2001
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

F-5

See accompanying notes to the consolidated financial statements

F-6

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)

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 the Company for the years ended December 31, 2003 and
2002 and for the period from August 16, 2001 to December 31, 2001. Results of
operations for subsidiaries acquired are included from the dates of their
acquisition by the Company. 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 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. Mutual funds whose underlying assets consist of
investments having maturities of greater than six and less than twelve months
when purchased are carried at their fair value.

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

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INVESTMENT IN PARTLY-OWNED COMPANIES

Investments in partly-owned companies are 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.

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. Amounts receivable from reinsurers are estimated in a manner
consistent with the loss reserve associated with the underlying policy.

CONSULTING FEE INCOME

Fixed fee income is 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.

F-8

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DERIVATIVE INSTRUMENTS

The Company accounts for its derivative instruments using FAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". FAS 133 requires
an entity to recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value with movements in fair
value reflected in earnings. The Company uses investment derivatives to manage
currency exposures and will also enter into such instruments to obtain exposure
to a specific transaction. None of these derivatives are designated as hedges,
and accordingly, financial options and foreign currency forward contracts
entered into during 2003 were carried at fair value, with the corresponding
realized and unrealized gains and losses included in net investment income in
the consolidated statements of earnings.

RECLASSIFICATIONS

Certain balances of the 2002 and 2001 figures have been reclassified to
conform to the 2003 presentation.

GOODWILL

Goodwill represents the excess of the purchase price over the fair value of
the net assets received related to the acquisition of Castlewood by Castlewood
Holdings. FAS No. 142 "Goodwill and Other Intangible Assets" requires that the
Company perform an initial valuation of its goodwill assets and 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 written down
in the period in which the determination is made. An annual impairment valuation
has concluded that there is no impairment to the value of the Company's goodwill
asset.

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 $896 and $150 relating to these restricted share awards
in 2003 and 2002, respectively. 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 in 2003 and 2002.

F-9

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. ACQUISITIONS

CASTLEWOOD

The acquisition of Castlewood by Castlewood Holdings was 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 were 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
=======

The following summarizes the estimated fair values of the assets acquired
and the liabilities assumed at the date of the acquisition of Castlewood.

Cash and investments........................................ $10,259
Accounts receivable......................................... 5,358
Other assets................................................ 1,996
Investment in partly-owned company.......................... 10,868
Accounts payable and accrued liabilities.................... (3,066)
-------
Net tangible assets acquired at fair value.................. $25,415
=======

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.

F-10

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The purchase price and fair value of assets acquired were 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
========

The following summarizes the combined estimated fair values of the assets
acquired and the liabilities assumed at the date of the acquisition of River
Thames, Overseas Re and Regis.

Cash and investments........................................ $ 216,307
Reinsurance balances receivable............................. 212,944
Losses and loss adjustment expenses......................... (411,594)
Accounts payable and accrued liabilities.................... (2,434)
---------
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 Reinsurance
Company Limited, a reinsurance company based in Bermuda.

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 were 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
======

The following summarizes the estimated fair values of the assets acquired
and the liabilities assumed at the date of the acquisition of Hudson.

Cash and investments........................................ $ 33,003
Reinsurance balances receivable............................. 7,697
Losses and loss adjustment expenses......................... (35,513)
Accounts payable and accrued liabilities.................... (1,079)
--------
Net tangible assets acquired at fair value.................. $ 4,108
========

F-11

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

HILLCOT

On March 31, 2003, a 50.1% owned subsidiary of Castlewood Holdings, Hillcot
Holdings Ltd., completed the acquisition of 100% of the outstanding shares of
Toa-Re Insurance Company (UK) Limited, a reinsurance company based in London
England, for L29,000,000. Castlewood Holdings common shares have 50% of
Hillcot's voting rights. Subsequent to the acquisition, the company's name was
changed to Hillcot Reinsurance Company Limited. The acquisition has been
accounted for using the purchase method of accounting, which requires that the
acquirer record assets and liabilities acquired at their estimated fair value.

The purchase price and fair value of assets acquired were as follows:

Purchase price.............................................. $45,820
Direct costs of acquisition................................. 606
-------
Total purchase price........................................ $46,426
=======
Net tangible assets acquired at fair value.................. $46,426
=======

The following summarizes the estimated fair values of the assets acquired
and the liabilities assumed at the date of the acquisition of Hillcot.

Cash and investments........................................ $ 113,967
Reinsurance balances receivable............................. 65,184
Losses and loss adjustment expenses......................... (128,384)
Accounts payable and accrued liabilities.................... (4,341)
---------
Net tangible assets acquired at fair value.................. $ 46,426
=========

4. PLEDGED ASSETS

Cash and cash equivalents in the amount of $11,208 and $6,558 as of
December 31, 2003 and 2002 respectively are pledged as collateral against
letters of credit. Letters of credit are issued to ceding insurers as security
for the obligations of insurance subsidiaries under reinsurance agreements with
those ceding insurers.

5. INVESTMENTS

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

F-12

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Mutual funds invest in fixed income and money market securities denominated
in U.S. dollars, with average target duration of nine months. The mutual funds
can be redeemed on a single trading day's notice.

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 years ended December 31, 2003 and 2002 and for the period from
August 16, 2001 to December 31, 2001 gross realized gains on sale of debt
securities were $64, $Nil and $Nil, respectively and gross realized losses on
sale of debt securities were $162, $Nil and $Nil, respectively.

6. REINSURANCE BALANCES RECEIVABLE

F-13

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 $43,550 and $38,908 at
December 31, 2003 and 2002, respectively.

At December 31, 2003 and 2002, reinsurance receivables with a carrying
value of $45,450 and $45,053 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 COMPANIES

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.

On June 23, 2003, Castlewood Holdings purchased a 40% interest in each of
JCF CFN LLC and JCF CFN II LLC (collectively, the "JCF CFN Entities") for a
total of $10,200.

JCF CFN Entities have invested in Green Tree Investment Holdings LLC and
related entities, (collectively "Green Tree") who have completed the purchase of
certain assets and operations of Conseco Finance Corporation for $630,000.

Investment in the JCF CFN Entities as at beginning of
year...................................................... $ --
Acquisition of partly-owned company......................... 10,200
Share of net earnings....................................... 1,224
Share of other comprehensive income......................... 340
Returns of capital.......................................... (193)
-------
Investment in the JCF CFN Entities as at end of year........ $11,571
=======

As of December 31, 2003 and 2002, consolidated retained earnings include
$7,398 and $5,968, respectively of undistributed earnings of companies accounted
for by the equity method.

On March 11, 2004, the JCF CFN Entities signed a definitive agreement for
the sale of their interests in Green Tree for cash to FIT CFN Holdings LLC, an
affiliate of Fortress Investment Group LLC. In exchange for their entire
interest, the JCF CFN Entities will receive approximately $40,000 in cash. Of
this amount, Castlewood Holdings will receive approximately $16,000. A partial
distribution of approximately $6,200 was

F-14

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

received on March 11, 2004 by the JCF CFN Entities, Castlewood Holdings
proportionate share of which is approximately $2,500. This and any additional
distributions which may be made by Green Tree prior to the closing of the sale
will reduce the amount to be received at closing. The sale is expected to close
in the third quarter of 2004. Castlewood Holdings anticipates a realized gain on
the sale.

8. 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, 2003 and 2002 included $90,259 and $45,994, 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,
2003 and 2002 was $196,217 and $154,856, respectively.

In establishing the liability for 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 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.
There can be no assurance that the reserves established by the Company will be
adequate or will not be adversely affected by the development of other latent
exposures.

Reductions in estimates of ultimate losses arise from loss settlements
below carried reserves and the resulting reductions in actuarial estimates of
losses incurred but not reported.

F-15

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 provision reflected in the
financial statements as at December 31, 2003 and 2002 was $19,953 and $17,239,
respectively.

10. 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
are redeemed based upon distributions to Class A and Class B shareholders.

On March 3, 2004 the Company designated 2,043,000 Class E shares as
redeemable. On March 18, 2003, the Company designated 15,282,000 Class E shares
as redeemable.

During the year ended December 31, 2003, 12,989,700 Class E shares were
redeemed for a total consideration of $12,990.

11. ADDITIONAL PAID-IN CAPITAL

During the years ended December 31, 2003 and 2002, shareholders of the
Company have made contributions in the amount of $14,338 and $42,000,
respectively. The contribution made in 2003 included $2,326 of accretion on the
original $79,000 commitment.

As part of the acquisition of Castlewood Limited in 2001, 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, 2003
and 2002, the undrawn capital commitments of these shareholders were $Nil and
$12,012, respectively.

F-16

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. UNDERWRITING INCOME

Underwriting income is summarized as follows:

Net underwriting income primarily arises from settlement of losses below
carried reserves and net reductions in actuarial estimates of losses incurred
but not reported. Net loss and loss adjustment expense reductions are net of
increases, a portion of which are recoverable from reinsurers.

13. RELATED PARTY TRANSACTIONS

During the years ended December 31, 2003 and 2002 and for the period from
August 16, 2001 to December 31, 2001, Castlewood earned consulting fees of
$1,250, $1,250 and $104, respectively from subsidiaries of BH.

During the years ended December 31, 2003 and 2002 and for the period from
August 16, 2001 to December 31, 2001, Castlewood incurred investment fee and
other expenses of $276, $425 and $Nil, respectively from a shareholder. As at
December 31, 2003 and 2002, investment fees and other payables to this
shareholder were $Nil and $400, respectively.

14. LITIGATION

Castlewood Holdings and its reinsurance subsidiaries, in common with the
insurance and reinsurance industry in general, are subject to litigation and
arbitration in the normal course of their business operations. While the outcome
of the litigation cannot be predicted with certainty, the Company is disputing
and will continue to dispute all allegations that management believes are
without merit. As of December 31, 2003 the Company was not a party to any
material litigation or arbitration.

15. 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.

F-17

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

United Kingdom non-insurance 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.

As of December 31, 2003 and 2002, UK insurance subsidiaries had tax loss
carry-forwards, which do not expire, and deductions available for tax purposes
of approximately $122,005 and $62,133, respectively. A valuation allowance has
been provided for the tax benefit of these items as follows:

16. 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, 2003 and 2002, 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. As at December 31, 2003 and 2002, retained earnings of $7,367
and $6,605 of one of BH's subsidiaries requires regulatory approval prior to
distribution.

17. 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, 2003:

2004........................................................ $ 1,859
2005........................................................ 1,765
2006........................................................ 1,482
2007........................................................ 1,096
2008........................................................ 968
2009 through 2011........................................... 3,016
-------
$10,186
=======

Rent expense for the years ended December 31, 2003 and 2002 and for the
period from August 16, 2001 to December 31, 2001 was $1,272, $708 and $50,
respectively.

18. 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 years ended December 31, 2003 and
2002 and for the period from August 16, 2001 to December 31, 2001 was $835, $550
and $64, respectively.

F-18

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Hillcot Re has a defined benefit pension plan (the "Plan") which the Plan
Trustees resolved to wind up effective January 1, 2003. At December 31, 2003,
based upon an actuarial valuation, the plan was fully funded and the Plan
actuary has reported that there is no regulatory requirement for Hillcot Re to
further fund the plan prior to its liquidation. During 2003 Plan liabilities
reduced by $3,106 as a result of an actuarial surplus and the impact of a cap on
liabilities arising from the termination of the plan, which has been treated as
a reduction in general and administrative expenses in the statement of earnings.

19. SUBSEQUENT EVENT

On March 3, 2004 the Company declared a dividend to its Class A and B
shareholders of $7,750.

F-19

B.H. ACQUISITION LTD.

CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

F-20

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, 2003 and 2002, and the
related consolidated statements of earnings and retained earnings and cash flows
for the years ended December 31, 2003, 2002 and 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 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. and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the years ended December 31, 2003, 2002 and
2001 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 3, 2004

F-21

B.H. ACQUISITION LTD.

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003 AND 2002
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-22

B.H. ACQUISITION LTD.

CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-23

B.H. ACQUISITION LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-24

B.H. ACQUISITION LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(EXPRESSED IN THOUSANDS OF 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 and $8,000, 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.

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 highly liquid debt instruments purchased with an initial maturity
of three months or less to be cash equivalents.

INVESTMENTS

Trading investments are carried at fair value with unrealized 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 period estimated to complete the
run-off.

F-25

B.H. ACQUISITION LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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.

RECLASSIFICATIONS

Certain balances of the 2002 and 2001 figures have been reclassified to
conform to the 2003 presentation.

GOODWILL

FAS No. 142 "Goodwill and Other Intangible Assets" 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 adoption of FAS
142 resulted in the recognition of a gain of $2,969 on January 1, 2002.

3. PLEDGED ASSETS

Cash equivalents and investments in the amount of $10,152 and $11,668 as of
December 31, 2003 and 2002, respectively, are pledged as collateral against
letters of credit and trust funds in the amount of $8,041 and $10,718 as of
December 31, 2003 and 2002, respectively. Letters of credit are issued to ceding
insurers as security for the obligations of insurance subsidiaries under
reinsurance agreements with those ceding insurers. As at December 31, 2003 and
2002 $5,000 and $5,000, respectively was held in a trust fund established by the
Company for the benefit of ceding insurers domiciled in the U.S.A.

4. INVESTMENTS

Trading investments with estimated fair values of $39,411 and $28,274 as of
December 31, 2003 and 2002, respectively, consist of mutual funds.

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

F-26

B.H. ACQUISITION LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Major categories of net investment income are summarized as follows:

5. REINSURANCE BALANCES RECEIVABLE

The fair value adjustment, determined on acquisition of the reinsurance
subsidiaries is 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, as adjusted for accelerations on commutation
settlements, using the constant yield method.

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 $4,981 and $7,212 at
December 31, 2003 and 2002, respectively.

At December 31, 2003 and 2002, reinsurance receivables with a carrying
value of $19,356 and $13,368, respectively, were associated with two and one
reinsurers, respectively, who 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.

6. LOSSES AND LOSS ADJUSTMENT EXPENSES

F-27

B.H. ACQUISITION LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

The Company's reserve for unpaid losses and loss adjustment expenses as of
December 31, 2003 and 2002 included $12,072 and $9,124 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,
2003 and 2002 was $34,552 and $21,061, 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 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.
There can be no assurance that the reserves established by the Company will be
adequate or will not be adversely affected by the development of other latent
exposures.

The fair value adjustment, determined on acquisition of the reinsurance
subsidiaries was based on the estimated timing of loss and loss adjustment
expense payments and an assumed interest rate of 3.5%, and is amortized over the
estimated payout period, as adjusted for accelerations on commutation
settlements, 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.

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B.H. ACQUISITION LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. UNDERWRITING (LOSS) 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.

8. RELATED PARTY TRANSACTIONS

The Company was charged by two of its shareholders administration fees and
expenses for the years ended December 31, 2003, 2002 and 2001 amounting to
$1,424, $1,250 and $104, respectively. As at December 31, 2003, 2002 and 2001
amounts included in accounts payable and accrued liabilities were $174, $Nil and
$Nil, respectively.

9. LITIGATION

BH and its reinsurance subsidiaries, in common with the insurance and
reinsurance industry in general, are subject to litigation and arbitration in
the normal course of their business operations. While the outcome of the
litigation cannot be predicted with certainty, the Company is disputing and will
continue to dispute all allegations that management believes are without merit.
As of December 31, 2003 the Company was not a party to any material litigation
or arbitration other than described below.

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 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.

10. 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.

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B.H. ACQUISITION LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CEAI's effective tax rate is approximately 40%. CEAI has tax loss
carry-forwards at December 31, 2003 and 2002 of approximately $9,119 and $6,600,
respectively, which do not expire. A valuation allowance has been provided for
the tax benefit of these loss carry-forwards as follows:

11. 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, 2003 and 2002, 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. As of December 31, 2003 and 2002 retained earnings of $16,371 and
$14,678 requires regulatory approval prior to distribution.

F-30