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, 2004
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. [X]

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, 2004, was $199,926,368 (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 30, 2005 was 5,517,909.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2005 Annual Meeting of Shareholders
are incorporated herein by reference in Part II and 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 its 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 acquires and manages
insurance and reinsurance companies in run-off. The management of these
businesses 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,
Brittany Insurance Company Ltd. ("Brittany") and Compagnie Europeenne
d'Assurances Industrielles S.A. ("CEAI"). Brittany and CEAI are principally
engaged in the active management of books of reinsurance business from
international markets. The Company owns 50% of the voting stock and a 33%
economic interest in B.H. Acquisition. As part of the transaction, Castlewood
owns 33% of the voting stock and a 45% economic interest in B.H. Acquisition.
The Company's ownership in B.H. Acquisition is accounted for using the equity
method of accounting.

In November 2001, the Company, together with Trident and the shareholders
and senior management of Castlewood (the "Castlewood Principals"), completed the
formation of a new venture, Castlewood Holdings, to acquire and manage insurance
and reinsurance companies, including companies in run-off (insurance and
reinsurance companies that have ceased the underwriting of new policies), and to
provide management, consulting and other services to the insurance and
reinsurance industry (the "Castlewood Holdings Transaction"). As part of the
transaction, the Company made a capital commitment of $39.5 million for its
interest in Castlewood Holdings. The Company owns 50% of the voting stock of
Castlewood Holdings and the Castlewood Principals and Trident each own 25% of
Castlewood Holdings' voting stock. The Company owns a 32.89% economic interest
in Castlewood Holdings. Castlewood is a private Bermuda-based firm, experienced
in managing and acquiring reinsurance operations. The Company's ownership in
Castlewood Holdings is accounted for using the equity method of accounting.

As a result of this transaction, the Company's 33% direct economic interest
in B.H. Acquisition increased by an additional indirect economic interest
through Castlewood Holdings. At December 31, 2004, the Company's beneficial
ownership in B.H. Acquisition was 47.8%. 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 contributed $12.5 million to Castlewood Holdings. In August 2002,
the Company funded an additional $21 million to Castlewood Holdings. The funds
were used, in part, to capitalize Fitzwilliam (SAC) Insurance Limited

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("Fitzwilliam"), a wholly owned subsidiary. 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 was funded in March 2003. 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
(collectively, the "River Thames Transaction"). 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 company, 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 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.
Hillcot is included in Castlewood Holdings' consolidated financial statements,
with the remaining 49.9% economic 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.
Castlewood Holdings' results of operations include the results of Toa-UK from
the date of acquisition in March 2003.

In August 2004, Castlewood Holdings awarded a grant of 744 shares of its
Class D stock to certain of its employees under a stock-based compensation plan.
The plan allows total awards up to a maximum of 7.5% of the total issued share
capital of Castlewood Holdings. Of the shares awarded, 242 shares had vested as
of December 31, 2004. The remaining shares granted under the award will vest
over various periods through April 2009. As a result of the award in August
2004, the Company's economic interest in Castlewood Holdings of 33 1/3% was
diluted by 0.44% to 32.89% as of December 31, 2004. As shares issued under the
August 2004 award vest and as additional shares are awarded in the future, the
Company's economic interest could decrease to a minimum of 30.83%. The Company's
voting interest will remain at 50%.

During 2004, Castlewood Holdings, through one of its subsidiaries, invested
a total of approximately $9.1 million in Cassandra Equity LLC and Cassandra
Equity (Cayman) LP, (collectively, "Cassandra"), for a 27% interest in each.
Cassandra was formed to invest in equity shares of a publicly traded
international reinsurance company. J.C. Flowers I LP also owns a 27% interest in
Cassandra. J.C. Flowers I LP is a private investment fund, the general partner
of which is JCF Associates I LLC. Mr. Flowers is the managing member of JCF
Associates I LLC. In March 2005, Cassandra sold all of its holdings for total
proceeds of approximately $40.0 million. Castlewood Holdings' proportionate
share of the proceeds was approximately $10.8 million.

Also during 2004, Castlewood Holdings, through one of its subsidiaries,
completed the acquisition of Mercantile Indemnity Company Ltd., ("Mercantile")
Harper Insurance Limited ("Harper")(formerly Turegum Insurance Company) and
Longmynd Insurance Company Ltd. ("Longmynd") (formerly Security Insurance (UK)
Ltd.) for a total purchase price of approximately $4.5 million. Castlewood
Holdings recorded an extraordinary gain of approximately $21.8 million relating
to the excess of the fair value of the net assets acquired over the cost of
these acquisitions.

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OTHER ACTIVITIES

The Company owned membership units of B-Line LLC ("B-Line") from November
1998 to December 2003. 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 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, resulting in a pre-tax 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. 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 is a member of the
Company's board of directors and the Company's largest shareholder.

During 2003, the Company funded approximately $15.3 million to JCF CFN LLC
and related entities (collectively, the "JCF CFN Entities") in exchange for a
60% interest in such entities. In addition, Castlewood Holdings funded
approximately $10.2 million to the JCF CFN Entities in exchange for a 40%
interest, which is reflected in the Company's financial statements as a minority
interest. The JCF CFN Entities were formed to serve as members of Green Tree
Investment Holdings LLC (formerly known as CFN Investment Holdings LLC) and
related entities (collectively, "Green Tree"), which, in turn, were 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).

In January 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, which requires consolidation by a
business enterprise of variable interest entities ("VIE") if the enterprise is
determined to be the primary beneficiary. In accordance with FIN 46R, the
Company has consolidated the JCF CFN Entities since their inception.

The JCF CFN Entities invested in 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. In June 2003, 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
consisted primarily of a portfolio of home equity and manufactured housing loan
securities as well as the associated servicing businesses. J.C. Flowers I LP is
a private investment fund, the general partner of which is JCF Associates I LLC.
The managing member of JCF Associates I LLC is Mr. Flowers, a member of the
Company's board of directors and the Company's largest shareholder. The JCF CFN
Entities accounted for the investment in Green Tree under the equity method of
accounting. Because the JCF CFN Entities are consolidated, Green Tree was
treated as a partially owned equity affiliate of the Company.

In July 2004, the JCF CFN Entities, along with certain affiliates of J.C.
Flowers I LP, completed the sale of their entire interests in Green Tree to FIT
CFN Holdings LLC, an affiliate of Fortress Investment Group LLC, and Cerberus
Green Tree Investments, LLC and Cerberus JCF Coinvest, LLC, each an affiliate of
Cerberus Capital Management L.P. In exchange for their entire interest, the JCF
CFN Entities received aggregate sales proceeds of approximately $40 million in
cash. Of this amount, Castlewood Holdings received aggregate sales proceeds of
approximately $16 million. The proceeds received by the JCF CFN Entities at
completion of the sale were reduced by prior cash distributions of approximately
$7.2 million made by Green Tree during 2004. The Company recorded a pre-tax
realized gain of approximately $6.9 million on the sale.

3

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.

SUBSIDIARIES

At December 31, 2004, 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. Since the sale of their
interests in Green Tree in July 2004, the JCF CFN Entities have been inactive.

STRATEGY FOR BUSINESS ACQUISITIONS

The Company's strategy for making a suitable acquisition is to utilize the
considerable experience, knowledge and business contacts of the Company's
executive officers and directors. Each of the Company's directors has been asked
by management to assist the Company actively in 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.

4

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.

ITEM 2. PROPERTIES

The Company's corporate headquarters are located at 401 Madison Avenue,
Montgomery, Alabama. In December 2004, the Company signed a one year lease
beginning January 1, 2005 on this office building. The lease also provides
renewal options for three periods of one year each. 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 $3,000 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 & Co. LLC running through November 2005 for the use of certain office
space and administrative services from J.C. Flowers & Co. LLC for an annual
payment of $66,000. J.C. Flowers & Co. LLC is managed by Mr. Flowers, a member
of the Company's board of directors and the Company's largest shareholder. The
Company does not own any real property.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any pending litigation and no proceeding was
terminated during the fourth quarter of 2004.

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, 2004.

5

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. The following table
reflects the range of high and low selling prices of the Company's Common Stock
by quarter for 2004 and 2003, as reflected in the Nasdaq Trade and Quote Summary
Reports:

At March 8, 2005, there were approximately 2,792 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."

The information required by this Item with respect to securities authorized
for issuance under equity compensation plans is included under the section
entitled "Equity Compensation Plan Information" of the Proxy Statement for the
2005 Annual Meeting of Shareholders (the "Proxy Statement") and such section is
deemed incorporated herein by reference.

6

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, 2004
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.

7

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:

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. The 2002
accounting change for B.H. Acquisition relates to the adoption of Statements of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets."

CASTLEWOOD HOLDINGS:

Net income for Castlewood Holdings for the year 2001 is reported for the
period August 16, 2001 (date of incorporation) to December 31, 2001. The 2004
extraordinary gain relates to the excess of the net assets acquired over the
cost in the acquisition of Mercantile, Harper and Longmynd by Castlewood
Holdings.

GREEN TREE:

Net income for Green Tree for the year 2003 is reported from the date of
inception to December 31, 2003. Net income for Green Tree for the year 2004 is
reported from January 1 to July 15, 2004, the date of sale of the JCF CFN
Entities' entire interest in Green Tree.

8

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, are not 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
acquires and manages insurance and reinsurance companies in run-off. The
management of these businesses 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.

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 SFAS 142. 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 was
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 46R which requires consolidation by a
business enterprise of a 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 in the JCF CFN
Entities reflected as a minority interest in the Company's financial statements.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"). SFAS 123R requires that the compensation cost resulting
from all share-based payment transactions (e.g. stock options and restricted
stock) be recognized in the financial statements. SFAS 123R requires all
entities to apply a fair-value-based measurement method in accounting for
share-based payment transactions with employees and non-employees except for
equity instruments held by employee share ownership plans. This statement
replaces SFAS 123, "Accounting for Stock-Based Compensation," and supersedes the
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company currently accounts for employee share-based
payment awards under the

9

provisions of APB 25. The Company will apply the provisions of SFAS 123R for the
first interim reporting period beginning after June 15, 2005. The Company is
currently evaluating the impact that the implementation of this statement will
have on its consolidated financial position and results of operations.

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 valuation allowance.

Income Tax Valuation Allowance -- 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, 2004, is based on
management's assessment of the Company's earnings history, expectations of
future taxable income, and other relevant considerations.

Castlewood Holdings and B.H. Acquisition

Certain amounts in Castlewood Holdings' and B.H. Acquisition's consolidated
financial statements are the result of transactions that require the use of best
estimates and assumptions to determine reported values. These amounts could
ultimately be materially different than what has been provided for in their
consolidated financial statements. The assessment of loss reserves and
reinsurance recoverable are considered to be the values requiring the most
inherently subjective and complex estimates. In addition, the assessment of the
possible impairment of goodwill involves certain estimates and assumptions. 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 reviewed and estimated
by management quarterly based upon reports received from ceding companies and
annually based upon independent actuarial estimates of ultimate unpaid losses.
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. In determining goodwill, Castlewood
Holdings must determine the fair values of the assets of an acquired company.
The determination of fair value necessarily involves many assumptions. Fair
values of reinsurance assets and

10

liabilities acquired are derived from probability weighted ranges of the
associated projected cash flows, based on actuarially prepared information and
management run-off strategy. Fair value adjustments are based on the estimated
timing of loss and loss adjustment expense payments and an assumed interest
rate, and are amortized over the estimated payout period, as adjusted for
accelerations on commutation settlements, using the constant yield method
options. If the assumptions made in initially valuing the assets change
significantly in the future, Castlewood Holdings may be required to record
impairment charges which could have a material impact on the financial
statements.

Castlewood Holdings assessed its recorded goodwill in 2004 in accordance
with SFAS 142 and determined that there had been no impairment in its carrying
value.

SFAS 142 also requires that negative goodwill be reversed immediately. Upon
adoption of SFAS 142 in 2002, B.H. Acquisition reversed its negative goodwill
into earnings and presented it as a cumulative effect of a change in accounting
principle. During 2004, Castlewood Holdings also took negative goodwill into
earnings upon the acquisition of three companies, and presented it as an
extraordinary gain.

RECENT DEVELOPMENTS

In March 2005, Cassandra sold all of its holdings for approximately $40.0
million. Castlewood Holdings' proportionate share of the proceeds was
approximately $10.8 million.

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.

Net cash provided by operating activities decreased from approximately
$14.6 million in 2003 to approximately $8.6 million in 2004. This substantial
decrease was primarily due to the receipt of approximately $20.8 million in
dividends from Castlewood Holdings in 2003, compared to the receipt of
distributions of approximately $7.2 million from Green Tree and a $3.0 million
dividend from Castlewood Holdings in 2004.

Net cash provided by investing activities was approximately $32.9 million
for 2004 and consisted primarily of proceeds received from the sale of Green
Tree. In July 2004, the JCF CFN Entities, along with certain affiliates of J.C.
Flowers I LP, completed the sale of their entire interests in Green Tree to FIT
CFN Holdings LLC, an affiliate of Fortress Investment Group LLC, and Cerberus
Green Tree Investments, LLC and Cerberus JCF Coinvest, LLC, each an affiliate of
Cerberus Capital Management L.P. In exchange for their entire interests, the JCF
CFN Entities received aggregate sales proceeds of approximately $40.0 million in
cash. The proceeds received by the JCF CFN Entities at completion of the sale
were reduced by cash distributions of approximately $7.2 million made by Green
Tree in 2004 prior to the completion of the sale.

For 2003, net cash used in investing activities was approximately $24.2
million. During 2003 the Company funded capital contributions to Castlewood
Holdings of approximately $7.2 million and the JCF CFN Entities invested
approximately $24.7 million in Green Tree. These amounts were partially offset
by the receipt of approximately $7.8 million in proceeds from the sale of
B-Line.

Net cash used in financing activities was approximately $15.6 million in
2004 compared to net cash provided by financing activities of approximately
$10.0 million for 2003. During 2004, approximately $16.1 million was distributed
to Castlewood Holdings as the minority interest portion of the approximately
$40.0 million in distributions received from Green Tree. This amount was
partially offset by the receipt of $555,000 from the exercise of certain stock
options in May 2004. Net cash provided by financing activities was approximately
$10.0 million in 2003, representing Castlewood Holdings' minority interest
capital contribution in the JCF CFN Entities of approximately $10.2 million less
minority interest distributions to Castlewood Holdings of $194,000.
11

The Company's assets, aggregating approximately $159.0 million at December
31, 2004, include approximately $81.7 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 December 2004, the Company signed a one year lease beginning January 1,
2005 on an office building at 401 Madison Avenue, Montgomery, Alabama which
serves as the corporate headquarters. The lease also provides renewal options
for three periods of one year each. 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 $3,000 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.
The Company incurred rent expense in the amount of $37,200, $37,200 and $35,950
for the three years ended December 31, 2004, 2003 and 2002, respectively. In
February 2002, the Company entered into an agreement with J.C. Flowers & Co. LLC
running through November 2005 for the use of certain office space and
administrative services from J.C. Flowers & Co. LLC for an annual payment of
$66,000. J.C. Flowers & Co. LLC is managed by Mr. Flowers, a member of the
Company's board of directors and the Company's largest shareholder.

RESULTS OF OPERATIONS

2004 Compared to 2003

Interest income was $983,000 in 2004 compared to $821,000 in 2003. Interest
income was earned from cash, cash equivalents and certificates of deposit.
Interest income increased during 2004 as a result of the receipt of
approximately $24.0 million in July 2004, representing the Company's share of
proceeds from the sale of Green Tree. In addition, interest rates earned on the
Company's cash, cash equivalents and certificates of deposit increased during
the last quarter of 2004.

Earnings of partially owned equity affiliates were approximately $8.3
million in 2004 compared to $15.9 million in 2003. The Company recorded equity
in earnings of $118,000 and $293,000 from B.H. Acquisition in 2004 and 2003,
respectively. The Company recorded equity in earnings of approximately $4.0
million in 2004 from Castlewood Holdings compared to approximately $9.6 million
in 2003. The Company's equity in earnings from B-Line was approximately $1.7
million in 2003 (the Company sold its entire interest in B-Line in December
2003). The Company reported equity in earnings of approximately $4.3 million
from Green Tree for the period from January 1 to July 15, 2004 (the Company sold
its entire interest in Green Tree in July 2004) compared to approximately $4.2
million for the period from June 23 to December 31, 2003 (the Company made its
investment in Green Tree in June 2003). The Company's reported income was
reduced by approximately $3.0 million and approximately $1.1 million in 2004 and
2003, respectively, to reflect Castlewood Holdings' minority interest in Green
Tree. In addition, the Company reported income of approximately $4.4 million,
net of income taxes, as its proportionate share of the excess of the net assets
acquired over the cost in the acquisition of Mercantile, Harper and Longmynd by
Castlewood Holdings. 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 July 2004, the JCF CFN Entities completed the sale of their entire
interests in Green Tree. In exchange for their entire interest, the JCF CFN
Entities received aggregate sales proceeds of approximately $40 million in cash.
Of this amount, Castlewood Holdings received aggregate sales proceeds of
approximately $16 million. The proceeds received by the JCF CFN Entities at
completion of the sale were reduced by prior cash distributions of approximately
$7.2 million made by Green Tree during 2004. The Company recorded a gain of
approximately $6.9 million on the sale.

Other income was $498,000 in 2004 compared to $484,000 in 2003. The Company
recorded a quarterly investment management fee of $100,000 from Castlewood
Holdings for each of the four quarters in 2004 and 2003.
12

General and administrative expenses were approximately $3.0 million and
approximately $3.1 million in 2004 and 2003, respectively. Of these amounts,
approximately $1.3 million and $1.4 million, including non-cash compensation,
related to employee expenses in 2004 and 2003, 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
approximately $1.0 million and $950,000 in 2004 and 2003, respectively.

Income tax expense was approximately $4.8 million and approximately $3.0
million in 2004 and 2003, respectively. The Company's effective tax rate for
2004 approximated the statutory rate. The effective tax rate for 2003 differed
from the statutory rate primarily due to changes in the valuation allowance
related to deferred tax assets.

Consolidated net income was approximately $10.4 million in 2004 compared to
approximately $13.2 million in 2003. The change in net income for 2004 compared
to 2003 is primarily a result of a decrease in earnings from partially owned
equity affiliates of approximately $7.5 million, an increase in the gain on sale
of partially owned equity affiliates of approximately $3.7 million, an increase
in income taxes of approximately $1.8 million, an increase in minority interest
of approximately $1.9 million and an increase from the extraordinary gain, net
of income taxes, of approximately $4.4 million.

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 pre-tax 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 for each of the four quarters 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.

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

13

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 related to
deferred tax assets. 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.

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. This discussion and analysis
should be read in conjunction with the audited consolidated financial statements
of the partially owned equity affiliates and related notes that are included in
this Annual Report.

Castlewood Holdings

2004 Compared to 2003

Underwriting income for the years ended December 31, 2004 and 2003 was
$13.7 million and $24.0 million, respectively. The underwriting income earned
for both 2004 and 2003 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 $23.7 million
and $24.7 million for the years ended December 31, 2004 and 2003, 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 both 2004 and 2003.

Castlewood Holdings' share of equity in earnings of partly-owned companies
for the years ended December 31, 2004 and 2003, was $6.9 million and $1.6
million, respectively. This amount represents Castlewood Holdings' proportionate
share of equity in the earnings of B.H. Acquisition and JCF CFN in 2004 and 2003
and Cassandra in 2004.

Net investment income, excluding unrealized gains and losses, for the years
ended December 31, 2004 and 2003, was $10.5 million and $7.1 million,
respectively. The increase was attributable to the combination of the
acquisition of Harper Insurance Limited's investment portfolio of $536.9 million
in October 2004 and the increase in the investment yield during 2004. In
addition, 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 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.

Castlewood Holdings has recorded foreign exchange gains of $3.7 million and
$2.4 million for the years ended December 31, 2004 and 2003, 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.

14

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 2004
arose primarily as a result of the Company disposing of its surplus Swiss Franc
cash balances obtained as part of the Harper acquisition. For 2003, the gain was
attributable to the company disposing of its British pound available for sale
investment portfolio.

Salaries and benefits, which include accrued bonuses, were $26.3 million
and $15.7 million for the years ended December 31, 2004 and 2003, 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 plan. Included as part of the salary cost is an accrual
relating to this plan. The increase in 2004 compared to 2003 was primarily due
to an increased number of employees, the implementation of an employee share
plan and a reduction in the 2003 bonus accrual due to a change in methodology
adopted in that year.

General and administrative expenses were $10.7 million and $7.0 million for
the years ended December 31, 2004 and 2003, respectively. 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.

Income taxes of $1.9 million and $1.5 million were recorded for the years
ended December 31, 2004 and 2003, 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.

Castlewood Holdings has recorded a minority interest in earnings of $3.1
million and $5.1 million in 2004 and 2003, respectively, reflecting the
remaining 49.9% economic interest in the earnings from Hillcot.

Negative goodwill of $21.8 million was recorded for the year ended December
31, 2004. This amount represents the excess of the fair value of net assets
acquired of $26.2 million over the cost of $4.4 million in the acquisition of
Mercantile, Harper and Longmynd. This excess has, in accordance with SFAS 141
"Business Combinations," been recognized as an extraordinary gain in 2004. The
fair values of the reinsurance assets and liabilities acquired are derived from
probability weighted ranges of the associated projected cash flows, based on
actuarially prepared information and management run-off strategy. Any amendment
to the fair values resulting from changes in such information or strategy will
be recognized when they occur.

Castlewood Holdings reported consolidated net earnings of approximately
$38.3 million in 2004 compared to approximately $30.6 million in 2003. The
increase in 2004 from 2003 was primarily a result of an extraordinary gain of
$21.8 million in 2004, partially offset by a substantial decrease in
underwriting income and a substantial increase in salaries and benefit expense.

2003 Compared to 2002

Underwriting income for the years ended December 31, 2003 and 2002 was
$24.0 million 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
15

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 both 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 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.

Castlewood Holdings 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.

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 plan. Included as part of the salary cost is an accrual
relating to this plan. 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.

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.

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.

16

B.H. Acquisition

2004 Compared to 2003

B.H. Acquisition reported net underwriting income of $428,000 for the year
ended December 31, 2004 compared to an underwriting loss of $230,000 for the
year ended December 31, 2003.

Net investment income for the year ended December 31, 2004 was $1.5 million
compared to $1.3 million for the year ended December 31, 2003. Investment income
consists primarily of interest income earned from cash, cash equivalents, debt
securities and mutual funds. The increase in net investment income in 2004 was
attributable to an increase in interest rates earned on the cash, cash
equivalents and investments.

General and administrative expenses were $2.8 million for the year ended
December 31, 2004 compared to $1.6 million for the year ended December 31, 2003.
General and administrative expenses include professional fees (legal, audit and
actuarial), management and consulting expenses, and provisions for doubtful
accounts. In 2003, there was an adjustment to the provision for doubtful
accounts associated with reinsurance recoverables of $693,000, resulting in a
reduction to general and administrative expenses in that year. There was no such
adjustment in 2004. The remaining increase in general and administrative
expenses for 2004 was mainly a result of increased legal and audit fees.

B.H. Acquisition recorded a foreign exchange loss of $142,000 for the year
ended December 31, 2004 compared to a gain of $927,000 for the year ended
December 31, 2003. Through its subsidiaries, B.H. Acquisition conducts business
in a variety of foreign (non-U.S.) currencies, the principal exposures being
Euros and British pounds. 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. In 2004, B.H.
Acquisition made an attempt to more closely match its foreign currency exposure,
resulting in a small loss for the year. For 2003, the gain generated was
attributable to B.H. Acquisition having a surplus Euro position at various
points during the year.

Amortization of the run-off provision was $1.3 million and $500,000 for the
years ended December 31, 2004 and 2003, 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. In 2003 an additional provision of $2.1
million was established and the expected life of the run-off was extended two
years.

Net earnings for the year ended December 31, 2004 were $359,000 compared to
$888,000 for the year ended December 31, 2003.

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 was attributable primarily to the
2002 annual 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, 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 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
17

movement of $1.8 million in the provision for doubtful accounts between this
year and that established last year.

B.H. Acquisition 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 B.H. Acquisition, 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.

RELATED PARTY TRANSACTIONS

In February 2002, the Company entered into an agreement with J.C. Flowers &
Co. LLC running through November 2005 for the use of certain office space and
administrative services from J.C. Flowers & Co. LLC for an annual payment of
$66,000. J.C. Flowers & Co. 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. In July 2004, the JCF CFN Entities completed the sale of their
entire interest in Green Tree for aggregate sales proceeds of approximately $40
million in cash. Of this amount, Castlewood Holdings' aggregate sales proceeds
were approximately $16 million. The proceeds received by the JCF CFN Entities at
completion of the sale were reduced by prior cash distributions of approximately
$7.2 million made by Green Tree during 2004. The Company recorded a pre-tax
realized gain of approximately $6.9 million on the sale. Each of the JCF CFN
Entities is controlled by JCF Associates I LLC, the managing member of which is
Mr. Flowers.

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 company, for
approximately $46 million. The acquisition was effected through 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. Hillcot is included in Castlewood
Holdings' consolidated financial statements,
18

with the remaining 49.9% economic interest reflected as minority interest. Mr.
Flowers, a member of the Company's board of directors and the Company's largest
shareholder, is a director of Shinsei.

During 2004, Castlewood Holdings, through one of its subsidiaries, invested
a total of approximately $9.1 million in Cassandra for a 27% interest. Cassandra
was formed to invest in equity shares of a publicly traded international
reinsurance company. J.C. Flowers I LP also owns a 27% interest in Cassandra.
J.C. Flowers I LP is a private investment fund, the general partner of which is
JCF Associates I LLC. Mr. Flowers is the managing member of JCF Associates I
LLC. In March 2005, Cassandra sold all of its holdings for total proceeds of
approximately $40.0 million. Castlewood Holdings' proportionate share of the
proceeds was approximately $10.8 million.

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-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, 2004, the Company had cash and cash equivalents of approximately
$81.7 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 $858,000 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, 2004 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

19

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

20

MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Enstar Group, Inc.'s (the "Company's") management is responsible for
establishing and maintaining adequate internal control over financial reporting.
Pursuant to the rules and regulations of the Securities and Exchange Commission,
internal control over financial reporting is a process designed by, or under the
supervision of, the Company's principal executive and principal financial
officers and effected by the Company's board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America and includes those policies and procedures that:

- Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;

- Provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and

- Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the financial statements.

Management has evaluated the effectiveness of its internal control over
financial reporting as of December 31, 2004 based on the control criteria
established in a report entitled Internal Control -- Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on such evaluation, we have concluded that the Company's internal control
over financial reporting is effective as of December 31, 2004.

The registered independent public accounting firm of Deloitte & Touche LLP,
as auditors of the Company's consolidated financial statements, has issued an
attestation report on management's assessment of the Company's internal control
over financial reporting, which report is included herein.

/s/ NIMROD T. FRAZER /s/ CHERYL D. DAVIS
- ----------------------------------------------------- -----------------------------------------------------
NIMROD T. FRAZER CHERYL D. DAVIS
Chairman of the Board of Directors Chief Financial Officer, Vice President and Secretary
and Chief Executive Officer
March 30, 2005
March 30, 2005

21

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited management's assessment, included in the accompanying Management
Report on Internal Control over Financial Reporting, that The Enstar Group, Inc.
and Subsidiaries (the "Company") maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
the Company as of December 31, 2004 and the related consolidated statements of
income, comprehensive income, shareholders' equity, and cash flows for the year
then ended, and our report dated March 30, 2005 expressed an unqualified opinion
on those financial statements.

/s/ Deloitte & Touche LLP

Birmingham, Alabama
March 30, 2005

22

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the 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, 2004 and 2003,
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, 2004. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits. We did not audit the 2003 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 2003 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 the standards of the Public
Company Accounting Oversight Board (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
audits and the reports of other auditors provide a reasonable basis for our
opinion.

In our opinion, based on our audits and the report of other auditors such
consolidated financial statements present fairly, in all material respects, the
financial position of The Enstar Group, Inc. and Subsidiaries as of December 31,
2004 and 2003, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2004, 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.

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on the criteria established in Internal Control -- Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission,
and our report dated March 30, 2005 expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP

Birmingham, Alabama
March 30, 2005

23

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

24

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

25

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

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

26

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.
27

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.

28

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.

29

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.

30

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, acquires and
manages insurance and reinsurance companies in run-off. The management of these
businesses 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.

The Company consolidates JCF CFN LLC and related entities (collectively,
the "JCF CFN Entities"). The JCF CFN Entities were formed to serve as members of
Green Tree Investment Holdings LLC (formerly known as CFN Investment Holdings
LLC) and related entities (collectively, "Green Tree"), which, in turn, were
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"). In July 2004, the JCF CFN Entities completed
the sale of their entire interest in Green Tree. See Note 3 for further
discussion of this transaction.

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 in its
financial statements 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

31

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company's cumulative proportionate share of losses that were not recognized
during the period the application of the equity method was suspended.

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

(f) Financial Instruments -- The Company holds certificates of deposit
("CDs") offered by commercial banks. These certificates had a weighted average
maturity of approximately six months at December 31, 2004. The estimated fair
value of CDs at December 31, 2004 and 2003, 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 that are
more likely than not 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.

The components of accumulated other comprehensive income are as follows:

(i) Deferred Compensation of Partially Owned Equity Affiliates -- The
Company records its proportionate share of deferred compensation reported by
Castlewood Holdings, one of its partially owned equity affiliates. The deferred
compensation arises from stock based compensation awards entered into 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

32

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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 ("VIE") 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 in the JCF CFN Entities reflected as a
minority interest in the Company's financial statements.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"). SFAS 123R requires that the compensation cost resulting
from all share-based payment transactions (e.g. stock options and restricted
stock) be recognized in the financial statements. SFAS 123R requires all
entities to apply a fair-value-based measurement method in accounting for
share-based payment transactions with employees and non-employees except for
equity instruments held by employee share ownership plans. This statement
replaces SFAS 123, "Accounting for Stock-Based Compensation," and supersedes the
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company currently accounts for employee share-based
payment awards under the provisions of APB 25. The Company will apply the
provisions of SFAS 123R for the first interim reporting period beginning after
June 15, 2005. The Company is currently evaluating the impact that the
implementation of this statement will have on its consolidated financial
position and results of operations.

(k) Revenue Recognition -- Revenue includes 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 its sale of B-Line in the fourth quarter of 2003, the
Company accounted for its investment in B-Line three months in arrears.

(l) Stock-Based Compensation -- For the three years ended December 31,
2004, the Company utilized various stock-based compensation plans for the
benefit of non-employee directors and certain officers. In 1997, the Company
adopted the Deferred Compensation and Stock Plan for Non-Employee Directors and
a long-term incentive program made up of three stock option/incentive plans.
Additionally, in 2001, the Company adopted the 2001 Outside Directors' Stock
Option Plan (the "2001 Directors' Plan") and amended certain provisions of an
existing plan. The Company accounts for these plans under the intrinsic value
recognition and measurement principles of 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 grants
under 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 was 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,
"Accounting for Stock-Based Compensation," the

33

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company's pro forma net income and net income per share for 2004, 2003 and 2002
would have been as follows:

The pro forma stock-based employee compensation reflected above is based on
the application of Emerging Issues Task Force No. 00-23, "Issues Related to the
Accounting for Stock Compensation Under APB 25 and FASB Interpretation No. 44,"
to the pro rata vesting of such awards.

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, 2004,
2003 and 2002 were $5.15, $5.14 and $4.82, 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.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, Brittany Insurance Company Ltd. ("Brittany")
and Compagnie Europeenne d'Assurances Industrielles S.A. ("CEAI"). Brittany and
CEAI are principally engaged in the active management of books of reinsurance
business from international markets. The Company owns 50% of the voting stock
and a 33% economic interest in B.H. Acquisition. As part of the transaction,
Castlewood owns 33% of the voting stock and a 45% economic interest in B.H.
Acquisition. The Company's ownership in B.H. Acquisition is accounted for using
the equity method of accounting.

34

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(b) Castlewood Holdings Limited -- In November 2001, the Company, together
with Trident and the shareholders and senior management of Castlewood (the
"Castlewood Principals"), completed the formation of a new venture, Castlewood
Holdings, to acquire and manage insurance and reinsurance companies, including
companies in run-off (insurance and reinsurance companies that have ceased the
underwriting of new policies), and to provide management, consulting and other
services to the insurance and reinsurance industry (the "Castlewood Holdings
Transaction"). As part of the transaction, the Company made a capital commitment
of $39.5 million for its interest in Castlewood Holdings. The Company owns 50%
of the voting stock of Castlewood Holdings and the Castlewood Principals and
Trident each own 25% of Castlewood Holdings' voting stock. The Company owns a
32.89% economic interest in Castlewood Holdings. Castlewood is a private
Bermuda-based firm, experienced in managing and acquiring reinsurance
operations. The Company's ownership in Castlewood Holdings is accounted for
using the equity method of accounting.

As a result of this transaction, the Company's 33% direct economic interest
in B.H. Acquisition increased by an additional indirect economic interest
through Castlewood Holdings. At December 31, 2004, the Company's beneficial
ownership in B.H. Acquisition was 47.8%. 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 contributed $12.5 million to Castlewood Holdings. In August 2002,
the Company funded an additional $21 million to Castlewood Holdings. The funds
were used, in part, to capitalize Fitzwilliam (SAC) Insurance Limited
("Fitzwilliam"), a wholly owned subsidiary. 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 was funded in March 2003. 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
(collectively, the "River Thames Transaction"). 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 company, 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 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.
Hillcot is included in Castlewood Holdings' consolidated financial statements,
with the remaining 49.9% economic 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.
Castlewood Holdings' results of operations include the results of Toa-UK from
the date of acquisition in March 2003.

In August 2004, Castlewood Holdings awarded a grant of 744 shares of its
Class D stock to certain of its employees under a stock-based compensation plan.
The plan allows total awards up to a maximum of 7.5% of the total issued share
capital of Castlewood Holdings. Of the shares awarded, 242 shares had vested as
of

35

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 2004. The remaining shares granted under the award will vest over
various periods through April 2009. As a result of the award in August 2004, the
Company's economic interest in Castlewood Holdings of 33 1/3% was diluted by
0.44% to 32.89% as of December 31, 2004. As shares issued under the August 2004
award vest and as additional shares are awarded in the future, the Company's
economic interest could decrease to a minimum of 30.83%. The Company's voting
interest will remain at 50%.

During 2004, Castlewood Holdings, through one of its subsidiaries, invested
a total of approximately $9.1 million in Cassandra Equity LLC and Cassandra
Equity (Cayman) LP, (collectively, "Cassandra"), for a 27% interest in each.
Cassandra was formed to invest in equity shares of a publicly traded
international reinsurance company. J.C. Flowers I LP also owns a 27% interest in
Cassandra. J.C. Flowers I LP is a private investment fund, the general partner
of which is JCF Associates I LLC. Mr. Flowers is the managing member of JCF
Associates I LLC. In March 2005, Cassandra sold all of its holdings for total
proceeds of approximately $40.0 million. Castlewood Holdings' proportionate
share of the proceeds was approximately $10.8 million.

Also during 2004, Castlewood Holdings, through one of its subsidiaries,
completed the acquisition of Mercantile, Harper and Longmynd for a total
purchase price of approximately $4.5 million. Castlewood Holdings recorded an
extraordinary gain of approximately $21.8 million relating to the excess of the
fair value of the net assets acquired over the cost of these acquisitions.

(c) B-Line -- The Company owned membership units of B-Line from November
1998 to December 2003. 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 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, resulting in a pre-tax gain of approximately $3.3
million.

(d) Green Tree -- During 2003, the Company funded approximately $15.3
million to the JCF CFN Entities in exchange for a 60% interest in such entities.
In addition, Castlewood Holdings funded approximately $10.2 million to the JCF
CFN Entities in exchange for a 40% interest.

The JCF CFN Entities invested in 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. In June 2003, 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
consisted primarily of a portfolio of home equity and manufactured housing loan
securities as well as the associated servicing businesses. J.C. Flowers I LP is
a private investment fund, the general partner of which is JCF Associates I LLC.
The managing member of JCF Associates I LLC is Mr. Flowers, a member of the
Company's board of directors and the Company's largest shareholder. The JCF CFN
Entities accounted for the investment in Green Tree under the equity method of
accounting. Because the JCF CFN Entities are consolidated, Green Tree was
treated as a partially owned equity affiliate of the Company.

In July 2004, the JCF CFN Entities, along with certain affiliates of J.C.
Flowers I LP, completed the sale of their entire interests in Green Tree to FIT
CFN Holdings LLC, an affiliate of Fortress Investment Group LLC, and Cerberus
Green Tree Investments, LLC and Cerberus JCF Coinvest, LLC, each an affiliate of
Cerberus Capital Management L.P. In exchange for their entire interest, the JCF
CFN Entities received aggregate sales proceeds of approximately $40 million in
cash. Of this amount, Castlewood Holdings received aggregate sales proceeds of
approximately $16 million. The proceeds received by the JCF CFN Entities at
completion of the sale were reduced by prior cash distributions of approximately
$7.2 million made by Green Tree during 2004. The Company recorded a pre-tax
realized gain of approximately $6.9 million on the sale.

36

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(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, 2004 and 2003 and for each of the three years ended
December 31, 2004. Summarized financial information for Green Tree for 2004 is
presented for the period from January 1 to July 15. The information for 2003 is
presented as of December 31 and for the period from June 23 to December 31
(Green Tree was acquired in June 2003 and sold in July 2004). Summarized
financial information for B-Line is presented for the year ended December 31,
2002 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. The
summarized financial information presented below for Green Tree is derived from
its 2003 audited financial statements and 2004 quarterly 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 its unaudited quarterly
financial statements.

37

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, Hillcot, Harper, Mercantile and Longmynd
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 $26.1 million
and approximately $18.9 million at December 31, 2004 and 2003, respectively.

NOTE 4: COMMITMENTS AND CONTINGENCIES

In December 2004, the Company signed a one year lease beginning January 1,
2005 on an office building at 401 Madison Avenue, Montgomery, Alabama which
serves as the corporate headquarters. The lease also provides renewal options
for three periods of one year each. 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 $3,000 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.
The Company incurred rent expense in the amount of $37,200, $37,200 and $35,950
for the three years ended December 31, 2004, 2003 and 2002, respectively. In
February 2002, the Company entered into an agreement with J.C. Flowers & Co. LLC
running through November 2005 for the use of certain office space and
administrative services from J.C. Flowers & Co. LLC for an annual payment of
$66,000. J.C. Flowers & Co. 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:

38

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts reported for income tax purposes. The following items
comprise the Company's deferred taxes at December 31, 2004 and 2003:

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 2004 and 2003, respectively. During 2004, the Company increased the
valuation allowance by approximately $640,000 to approximately $5.8 million.
During 2003 and 2002, the Company decreased the valuation allowance by
approximately $2.8 million and $3.6 million, respectively, to approximately $5.2
million and $8.0 million, respectively, to reflect the utilization of credits.

The Company has established reserves for tax-related uncertainties based on
its best estimates of whether, and the extent to which, additional taxes and
interest will be due. These reserves are adjusted in light of changing facts and
circumstances. At December 31, 2004, the accrual of $2.6 million for tax
contingencies is reflected in accrued taxes on the balance sheet.

In October 2004, the American Jobs Creation Act of 2004 (the "Act") was
enacted. The Act creates a temporary incentive to repatriate foreign earnings by
providing an 85% dividends received deduction for certain dividends from
controlled foreign corporations. Due to both the complexity of the newly enacted
law and the lack of guidance on implementation, the potential impact, if any, of
the new provision is still being evaluated.

39

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2004, 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.

(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,
2004.

(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
$662,000 and $695,000 in stock compensation were deferred under this plan as of
December 31, 2004, and 2003, respectively. In May 2004 Jeffrey S. Halis resigned
from the Company's board of directors. Upon his resignation, Mr. Halis was
issued 12,156 shares of the Company's common stock in connection with this plan,
representing approximately $225,000 in deferred compensation.

(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
40

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1997 Amended CEO Stock Option Plan (the "CEO Plan"), the 1997 Amended Outside
Directors' Stock Option Plan (the "1997 Directors' Plan"), and the 1997 Amended
Omnibus Incentive Plan (the "Incentive Plan"). In May 2001, the Company adopted
the 2001 Directors' Plan and amended certain provisions of the Incentive Plan.
(Note 2).

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

Under the 1997 Directors' Plan, each of the Company's four outside
directors was granted options for 25,000 shares of common stock in 1997. The
options have an exercise price of $10.8125 and vested in five equal installments
of 5,000 options through January 1, 2001. The options granted under the 1997
Directors' Plan expire in January 2007. In May 2004, Mr. Halis exercised options
for 25,000 shares of the Company's common stock at a total exercise price of
approximately $270,000 in connection with this plan.

The Incentive Plan was established for the benefit of key employees and
directors and 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 vested 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 2004, 2003 and 2002 of $19,000, $95,000 and $243,000,
respectively.

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 vested 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 2004, 2003 and 2002 of $14,000, $71,000 and
$181,000, respectively.

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 vested 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. In May 2004, Mr. Halis exercised options for 15,000 shares of
the Company's common stock at a total exercise price of approximately $284,000
in connection with this plan.

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 options granted to Messrs. Frazer and Oros vest in four equal
annual installments starting January 1, 2005. The options granted to Mr. Curl
vested 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.

41

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Transactions under the Company's stock option/incentive plans as of and for
the three years ended December 31, 2004 are as follows:

Stock options outstanding and exercisable under these plans as of December
31, 2004 were:

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
2004, 2003 and 2002. 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).

42

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, 2004 and 2002.

NOTE 9: SEGMENT INFORMATION

The Company separately evaluates the performance of B.H. Acquisition and
Castlewood Holdings based on the different services provided by each of the
entities, and such evaluation is based on 100% of the entities' results of
operations. Prior to its sale in December 2003, the Company also separately
evaluated the performance of B-Line. The Company also reviews separate financial
results for JCF CFN and Enstar's corporate activity.

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

43

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Conseco Finance. B-Line provided services to credit card issuers and other
holders of similar receivables. B-Line also purchased credit card receivables
and recovered payments on these accounts.

The consolidated financial information for B.H. Acquisition and Castlewood
Holdings is reported for all years presented. Summarized financial information
for JCF CFN for 2004 is presented for the period from January 1 to July 15. The
information for 2003 is presented as of December 31 and for the period from June
23 to December 31 (Green Tree was acquired by JCF CFN in June 2003 and sold in
July 2004). Summarized financial information for B-Line is presented for the
year ended December 31, 2002 and from January 1, 2003 through December 23, 2003
(date of sale). A reconciliation of the consolidated financial information by
segment to the Company's consolidated financial statements as of December 31,
2004 and 2003 and for each of the three years ended December 31, 2004 is as
follows:

44

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The income tax amount of $7,550,000 included in the corporate segment
includes $2,741,000 which is netted against the Company's proportionate share of
an extraordinary gain in the Company's consolidated statement of income. The
Company's economic ownership percentage in Castlewood Holdings decreased from
33 1/3% to 32.89% during the three months ended September 30, 2004. The
Company's economic ownership percentage used in the above table represents a
weighted average for the year (Note 3).

45

THE ENSTAR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

46

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.

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.

47

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, 2004 and 2003 is as follows:

48

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 and the first, second and third quarters of 2004.

In the fourth quarter of 2004, the Company recorded an extraordinary gain
of approximately $4.4 million, net of income taxes. This gain represents the
Company's proportionate share of the excess of the fair value of net assets
acquired over the cost in the acquisition of Mercantile, Harper and Longmynd by
Castlewood Holdings.

NOTE 11: SUBSEQUENT EVENTS

In March 2005, Cassandra sold all of its holdings for approximately $40.0
million. Castlewood Holdings' proportionate share of the proceeds was
approximately $10.8 million.

49

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.

Management's report on internal control over financial reporting and the
attestation report of the Company's independent auditors are included under Item
8 under the captions "Management's Report on Internal Control Over Financial
Reporting" and "Report of Independent Registered Public Accounting Firm."

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 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 operating officer, chief financial officer and chief
accounting officer and persons performing similar functions.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is included under the sections
entitled "Employment Agreements", "Executive Compensation", "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.

50

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 Accounting Firm Fees and Services" appearing in the Proxy
Statement and such section is deemed incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1. Financial Statements

The following financial statements are set forth under Item 8 of this
Annual Report and are for the fiscal period ended December 31, 2004.

Management Report on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2004 and 2003.

Consolidated Statements of Income for the years ended December 31, 2004, 2003
and 2002.

Consolidated Statements of Comprehensive Income for the years ended December 31,
2004, 2003 and 2002.

Consolidated Statements of Shareholders' Equity for the years ended December 31,
2004, 2003 and 2002.

Consolidated Statements of Cash Flows for the years ended December 31, 2004,
2003 and 2002.

Notes to Consolidated Financial Statements.

2. Financial Statement Schedules

51

The following financial statements of Castlewood Holdings are filed as
schedules to this Annual Report and are for the fiscal period ended December 31,
2004.

The following financial statements of B.H. Acquisition are filed as
schedules to this Annual Report and are for the fiscal period ended December 31,
2004.

52

3. Exhibits

- ---------------

* Indicates a management contract or compensatory plan or arrangement.

55

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 30, 2005

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 30, 2005
---------------------------------------------------- Directors and Chief Executive
Nimrod T. Frazer Officer (Principal Executive
Officer)

/s/ CHERYL D. DAVIS Chief Financial Officer, Vice March 30, 2005
---------------------------------------------------- President and Secretary
Cheryl D. Davis (Principal Financial and
Accounting Officer)

/s/ JOHN J. OROS President and Chief Operating March 30, 2005
---------------------------------------------------- Officer
John J. Oros

/s/ T. WHIT ARMSTRONG Director March 30, 2005
----------------------------------------------------
T. Whit Armstrong

/s/ PAUL J. COLLINS Director March 30, 2005
----------------------------------------------------
Paul J. Collins

/s/ GREGORY L. CURL Director March 30, 2005
----------------------------------------------------
Gregory L. Curl

/s/ T. WAYNE DAVIS Director March 30, 2005
----------------------------------------------------
T. Wayne Davis

/s/ J. CHRISTOPHER FLOWERS Director March 30, 2005
----------------------------------------------------
J. Christopher Flowers

56

CASTLEWOOD HOLDINGS LIMITED

CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2004 and
2003, and the related consolidated statements of earnings, comprehensive income,
changes in shareholders' equity and cash flows for the years ended December 31,
2004, 2003 and 2002. 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 the standards of the Public Company
Accounting Oversight Board (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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, 2004 and 2003 and the results of their
operations and their cash flows for the years ended December 31, 2004, 2003 and
2002 in conformity with accounting principles generally accepted in the United
States of America.

/s/ Deloitte & Touche

Hamilton, Bermuda
March 11, 2005

F-2

CASTLEWOOD HOLDINGS LIMITED

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2003
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)

See accompanying notes to the consolidated financial statements

F-3

CASTLEWOOD HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-4

CASTLEWOOD HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-5

CASTLEWOOD HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-6

CASTLEWOOD HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

(Continued)

F-7

CASTLEWOOD HOLDINGS LIMITED

CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-8

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)

1. DESCRIPTION OF BUSINESS

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 as of December 31, 2004 and 2003 and for
the years ended December 31, 2004, 2003 and 2002. 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 classified as available-for-sale securities 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.
Debt securities classified as held-to-maturity securities are carried at
purchase cost adjusted for amortization of premiums and discounts. Amortization
expenses derive from the difference between the nominal value and purchase cost
and they are spread over the time to maturity of the debt securities. Debt
securities classified as trading securities are carried at fair value, with
unrealized holding gains and losses recognized within the net earnings. Mutual
funds, classified as available-for-sale whose underlying assets consist of
investments having maturities of greater than six and less than twelve months
when purchased, are carried at fair value.

Investments held to maturity and available-for-sale are reviewed on a
regular basis to determine if they have sustained an impairment of value that is
considered to be other than temporary. There are several factors that are
considered in the assessment of an investment, which include (i) an analysis of
the financial condition of the issuer and (ii) an analysis of the collateral
structure and credit support of the security, if applicable. 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.

F-9

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

INVESTMENT IN PARTLY-OWNED COMPANIES

Investment in partly-owned companies, where the Company has significant
influence, 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, unrealized investment gains and 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.

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
F-10

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. No derivatives were held as at December
31, 2004 and 2003.

RECLASSIFICATIONS

Certain balances of the 2003 and 2002 figures have been reclassified to
conform to the 2004 presentation.

ACQUISITIONS

Goodwill represents the excess of the purchase price over the fair value of
the net assets received related to the acquisition of Castlewood Limited 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.

Negative goodwill arises where the fair value of assets acquired exceeds
the purchase price of those acquired assets and, in accordance with FAS 141,
"Business Combinations", has been recognized as an extraordinary gain.

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. 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 using the straight-line method. Had the Company applied FAS No.
123, "Accounting for Stock-Based Compensation," in accounting for its restricted
share awards, compensation expense and net earnings would not have changed in
2004.

3. ACQUISITIONS

2002

In 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 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 assets acquired at fair value........................... $4,108
======

F-11

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 assets acquired at fair value........................... $ 4,108
========

2003

In 2003, a 50.1% owned subsidiary of Castlewood Holdings, Hillcot Holdings
Ltd., completed the acquisition of Hillcot Reinsurance Company Limited (formerly
Toa-Re Insurance Company (UK) Limited), a reinsurance company based in London
England.

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 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 assets acquired at fair value........................... $ 46,426
=========

2004

In 2004, Castlewood Holdings, through its wholly owned subsidiary, Kenmare
Holdings Ltd., completed the acquisition of Mercantile Indemnity Company Ltd,
Harper Insurance Limited ("Harper"), (formerly Turegum Insurance Company) and
Longmynd Insurance Company (formerly Security Insurance (UK) Ltd.).

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

Purchase price.............................................. $ 3,581
Direct costs of acquisition................................. 874
--------
Total purchase price........................................ $ 4,455
--------
Net assets acquired at fair value........................... $ 26,214
--------
Excess of net assets over purchase price (Negative
goodwill)................................................. $(21,759)
========

F-12

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following summarizes the estimated fair values of the assets acquired
and the liabilities assumed as at the date of the acquisitions:

Cash, investments and accrued interest...................... $560,568
Reinsurance balances receivable............................. 200,243
Losses and loss adjustment expenses......................... (732,779)
Accounts payable and accrued liabilities.................... (1,818)
--------
Net assets acquired at fair value........................... $ 26,214
========

The seller of Harper has indemnified Castlewood Holdings for adverse loss
development subject to certain limits. Reinsurance balances receivable include
$88,379 in relation to these indemnities.

The fair values of reinsurance assets and liabilities acquired are derived
from probability weighted ranges of the associated projected cash flows, based
on actuarially prepared information and management's run-off strategy. Any
amendment to the fair values resulting from changes in such information or
strategy will be recognized when they occur.

4. PLEDGED ASSETS

Cash and cash equivalents in the amount of $48,487 and $11,208 as of
December 31, 2004 and 2003 respectively, are pledged as collateral against
letters of credit in the amount of $45,287 and $11,208 as of December 31, 2004
and 2003, respectively. 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

AVAILABLE-FOR-SALE:

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

The amortized cost and estimated fair values of debt securities classified
as available-for-sale by contractual maturity are shown below.

F-13

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.

HELD-TO-MATURITY:

After acquisition, the investment portfolio of Harper was restructured and
a portion was designated as held-to-maturity. The amortized cost and estimated
fair value of investments in debt securities held-to-maturity are as follows:

The unrecognized holding losses on the Harper portfolio have arisen in the
two months since acquisition.

The amortized cost and estimated fair values of debt securities classified
as held-to-maturity by contractual maturity are shown below.

Expected maturities could differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.

TRADING:

After acquisition, as part of the restructuring of the portfolio, a portion
of the Harper investment portfolio was identified to be sold and was designated
as trading. The estimated fair value of investments in debt securities
classified as trading securities are as follows:

F-14

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The estimated fair values of debt securities classified as trading
securities by contractual maturity are shown below.

As at March 11, 2005, the entire investment portfolio classified as trading
securities had been sold.

Major categories of net investment income are summarized as follows:

During the years ended December 31, 2004, 2003 and 2002 gross realized
gains on sale of debt securities were $68, $64 and $Nil, respectively and gross
realized losses on sale of debt securities were $668, $162 and $Nil,
respectively.

6. REINSURANCE BALANCES RECEIVABLE

BH:

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.

JCF CFN ENTITIES:

In 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. On November 11, 2003, Castlewood Holdings transferred its investment to
Hudson, its wholly owned subsidiary.

In 2004, the JCF CFN Entities were sold and the company received
distributions of $16,119.

CASSANDRA:

In 2004, Castlewood Holdings' wholly owned subsidiary, Hudson, purchased a
27% interest in Cassandra Equity (Cayman) LP ("Cassandra") for $9,147.

F-16

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Cassandra was established to invest in equity shares of a publicly traded
international reinsurance company. On March 1, 2005, Cassandra sold 100% of its
equity shareholdings for total proceeds of $40,048. Castlewood Holdings share of
total proceeds was $10,813.

As of December 31, 2004 and 2003, consolidated retained earnings include
$8,085 and $7,398, respectively of undistributed earnings of companies accounted
for by the equity method.

8. LOSSES AND LOSS ADJUSTMENT EXPENSES

The fair value adjustment, determined on acquisition of a reinsurance
subsidiary, was based on the estimated timing of loss and loss adjustment
expense payments and an assumed interest rate of 4.18%, and is amortized over
the estimated payout period, as adjusted for accelerations on commutation
settlements, using the constant yield method.

The Company's liability for unpaid losses and loss adjustment expenses as
of December 31, 2004 and 2003 included $525,642 and $90,259, 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,
2004 and 2003 was $743,294 and $196,217, 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.
The Company has not made any changes in reserve estimates that might arise as a
result of any potential federal reform of asbestos litigation. 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.

F-17

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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.

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, 2004 and 2003 was $19,757 and $19,953,
respectively.

10. SHARE CAPITAL

Authorized shares of par value $1 each

Issued and fully paid shares of par value $1 each

F-18

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 2,250,000 Class E shares as
redeemable, bringing the total outstanding shares designated as redeemable to
4,618,190.

In 2004, these shares were redeemed for a total consideration of $4,618.

11. ADDITIONAL PAID-IN CAPITAL

During the years ended December 31, 2004, 2003 and 2002, shareholders of
the Company have made contributions in the amount of $Nil, $14,338 and $42,000,
respectively.

12. ACCUMULATED OTHER COMPREHENSIVE INCOME

Other comprehensive income for the years ended December 31, 2004, 2003 and
2002 is comprised of cumulative translation adjustments and unrealized gains and
losses on investments as shown in the table below:

13. EMPLOYEE BENEFITS

During 2002, the Company entered into an agreement with 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 employees. The shares
vest over a period of 4 years. The Company has charged compensation expense of
$481 and $896 relating to these restricted share awards in 2004 and 2003,
respectively.

During 2004, the Company established an employee share plan. Employee stock
awards for 744 Class D common shares were granted to employees in the year. The
shares vest over a period of 5 years. The Company has charged compensation
expense of $3,125 relating to these restricted share awards in 2004.

14. 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.

F-19

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. 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, 2004, 2003
and 2002 was $1,126, $835 and $550, respectively.

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 of
Hillcot Re's deferred benefit pension plan were 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. This reduction has been treated as a reduction in
general and administrative expenses.

16. RELATED PARTY TRANSACTIONS

During the years ended December 31, 2004, 2003 and 2002, Castlewood earned
consulting fees of $1,250, $1,250 and $1,250, respectively from subsidiaries of
BH.

During the years ended December 31, 2004, 2003 and 2002, Castlewood
incurred investment fee and other expenses of $362, $276 and $425, respectively
from a shareholder. As at December 31, 2004 and 2003, no amounts on account of
investment fees and other expenses were payable to this shareholder.

17. 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, 2004, the Company was not a party to any
material litigation or arbitration.

18. 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.

The Company has operating subsidiaries and branch operations in the United
States, Barbados, the United Kingdom and Switzerland and is subject to the
relevant taxes in those jurisdictions. The weighted average expected tax
provision has been calculated using the pre-tax accounting income in each
jurisdiction multiplied by that jurisdiction's applicable statutory tax rate.

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, 2004 and 2003, UK insurance subsidiaries and branch
operations had tax loss carry-forwards, which do not expire, and deductions
available for tax purposes of approximately $223,060 and

F-20

CASTLEWOOD HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$122,005, respectively. A valuation allowance, using an assumed 30% tax rate,
has been provided for the tax benefit of these items as follows:

19. 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, 2004 and 2003, 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, 2004 and 2003, retained earnings of $8,494
and $7,367 of one of BH's subsidiaries requires regulatory approval prior to
distribution.

20. COMMITMENTS

The Company leases office space under operating leases expiring in various
years through 2014. 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, 2004:

2005........................................................ $1,973
2006........................................................ 1,367
2007........................................................ 1,367
2008........................................................ 1,202
2009........................................................ 899
2010 through 2014........................................... 1,694
------
$8,502
======

Rent expense for the years ended December 31, 2004, 2003 and 2002 was
$1,402, $1,272 and $708, respectively.

F-21

B.H. ACQUISITION LTD.

CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

F-22

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of
B.H. Acquisition Ltd.

We have audited the accompanying consolidated balance sheets of B.H.
Acquisition Ltd. and subsidiaries (the "Company") as of December 31, 2004 and
2003, and the related consolidated statements of earnings and retained earnings
and cash flows for the years ended December 31, 2004, 2003 and 2002. 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 the standards of the Public
Company Accounting Oversight Board (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. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, 2004 and 2003, and the results of their
operations and their cash flows for the years ended December 31, 2004, 2003 and
2002 in conformity with accounting principles generally accepted in the United
States of America.

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

/s/ Deloitte & Touche

Hamilton, Bermuda
March 11, 2005

F-23

B.H. ACQUISITION LTD.

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2003
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-24

B.H. ACQUISITION LTD.

CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-25

B.H. ACQUISITION LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

See accompanying notes to the consolidated financial statements

F-26

B.H. ACQUISITION LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
(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.

F-27

B.H. ACQUISITION LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RUN-OFF PROVISION

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

PREMIUMS

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

LOSSES AND LOSS ADJUSTMENT EXPENSES

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

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 $9,388 and $10,152 as of
December 31, 2004 and 2003, respectively, are pledged as collateral against
letters of credit and trust funds in the amount of $6,090 and $8,041 as of
December 31, 2004 and 2003, 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, 2004 and
2003, $Nil 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 $45,077 and $39,411 as of
December 31, 2004 and 2003, 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-28

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%, and 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 $5,674 and $4,981 at
December 31, 2004 and 2003, respectively.

At December 31, 2004 and 2003, reinsurance receivables with a carrying
value of $20,225 and $19,356, respectively, were associated with one and two
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-29

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, 2004 and 2003 included $14,112 and $12,072, 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,
2004 and 2003 was $34,403 and $34,552, 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.

F-30

B.H. ACQUISITION LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. UNDERWRITING INCOME (LOSS)

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, 2004, 2003 and 2002 amounting to
$1,250, $1,424 and $1,250, respectively. As at December 31, 2004, 2003 and 2002
amounts included in accounts payable and accrued liabilities were $Nil, $174 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, 2004, 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 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.

F-31

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, 2004 and 2003 of approximately $9,654 and $9,119,
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, 2004 and 2003, 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, 2004 and 2003, retained earnings of $18,876 and
$16,371 requires regulatory approval prior to distribution.

F-32