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

                                   FORM 10-K

                    ANNUAL REPORT PURSUANT TO SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

                         COMMISSION FILE NUMBER 0-07477

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

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<S>                                            <C>
                   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)
</Table>

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

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

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<Caption>
                                                          NAME OF EACH EXCHANGE ON
            TITLE OF EACH CLASS                               WHICH REGISTERED
            -------------------                           ------------------------
<S>                                             <C>
               Not applicable                                  Not applicable
</Table>

          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 is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.  Yes [ ]  No [X]

     Indicate by check mark whether the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [ ]  No [X]

     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 a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):

Large Accelerated Filer [ ]     Accelerated Filer [X]     Non-Accelerated Filer
                                      [ ]

     Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).  Yes [ ]  No [X]

     The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of June 30, 2005, was $252,279,716 (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 16, 2006 was 5,517,909.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Proxy Statement for the 2006 Annual Meeting of Shareholders
are incorporated herein by reference in Part II and Part III.
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                               TABLE OF CONTENTS

<Table>
<Caption>
ITEM                                                                  PAGE
----                                                                  ----
<S>    <C>                                                            <C>
                                  PART I
1.     Business....................................................      1
1A.    Risk Factors................................................      6
1B.    Unresolved Staff Comments...................................     10
2.     Properties..................................................     10
3.     Legal Proceedings...........................................     11
4.     Submission of Matters to a Vote of Security Holders.........     11



                                 PART II
5.     Market for Registrant's Common Equity, Related Stockholder
       Matters and Issuer Purchases of Equity Securities...........     12
6.     Selected Financial Data.....................................     13
7.     Management's Discussion and Analysis of Financial Condition
       and Results of Operations...................................     15
7A.    Quantitative and Qualitative Disclosures About Market
       Risk........................................................     27
8.     Financial Statements and Supplementary Data.................     27
9.     Changes in and Disagreements with Accountants on Accounting
       and Financial Disclosure....................................     56
9A.    Controls and Procedures.....................................     56
9B.    Other Information...........................................     56



                                 PART III
10.    Directors and Executive Officers of the Registrant..........     56
11.    Executive Compensation......................................     56
12.    Security Ownership of Certain Beneficial Owners and
       Management and Related Stockholder Matters..................     57
13.    Certain Relationships and Related Transactions..............     57
14.    Principal Accountant Fees and Services......................     57



                                 PART IV
15.    Exhibits and Financial Statement Schedules..................     57
</Table>

     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. THERE ARE A NUMBER OF IMPORTANT FACTORS THAT COULD CAUSE OUR
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING
STATEMENTS. THESE FACTORS INCLUDE, WITHOUT LIMITATION, THOSE SET FORTH IN ITEM
1A. "RISK FACTORS." 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.

                                        i
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

GENERAL

     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. 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 (insurance and reinsurance
companies that have ceased the underwriting of new policies). 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 Item 1A. "Risk
Factors." For business segment information, see Note 11 of the Notes to
Consolidated Financial Statements.

ACTIVITIES RELATED TO THE REINSURANCE INDUSTRY

  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. 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.

  CASTLEWOOD HOLDINGS

     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, and to provide
management, consulting and other services to the insurance and reinsurance
industry (the "Castlewood Holdings Transaction"). 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 32.63%
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, 2005, the Company's beneficial
ownership in B.H. Acquisition was 47.68%. The Company's combined voting interest
in B.H. Acquisition is limited to 50%.

                                        1
<PAGE>

     In conjunction with the closing of the Castlewood Holdings Transaction, a
wholly owned subsidiary of Castlewood Holdings 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.

     Also in 2002, Castlewood Holdings capitalized 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.

     In March 2003, Castlewood Holdings and Shinsei Bank, Limited ("Shinsei")
completed the acquisition of all of the outstanding capital stock of The Toa-Re
Insurance Company (UK) Limited ("Toa-UK"), a London-based subsidiary of The Toa
Reinsurance Company, Limited, for approximately $46 million. Toa-UK underwrote
reinsurance business throughout the world between 1980 and 1994, when it stopped
writing new business and is currently operating in run-off. The acquisition was
effected through Hillcot Holdings Ltd. ("Hillcot"), a newly formed Bermuda
company, in which Castlewood Holdings has a 50.1% economic interest and a 50%
voting interest. Upon completion of the transaction, Toa-UK's name was changed
to Hillcot Re Limited. 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 and the largest shareholder 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 implemented an employee stock-based
compensation plan. The plan allows for the award of Castlewood Holdings' Class D
non-voting shares to certain senior employees up to a maximum of 7.5% of the
total issued share capital of Castlewood Holdings. As a result of awards made in
2005 and 2004, the Company's economic interest in Castlewood Holdings of 33 1/3%
has been diluted by 0.70% to 32.63% as of December 31, 2005. As awarded shares
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 owned 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.

     In May 2005, Castlewood Holdings, through one of its subsidiaries,
purchased Fieldmill Insurance Company Limited (formerly known as Harleysville
Insurance Company (UK) Limited) for approximately $1.4 million.

                                        2
<PAGE>

     In December 2005, Castlewood Holdings and Shinsei signed definitive
agreements for the purchase of Aioi Insurance Company of Europe Limited ("Aioi
Europe"), a London-based subsidiary of Aioi Insurance Company, Limited. Aioi
Europe has underwritten general insurance and reinsurance business in Europe for
its own account until 2002 when it generally ceased underwriting, and placed
into run-off, its general insurance and reinsurance business. The aggregate
purchase price to be paid for Aioi Europe is L62 million (approximately $108
million), with L50 million in cash upon the closing of the transaction and L12
million in the form of a promissory note, payable twelve months from the date of
the closing. The acquisition will be effected through Hillcot, a Bermuda-based
company, which is jointly owned by Castlewood Holdings and Shinsei. Subject to
regulatory approval, the acquisition is expected to be completed during the
first quarter of 2006.

OTHER ACTIVITIES

  B-LINE LLC

     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.

  JCF CFN ENTITIES

     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. 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
                                        3
<PAGE>

Tree during 2004. The Company recorded a pre-tax realized gain of approximately
$6.9 million on the sale. The JCF CFN Entities have been inactive since July
2004.

  AFFIRMATIVE INVESTMENT LLC

     In June 2005, the Company committed to contribute up to $10 million for a
14%, non-voting interest in Affirmative Investment LLC ("Affirmative
Investment"), a newly formed Delaware limited liability company. J.C. Flowers I
LP committed the capital necessary for the remaining 86% interest in Affirmative
Investment. Both J.C. Flowers I LP and Affirmative Associates LLC, the managing
member of Affirmative Investment, are controlled by Mr. Flowers, a member of the
Company's board of directors and the Company's largest shareholder. In July
2005, the Company funded its initial capital contribution of approximately $2.6
million. Since that time, the Company has funded additional capital
contributions of approximately $5.7 million. At December 31, 2005, the Company's
total investment in Affirmative Investment was approximately $8.5 million,
including equity in earnings from July 1 to December 31, 2005. The Company's
ownership in Affirmative Investment is accounted for using the equity method of
accounting.

     Also in June 2005, Affirmative Investment acquired 1,183,000 shares of
common stock of Affirmative Insurance Holdings, Inc. ("Affirmative Insurance"),
through open market purchases. In August, Affirmative Investment acquired 50% of
the membership interests of New Affirmative LLC ("NAL"), a newly formed Delaware
limited liability company, for approximately $40.7 million in cash and the
1,183,000 shares of Affirmative Insurance. The remaining 50% of the membership
interests of NAL were acquired by Delaware Street Capital Master Fund, LP or its
affiliates ("DSC") for approximately $37.5 million in cash and 1,459,699 shares
of Affirmative Insurance common stock. In turn, NAL, pursuant to a Stock
Purchase Agreement with Vesta Insurance Group, Inc. ("VIG") and Vesta Fire
Insurance Corporation, a subsidiary of VIG (together with VIG, "Vesta"),
acquired from Vesta an aggregate of 5,218,228 shares of Affirmative Insurance
common stock for a purchase price of $15.00 per share. Upon the closing of the
transaction with Vesta and the transfer of the shares of Affirmative Insurance
from Affirmative Investment and DSC, NAL's ownership percentage in Affirmative
Insurance was approximately 52.9%. Affirmative Investment's ownership in NAL is
accounted for using the equity method of accounting. Affirmative Investment
accounts for its investment in NAL three months in arrears.

  NEW NIB PARTNERS LP

     In December 2005, the Company invested approximately $3.5 million in New
NIB Partners LP ("NIB Partners"), a newly formed Province of Alberta limited
partnership, in exchange for an approximately .2% limited partnership interest.
Castlewood Holdings, through two of its wholly-owned subsidiaries, also invested
approximately $24.5 million in NIB Partners for an approximately 1.4% interest.
NIB Partners was formed for the purpose of purchasing, together with certain
affiliated entities, 100% of the outstanding share capital of NIBC N.V.
(formerly, NIB Capital N.V.) and its affiliates ("NIBC"). NIBC is a merchant
bank focusing on the mid-market segment in northwest Europe with a global
distribution network.

     New NIB Partners and certain related entities are indirectly controlled by
New NIB Limited, an Irish corporation. Mr. Flowers is a director of New NIB
Limited and is on the supervisory board of NIBC. Certain affiliates of J.C.
Flowers I LP also participated in the acquisition of NIBC.

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.

                                        4
<PAGE>

SUBSIDIARIES

     At December 31, 2005, the Company had two wholly-owned subsidiaries: Enstar
Financial Services, Inc., a Florida corporation, and Enstar Group Operations,
Inc., a Georgia corporation, both of which are currently 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.

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 or
furnished 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.

                                        5
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ITEM 1A.  RISK FACTORS

     The following risk factors, in addition to other information provided in
the Company's periodic and interim reports, should be considered when evaluating
the Company. The risks described below are not the only ones that the Company
faces. There may be additional risks and uncertainties. If any of the following
risks actually occur, the Company's business, financial condition or results of
operations could be materially and adversely affected and the trading price of
the Company's common shares could decline significantly.

RISKS RELATED TO THE COMPANY'S BUSINESS

  THE COMPANY HAS MADE, AND EXPECTS TO CONTINUE TO MAKE, STRATEGIC ACQUISITIONS
  AND INVESTMENTS, AND THESE ACTIVITIES MAY NOT BE FINANCIALLY BENEFICIAL TO THE
  COMPANY OR ITS SHAREHOLDERS.

     The Company and its partially owned equity affiliates, Castlewood Holdings
and B.H. Acquisition, and their subsidiaries, have made several acquisitions and
investments and expect to continue to make such acquisitions and investments.
See "Business -- Activities Related to the Reinsurance Industry" and
"Business -- Other Activities" included in Item 1 of this Annual Report on Form
10-K. The Company cannot assure you that any of these acquisitions or
investments will be financially advantageous for the Company or its
shareholders. In addition, as described below, the Company's entry into the
reinsurance industry, through the operations of its partially-owned equity
affiliates, Castlewood Holdings and B.H. Acquisition, and their subsidiaries,
exposes the Company to risks and uncertainties inherent in the reinsurance
industry which could materially and adversely affect the business, financial
condition and results of operations of the Company.

     The business of any future acquisition target may be subject to numerous,
unpredictable risks. For example, an acquisition target may be subject to
government regulation. In sum, the Company cannot assure you that it will make
any acquisition that will bring value or prove financially advantageous to the
Company or its shareholders.

  ACQUISITIONS ARE A COMPONENT OF THE COMPANY'S GROWTH STRATEGY, AND ITS FAILURE
  TO COMPLETE FUTURE ACQUISITIONS SUCCESSFULLY COULD REDUCE ITS EARNINGS AND
  SLOW ITS GROWTH.

     The Company's business strategy has emphasized growth through acquisitions,
but it may not be able to continue to identify operating businesses for
acquisition or it may not be able to make acquisitions on terms that it
considers economically acceptable. The Company faces intense competition in its
search for one or more operating businesses. The Company competes with strategic
and financial buyers and others looking to acquire suitable operating
businesses, who have greater financial resources and greater flexibility in
structuring acquisition transactions or strategic relationships than the
Company. In addition, there may be certain financing contingencies that will
restrict the ability of the Company to make a given acquisition.

  THE COMPANY IS DEPENDENT ON ITS EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY
  PERSONNEL.

     The success of the Company is highly dependent on the ability of Nimrod T.
Frazer, the Company's Chairman and Chief Executive Officer, and the other
executive officers and directors of the Company to identify and consummate
acquisitions on favorable terms. J. Christopher Flowers has been a director
since October 1996 and for the period December 1998 to July 2003 served as Vice
Chairman of the Board of Directors. Additionally, in March 2000, John J. Oros
was named Executive Vice President and elected as a director of the Company. Mr.
Oros was subsequently elected President and Chief Operating Officer in June
2001. The Company believes Mr. Flowers' and Mr. Oros' extensive business and
financial talent and experience greatly enhance the Company's ability to locate
operating businesses. The Company would be materially and adversely affected if
it were unable to retain the services of Messrs. Frazer, Flowers or Oros.

     Additionally, the success of the Company is also dependent, in part, on key
personnel at its partially-owned equity affiliates. The experiences and
reputations of the key personnel in the reinsurance industry are important
factors in their ability to attract new business.

                                        6
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  THE COMPANY'S STOCK PRICE MAY EXPERIENCE VOLATILITY, THEREBY CAUSING A
  POTENTIAL LOSS OF VALUE TO ITS INVESTORS.

     The market price for the Company's common stock may fluctuate substantially
due to, among other things, the following factors:

     - announcements with respect to an acquisition or investment;

     - changes in the value of the Company's assets;

     - quarterly operating results of the Company;

     - changes in general conditions in the economy;

     - the financial markets; and

     - adverse press or news announcements.

     In addition, from time to time the stock market experiences significant
price and volume fluctuations. This volatility affects the market prices of
securities issued by many companies for reasons unrelated to their operating
performance.

  SIGNIFICANT FLUCTUATION IN THE MARKET PRICE OF THE COMPANY'S COMMON STOCK
  COULD RESULT IN SECURITIES CLASS ACTION CLAIMS AGAINST IT.

     Significant price and value fluctuations have occurred with respect to the
securities of insurance and insurance-related companies. The Company's common
stock price is likely to be volatile in the future. In the past, following
periods of downward volatility in the market price of a company's securities,
class action litigation has often been pursued against such companies. If
similar litigation were pursued against the Company, it could result in
substantial costs and a diversion of management's attention and resources.

  FUTURE ACTUAL OR POTENTIAL STOCK SALES BY THE COMPANY'S MAJOR STOCKHOLDERS
  COULD CAUSE ITS STOCK PRICE TO FALL.

     A substantial amount of the Company's common stock becoming available (or
being perceived to become available) for sale in the public market could cause
the market price of the stock to fall or prevent it from increasing,
particularly given the relatively low trading volumes of the Company's stock.
Also, actual or potential sales by officers or directors could be viewed
negatively by other investors.

  THE COMPANY'S LACK OF INDUSTRY DIVERSIFICATION MAKES IT MORE VULNERABLE TO
  ECONOMIC DOWNTURNS.

     The Company does not plan to diversify across several industries. In fact,
the Company may decide to acquire additional businesses operating in a single
industry. The concentration of investments in the insurance industry makes the
Company more vulnerable to adverse effects of occurrences that may affect this
industry.

  PROVISIONS IN THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS AND UNDER
  GEORGIA LAW MAY INHIBIT A TAKEOVER, WHICH COULD ADVERSELY AFFECT THE VALUE OF
  THE COMPANY'S COMMON STOCK.

     The Company's Articles of Incorporation and Bylaws contain provisions that
may discourage other persons from attempting to acquire control of the Company.
Such provisions include, among others, a classified board of directors and
procedural requirements in connection with shareholder nominations for election
of directors.

     The Company is a Georgia corporation and has elected to be governed by the
"business combination" provisions of the Georgia Code, that could be viewed as
having the effect of discouraging an attempt to obtain control of the Company.
The business combination provisions generally would prohibit the Company from
engaging in various business combination transactions with any interested
stockholder for a period of five years after the date of the transaction in
which the person became an interested stockholder unless certain designated
conditions are met.

                                        7
<PAGE>

     The Company has also adopted a share purchase rights plan, which could make
it uneconomical for a third party to acquire the Company on a hostile basis. The
market price of the Company's common stock may be affected by the forgoing
provisions and agreements which inhibit or discourage take-over attempts.

  CONFLICTS OF INTEREST MIGHT PREVENT THE COMPANY FROM PURSUING DESIRABLE
  INVESTMENT AND BUSINESS OPPORTUNITIES.

     The Company's directors and executive officers may have ownership interests
or other involvement with entities that could compete against it, either in the
pursuit of acquisition targets or in general business operations. The Company
has procedures in place to ensure that directors do not deliberate or vote on
transactions where the Company's interests conflict with those of entities with
which the director is involved. However, these procedures cannot guarantee that
the Company will pursue all advantageous transactions that it would otherwise
pursue in the absence of a conflict.

  REGULATORY CHALLENGES TO THE COMPANY'S TAX FILING POSITIONS COULD RESULT IN
  ADDITIONAL TAXES.

     The Company has claimed deductions for net operating loss carryforwards
("NOLs") totaling approximately $94.8 million on its federal income tax returns
for its taxable years ended August 31, 1997 through 2004. Although the Company
believes that it is entitled to the deductions for NOLs that it has claimed on
its federal income tax returns for the taxable years ended August 31, 1997
through 2004, there can be no assurance that the Internal Revenue Service will
not challenge the Company's position or as to the result of any such challenge.

  FLUCTUATIONS IN CURRENCY EXCHANGE RATES MAY CAUSE THE GROUP TO EXPERIENCE
  LOSSES.

     The Group maintains a portion of its investment portfolio in investments
denominated in currencies other than United States dollars. Consequently, the
Company may experience foreign exchange losses.

     The Company publishes its consolidated financial statements in U.S.
dollars. Therefore, fluctuations in exchange rates used to convert other
currencies, particularly other European currencies including the Euro and
British pound, into U.S. dollars will impact the Company's reported consolidated
financial condition, results of operations and cash flows from year to year.

RISKS RELATED TO THE REINSURANCE INDUSTRY

     Through the Company's partially owned equity affiliates, Castlewood
Holdings and B.H. Acquisition, and their subsidiaries, the Company has acquired
and manages books of reinsurance business. The Company is exposed to the
following risks and uncertainties, among others, through its participation in
the reinsurance industry.

  FLUCTUATIONS IN THE REINSURANCE INDUSTRY COULD CAUSE THE GROUP'S OPERATING
  RESULTS TO FLUCTUATE.

     The reinsurance industry historically has been subject to significant
fluctuations and uncertainties. Factors that affect the industry in general
could also cause the Group's operating results to fluctuate. The industry's
profitability may be affected significantly by:

     - fluctuations in interest rates, inflationary pressures and other changes
       in the investment environment, which affect returns on invested capital
       and may impact the ultimate payout of loss amounts and the costs of
       administering books of reinsurance business;

     - volatile and unpredictable developments and catastrophic events which
       could adversely affect the recoverability of reinsurance from the Group's
       reinsurers;

     - changes in reserves resulting from different types of claims that may
       arise and the development of judicial interpretations relating to the
       scope of insurers' liability; and

     - the overall level of economic activity and the competitive environment in
       the industry.

                                        8
<PAGE>

  IF THE REINSURANCE SUBSIDIARIES' LOSS RESERVES ARE INADEQUATE TO COVER THEIR
  ACTUAL LOSSES, THE REINSURANCE SUBSIDIARIES' NET INCOME WOULD BE REDUCED OR
  THEY COULD INCUR A LOSS.

     The reinsurance subsidiaries of Castlewood Holdings and B.H. Acquisition
(the "Reinsurance Subsidiaries") are required to maintain reserves to cover
their estimated ultimate liability of losses and loss adjustment expenses for
both reported and unreported claims incurred. These reserves are only estimates
of what the Reinsurance Subsidiaries think the settlement and administration of
claims will cost based on facts and circumstances known to the Reinsurance
Subsidiaries. Because of the uncertainties that surround estimating loss
reserves and loss adjustment expenses, the Reinsurance Subsidiaries cannot be
certain that ultimate losses will not exceed these estimates of losses and loss
adjustment reserves. If the Reinsurance Subsidiaries' reserves are insufficient
to cover their actual losses and loss adjustment expenses, the Reinsurance
Subsidiaries would have to augment their reserves and incur a charge to their
earnings. These charges could be material and could ultimately reduce the
Company's net income.

     The difficulty in estimating the Reinsurance Subsidiaries' reserves is
increased because the Reinsurance Subsidiaries' loss reserves include reserves
for potential asbestos and environmental liabilities. Asbestos and environmental
liabilities are especially hard to estimate for many reasons, including the long
waiting periods between exposure and manifestation of any bodily injury or
property damage, difficulty in identifying the source of the asbestos or
environmental contamination, long reporting delays and difficulty in properly
allocating liability for the asbestos or environmental damage. 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.
In view of the changes in the legal and tort environment that affect the
development of such claims, the uncertainties inherent in valuing asbestos and
environmental claims are not likely to be resolved in the near future. Ultimate
values for such claims cannot be estimated using traditional reserving
techniques and there are significant uncertainties in estimating the amount of
the Reinsurance Subsidiaries' potential losses for these claims. The Reinsurance
Subsidiaries have 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 Reinsurance Subsidiaries will be
adequate or will not be adversely affected by the development of other latent
exposures.

  THE VALUE OF THE REINSURANCE SUBSIDIARIES' INVESTMENT PORTFOLIOS AND THE
  INVESTMENT INCOME IT RECEIVES FROM THOSE PORTFOLIOS COULD DECLINE AS A RESULT
  OF MARKET FLUCTUATIONS AND ECONOMIC CONDITIONS.

     The fair market value of the fixed income securities and equity securities
in the Reinsurance Subsidiaries' investment portfolios and the investment income
from these assets fluctuate depending on general economic and market conditions.
For example, the fair market value of the Reinsurance Subsidiaries' fixed income
securities generally increases or decreases in an inverse relationship with
fluctuations in interest rates. The fair market value of its fixed income
securities can also decrease as a result of any downturn in the business cycle
that causes the credit quality of those securities to deteriorate. The net
investment income that the Reinsurance Subsidiaries realize from investments in
fixed income securities will generally increase or decrease with interest rates.
The changes in the market value of the Reinsurance Subsidiaries' securities that
are classified as available for sale are reflected in its financial statements.
As a result, a decline in the value of the securities in the Reinsurance
Subsidiaries portfolio could reduce its net income or cause it to incur a loss.

  THE REINSURANCE SUBSIDIARIES' REINSURERS MAY NOT SATISFY THEIR OBLIGATIONS TO
  THEM.

     The Reinsurance Subsidiaries are subject to credit risk with respect to
their reinsurers because the transfer of risk to a reinsurer does not relieve
the Reinsurance Subsidiaries of their liability to the insured. In addition,
reinsurers may be unwilling to pay the Reinsurance Subsidiaries even though they
are able to do so. The failure of one or more of the Reinsurance Subsidiaries'
reinsurers to honor their obligations in a timely fashion would impact the
Reinsurance Subsidiaries' and the Group's cash flows and reduce their net income
and could cause the Reinsurance Subsidiaries and the Company to incur a
significant loss.

                                        9
<PAGE>

  THE REINSURANCE INDUSTRY IS HIGHLY COMPETITIVE AND THE GROUP MAY NOT BE ABLE
  TO COMPETE SUCCESSFULLY IN THE FUTURE.

     The Group competes in international markets with domestic and international
reinsurance companies. 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.

  INSURANCE LAWS AND REGULATIONS RESTRICT THE GROUP'S ABILITY TO OPERATE AND ANY
  FAILURE TO COMPLY WITH THOSE LAWS AND REGULATIONS COULD HAVE A MATERIAL
  ADVERSE ON THE GROUP'S BUSINESS.

     The Group, through its Reinsurance Subsidiaries, is subject to extensive
regulation under foreign insurance laws. These laws limit the amount of
dividends that can be paid to the Company, Castlewood Holdings and B.H.
Acquisition by their Reinsurance Subsidiaries, impose restrictions on the amount
and type of investments that they can hold, prescribe solvency standards that
must be met and maintained by them and require them to maintain reserves. The
Group's failure to comply with these laws could subject it to fines and
penalties and restrict it from conducting business. The application of these
laws could affect the Company's liquidity and ability to pay dividends on its
common shares and could restrict the Company's ability to expand its business
operations through acquisitions involving the Company's partially owned
affiliates and their subsidiaries.

  IF THE GROUP FAILS TO COMPLY WITH APPLICABLE INSURANCE LAWS, RULES AND
  REGULATIONS, THE GROUP COULD BE SUBJECT TO DISCIPLINARY ACTIONS, DAMAGES,
  PENALTIES OR RESTRICTIONS THAT COULD SIGNIFICANTLY HARM THE GROUP'S BUSINESS.

     The Company cannot assure that the Group has or can maintain all required
licenses and approvals or that its business fully complies with the wide variety
of applicable laws and regulations or the relevant authority's interpretation of
the laws and regulations. In addition, some regulatory authorities have
relatively broad discretion to grant, renew or revoke licenses and approvals. If
the Group does not have the requisite licenses and approvals or does not comply
with applicable regulatory requirements, the insurance regulatory authorities
could preclude or temporarily suspend the Group from carrying on some or all of
its activities or monetarily penalize the Group. These types of actions could
have a material adverse effect on the Company's business.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

     None.

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. In December 2005, the
Company signed a one year renewal option beginning January 1, 2006.
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 September 2005, the Company entered
into an agreement with J.C. Flowers & Co. LLC continuing through October 2014
for the use of certain office space and administrative services from J.C.
Flowers & Co. LLC for monthly payments of $4,146. Either party may, at its
option with or without cause, terminate this agreement upon thirty (30) days
prior written notice to the other party. 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.

                                        10
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

     The Company is not a party to any pending litigation and no proceeding was
terminated during the fourth quarter of 2005.

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, 2005.

                                        11
<PAGE>

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
        ISSUER PURCHASES OF EQUITY SECURITIES

     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 2005 and 2004, as reflected in the Nasdaq Trade and Quote Summary
Reports:

<Table>
<Caption>
                                                             2005            2004
                                                         -------------   -------------
                                                         HIGH     LOW    HIGH     LOW
                                                         -----   -----   -----   -----
<S>                                                      <C>     <C>     <C>     <C>
First Quarter..........................................  64.97   56.12   48.40   40.61
Second Quarter.........................................  67.85   49.03   53.98   39.82
Third Quarter..........................................  69.94   63.40   53.00   44.56
Fourth Quarter.........................................  72.85   60.19   63.00   49.25
</Table>

     At March 3, 2006, there were approximately 2,676 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
2006 Annual Meeting of Shareholders (the "Proxy Statement") and such section is
deemed incorporated herein by reference.

                                        12
<PAGE>

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, 2005
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.

<Table>
<Caption>
                                                         YEAR ENDED DECEMBER 31,
                                        ---------------------------------------------------------
                                          2005        2004        2003        2002        2001
                                        ---------   ---------   ---------   ---------   ---------
                                              (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                     <C>         <C>         <C>         <C>         <C>
Income before extraordinary gain and
  cumulative effect of a change in
  accounting principle................  $  19,045   $   5,977   $  13,226   $  21,526   $   1,574
Extraordinary gain, net of income
  taxes...............................         --       4,415          --          --          --
Cumulative effect of a change in
  accounting principle, net of income
  taxes...............................         --          --          --         967          --
                                        ---------   ---------   ---------   ---------   ---------
Net income............................  $  19,045   $  10,392   $  13,226   $  22,493   $   1,574
                                        ---------   ---------   ---------   ---------   ---------
Income per common share before
  extraordinary gain and change in
  accounting principle -- basic.......  $    3.45   $    1.09   $    2.42   $    3.94   $     .30
Extraordinary gain -- basic...........         --         .80          --          --          --
Cumulative effect of a change in
  accounting principle -- basic.......         --          --          --         .18          --
                                        ---------   ---------   ---------   ---------   ---------
Net income per common share --basic...  $    3.45   $    1.89   $    2.42   $    4.12   $     .30
                                        =========   =========   =========   =========   =========
Weighted average shares outstanding --
  basic...............................  5,517,909   5,496,819   5,465,753   5,465,753   5,277,808
                                        =========   =========   =========   =========   =========
Income per common share before
  extraordinary gain and change in
  accounting principle -- assuming
  dilution............................  $    3.25   $    1.03   $    2.25   $    3.74   $     .29
Extraordinary gain -- assuming
  dilution............................         --         .76          --          --          --
Cumulative effect of a change in
  accounting principle -- assuming
  dilution............................         --          --          --        0.17          --
                                        ---------   ---------   ---------   ---------   ---------
Net income per common share --assuming
  dilution............................  $    3.25   $    1.79   $    2.25   $    3.91   $     .29
                                        =========   =========   =========   =========   =========
Weighted average shares outstanding --
  assuming dilution...................  5,856,144   5,800,993   5,881,410   5,753,553   5,449,627
                                        =========   =========   =========   =========   =========
Balance sheet data:
  Total assets........................  $ 185,220   $ 158,977   $ 152,620   $ 128,609   $  99,621
  Total liabilities...................     20,097      12,803       6,688       8,360       1,964
  Minority interest...................         --          --      11,449          --          --
  Shareholders' equity................    165,123     146,174     134,483     120,249      97,657
</Table>

                                        13
<PAGE>

     The following tables set forth selected financial information of B.H.
Acquisition and Castlewood Holdings for each of the five years in the period
ended December 31, 2005. The table for Green Tree sets forth selected financial
information for the period of ownership in 2003 and 2004.

     B.H. ACQUISITION:

<Table>
<Caption>
                                                YEAR ENDED DECEMBER 31,
                                  ----------------------------------------------------
                                    2005       2004       2003       2002       2001
                                  --------   --------   --------   --------   --------
                                                 (DOLLARS IN THOUSANDS)
<S>                               <C>        <C>        <C>        <C>        <C>
Income before cumulative effect
  of a change in accounting
  principle.....................  $    179   $    359   $    888   $ 22,398   $  4,798
Net income......................       179        359        888     25,367      4,798
Total assets....................   105,578    110,414    120,474    125,428    136,085
Total liabilities...............    66,733     71,748     82,167     88,009    114,033
Total equity....................    38,845     38,666     38,307     37,419     22,052
</Table>

     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:

<Table>
<Caption>
                                               YEAR ENDED DECEMBER 31,
                               --------------------------------------------------------
                                  2005         2004        2003       2002       2001
                               ----------   ----------   --------   --------   --------
                                                (DOLLARS IN THOUSANDS)
<S>                            <C>          <C>          <C>        <C>        <C>
Income (loss) before
  extraordinary gain.........  $   80,710   $   16,535   $ 30,592   $ 60,619   $   (407)
Net income (loss)............      80,710       38,294     30,592     60,619       (407)
Total assets.................   1,199,963    1,347,853    632,347    514,597    527,845
Total liabilities............     898,513    1,139,123    456,436    347,124    464,149
Minority interest............      40,544       31,392     28,295         --         --
Total equity.................     260,906      177,338    147,616    167,473     63,696
</Table>

     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:

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                                2004          2003
                                                              ---------   ------------
                                                               (DOLLARS IN THOUSANDS)
<S>                                                           <C>         <C>
Net income..................................................   $99,114     $   96,318
Total assets................................................        --      1,020,514
Total liabilities...........................................        --        399,457
Total equity................................................        --        621,057
</Table>

     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.

                                        14
<PAGE>

     AFFIRMATIVE INVESTMENT:

<Table>
<Caption>
                                                                YEAR ENDED
                                                               DECEMBER 31,
                                                                   2005
                                                               ------------
                                                               (DOLLARS IN
                                                                THOUSANDS)
<S>                                                            <C>
Net income..................................................     $   856
Total assets................................................      60,199
Total liabilities...........................................          --
Total equity................................................      60,199
</Table>

     In July 2005, the Company acquired a 14% ownership percentage in
Affirmative Investment.

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 Item 1A. "Risk Factors."

     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 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.
The JCF CFN Entities have been inactive since the sale of their entire interests
in Green Tree in July 2004.

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123R supersedes Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and amends SFAS No. 95, "Statement of Cash Flows." The
approach in SFAS 123R generally is similar to the approach described in SFAS
123. However, SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the earnings
statements based on their grant date fair values. Pro forma disclosure will no
longer be an alternative.

                                        15
<PAGE>

     The Company adopted SFAS 123R as of January 1, 2006 using the
modified-prospective method. Under this transition method, compensation cost is
recognized beginning with the effective date (a) based on the requirements of
SFAS 123R for all share-based payments granted after the effective date and (b)
based on the requirements of SFAS 123 for all awards granted to employees prior
to the effective date of SFAS 123R that remain unvested on the effective date.
As permitted by SFAS 123, through December 31, 2005 the Company accounted for
share-based payments to employees using APB 25's intrinsic value method and, as
such, generally has not recognized compensation cost for employee stock options.
We estimate that 2006 pretax compensation expense for stock options will be
approximately $213,000.

     SFAS 123R also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as previously required. This requirement will
reduce net operating cash flows and increase net financing cash flows. While we
cannot estimate what those amounts will be in the future (because they depend
on, among other things, when stock options will be exercised), the amounts of
operating cash flows recognized in prior periods for such excess tax deductions
were $0 and $606,000 in 2005 and 2004, respectively.

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, 2005, 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 estimated by management
based upon reports received from ceding companies, supplemented by Castlewood
Holdings' and B.H. Acquisition's own estimates of reserves for which ceding
company reports have not been received, and independent actuarial estimates of
ultimate unpaid losses. Castlewood Holdings' and B.H. Acquisition's reserves are
largely comprised of casualty exposures including asbestos and
                                        16
<PAGE>

environmental exposures and therefore these claims are subject to a higher
degree of estimation volatility as a result of changes in the legal environment,
jury awards, medical cost trends and general inflation. Castlewood Holdings and
B.H. Acquisition regularly review and update these estimates using the most
current information available and employing various actuarial methods. The
ultimate liability for a loss is likely to differ from the original estimate due
to the factors discussed above. Adjustments resulting from changes in our
estimates are recorded in the period such adjustments are determined. The
establishment of reserves, or the adjustment of reserves for reported losses,
could result in significant upward or downward changes to our financial
condition or results of our operations in the period such amounts are reported.

     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 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 2005 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.
During 2004, Castlewood Holdings took negative goodwill into earnings upon the
acquisition of three companies, and presented it as an extraordinary gain.

RECENT DEVELOPMENTS

     In December 2005, Castlewood Holdings and Shinsei signed definitive
agreements for the purchase of Aioi Europe, a London-based subsidiary of Aioi
Insurance Company, Limited. The aggregate purchase price to be paid for Aioi
Europe is L62 million (approximately $108 million), with L50 million in cash
upon the closing of the transaction and L12 million in the form of a promissory
note, payable twelve months from the date of the closing. The acquisition will
be effected through Hillcot, a Bermuda-based company, which is jointly owned by
Castlewood Holdings and Shinsei. Castlewood Holdings' commitment is
proportionate to its 50.1% ownership percentage to Hillcot. Subject to
regulatory approval, the acquisition is expected to be completed during the
first quarter of 2006. J. Christopher Flowers ("Mr. Flowers"), a member of the
Company's board of directors and the Company's largest shareholder, is a
director and the largest shareholder of Shinsei.

     In February 2006, the Company announced that it approved a commitment of up
to $25.0 million in J.C. Flowers II LP (the "J.C. Flowers Fund"), a private
investment fund to be formed by J.C. Flowers & Co. LLC. The transaction is
expected to close in the second quarter of 2006. The Company intends to use cash
on hand to fund its commitment.

     In March 2006, the Company announced that its partially owned equity
affiliate, Castlewood Holdings, approved a commitment of up to $75.0 million in
the J.C. Flowers Fund. Castlewood Holdings intends to use cash on hand to fund
its commitment.

                                        17
<PAGE>

     J.C. Flowers & Co. LLC is controlled by Mr. Flowers. No fees will be
payable by the Company or Castlewood Holdings to J.C. Flowers II LP, J.C.
Flowers & Co. LLC, or Mr. Flowers in connection with the Company's or Castlewood
Holdings' investment in the J.C. Flowers Fund.

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 and other investment
opportunities. The primary sources of the Company's liquidity include the
receipt of dividends and distributions from partially owned equity affiliates.

     Net cash used in operating activities was approximately $2.0 million in
2005 compared to net cash provided by operating activities of approximately $8.6
million in 2004. This decrease was primarily due to the substantial reduction in
distributions from partially owned equity affiliates from 2004 to 2005. The
Company received distributions of $11,000 in 2005 from Affirmative Investment
compared to distributions of approximately $7.2 million from Green Tree and a
$3.0 million dividend from Castlewood Holdings in 2004.

     Net cash used in investing activities was approximately $25.6 million for
2005. During 2005 the Company funded capital contributions to Affirmative
Investment of approximately $8.4 million and invested approximately $3.5 million
in NIB Partners. In addition, the Company purchased marketable securities for
approximately $9.5 million. These amounts were partially offset by the receipt
of approximately $11.2 million in proceeds from the sale of marketable
securities. The Company also purchased approximately $15.5 million of
certificates of deposit in excess of maturities.

     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. 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.

     Net cash used in financing activities was approximately $15.6 million in
2004. 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.
There were no cash flows from financing activities during 2005.

     The Company's assets, aggregating approximately $185.2 million at December
31, 2005, include approximately $54.0 million in cash and cash equivalents and
approximately $19.7 million in short-term certificates of deposit. The Company
believes its current liquidity is adequate to fund any foreseeable cash
requirements including its $25.0 million commitment in the J.C. Flowers Fund.

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. In December 2005, the Company signed a one
year renewal option beginning January 1, 2006. 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 September 2005, the Company entered into an agreement with

                                        18
<PAGE>

J.C. Flowers & Co. LLC continuing through October 2014 for the use of certain
office space and administrative services from J.C. Flowers & Co. LLC for monthly
payments of $4,146. Either party may, at its option with or without cause,
terminate this agreement upon thirty (30) days prior written notice to the other
party. 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. Including payments made to J.C. Flowers & Co.
LLC, the Company incurred rent expense in the amount of $77,000, $80,000 and
$80,000 for the three years ended December 31, 2005, 2004 and 2003,
respectively.

     In February 2006, the Company announced that it approved a commitment of up
to $25.0 million in the J.C. Flowers Fund, a private investment fund to be
formed by J.C. Flowers & Co. LLC. The transaction is expected to close in the
second quarter. The Company intends to use cash on hand to fund its commitment.

     In March 2006, the Company announced that its partially owned equity
affiliate, Castlewood Holdings, approved a commitment of up to $75.0 million in
the J.C. Flowers Fund. Castlewood Holdings intends to use cash on hand to fund
its commitment.

     J.C. Flowers & Co. LLC is controlled by J. Christopher Flowers, a member of
the Company's board of directors and the Company's largest shareholder. No fees
will be payable by the Company or Castlewood Holdings to J.C. Flowers II LP,
J.C. Flowers & Co. LLC, or J. Christopher Flowers in connection with the
Company's investment in the J.C. Flowers Fund.

RESULTS OF OPERATIONS

  2005 Compared to 2004

     Interest income was approximately $2.3 million in 2005 compared to $983,000
in 2004. Interest income was earned from cash, cash equivalents and certificates
of deposit. Interest income increased substantially during 2005 as a result of
the receipt of approximately $24.0 million in proceeds from the sale of Green
Tree in July 2004, which caused the Company's average cash and certificate of
deposit balance to be approximately $79.4 million in 2005 compared to $74.5
million in 2004. In addition, interest rates earned on the Company's cash, cash
equivalents and certificates of deposit increased during 2005 as evidenced by
federal funds interest rate increases of 3.25% from June 2004 through December
2005.

     Other investment income of approximately $1.8 million in 2005 resulted from
gains on the sale of certain marketable securities from June through December
2005 and the receipt of dividends on those marketable securities.

     Earnings of partially owned equity affiliates were approximately $26.5
million in 2005 compared to $8.3 million in 2004. The Company recorded equity in
earnings of $59,000 and $118,000 from B.H. Acquisition in 2005 and 2004,
respectively. The Company recorded equity in earnings of approximately $26.3
million in 2005 from Castlewood Holdings compared to approximately $4.0 million
in 2004. The Company recorded equity in earnings from Affirmative Investment of
$120,000 for the period from July 1 to December 31, 2005 (the Company made its
initial capital contribution to Affirmative Investment on July 1, 2005). 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). The Company's reported income was reduced
by approximately $3.0 million in 2004 to reflect Castlewood Holdings' minority
interest in Green Tree. Also in 2004, 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 2004, the Company recorded a gain on the sale of its entire interest in
Green Tree of approximately $6.9 million. There were no sales of partially owned
equity affiliates during 2005.

                                        19
<PAGE>

     Other income was $402,000 in 2005 compared to $498,000 in 2004. These
amounts include a quarterly investment advisory fee of $100,000 from Castlewood
Holdings and B.H. Acquisition for each of the four quarters in 2005 and 2004.

     General and administrative expenses were approximately $3.1 million and
approximately $3.0 million in 2005 and 2004, respectively. Of these amounts,
approximately $1.3 million, including non-cash compensation of $33,000 in 2004,
related to employee expenses in both 2005 and 2004, 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 $1.2 million and approximately $1.0 in 2005 and 2004,
respectively.

     Income tax expense was approximately $8.9 million and approximately $4.8
million in 2005 and 2004, respectively. The effective tax rate for 2005 differed
from the statutory rate primarily due to changes in the valuation allowance
related to deferred tax assets and changes in tax contingencies. The Company's
effective tax rate for 2004 approximated the statutory rates.

     Consolidated net income was approximately $19.0 million in 2005 compared to
approximately $10.4 million in 2004. The increase in net income for 2005
compared to 2004 is primarily a result of an increase in earnings from partially
owned equity affiliates of approximately $18.2 million, an increase in interest
income of approximately $1.4 million, the inclusion of other investment income
of approximately $1.8 million in 2005 and the lack of any reduction for minority
interest, which was approximately $3.0 million in 2004. This increase was
partially offset by the gain on sale of partially owned equity affiliates of
approximately $6.9 million and the extraordinary gain, net of income taxes, of
approximately $4.4 million, both of which occurred in 2004.

  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
                                        20
<PAGE>

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. In
December 2003, the Company sold its entire interest in B-Line for approximately
$7.8 million in cash, resulting in a gain of approximately $3.3 million.

     Other income was $498,000 in 2004 compared to $484,000 in 2003. These
amounts include a quarterly investment advisory fee of $100,000 from Castlewood
Holdings and B.H. Acquisition for each of the four quarters in 2004 and 2003.

     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.

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

  2005 Compared to 2004

     Underwriting income for the years ended December 31, 2005 and 2004 was
$96.0 million and $13.7 million, respectively. The underwriting income earned
for both 2005 and 2004 was attributable to the reduction in estimates of
ultimate losses that arose from commutations, policy buy-backs and settlement of
losses in the year below carried reserves and the resulting reductions in
actuarial estimates of losses incurred but not reported.

     Castlewood Holdings earned consulting fees of approximately $22.0 million
and $23.7 million for the years ended December 31, 2005 and 2004, 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 2005 and 2004.

     Castlewood Holdings' share of equity in earnings of partly-owned companies
for the years ended December 31, 2005 and 2004, was $192,000 and $6.9 million,
respectively. The 2005 amount represents Castlewood Holdings' proportionate
share of equity in the earnings of B.H. Acquisition and Cassandra Equity

                                        21
<PAGE>

(Cayman) LP. The 2004 amount also included Castlewood Holdings' proportionate
share of earnings of the JCF CFN Entities.

     Net investment income, including realized gains and losses, for the year
ended December 31, 2005 increased $19.0 million to $29.5 million compared to
$10.5 million for the year ended December 31, 2004. The increase was
attributable to having a larger average cash and investment balance in 2005
($913.9 million) versus 2004 ($446.8 million) and the increase in investment
yield in the year. The average investment return on the cash and fixed
maturities investments for the year ended December 31, 2005 was 3.1% compared to
the average return of 2.3% for the year ended December 31, 2004.

     Castlewood Holdings has recorded a foreign exchange loss of $4.6 million
compared to a foreign exchange gain of $3.7 million in 2004. 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 loss in the current year arose
as a result of Castlewood Holdings having surplus British Pounds and Euro's at
various points in the year. For 2004, the foreign exchange gain arose primarily
as a result of the Company disposing of its surplus Swiss Franc cash balances.

     Salaries and benefits, which include accrued bonuses, were $40.8 million
and $26.3 million for the years ended December 31, 2005 and 2004, 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 2005 compared to 2004 was primarily due
to an increased number of employees and an increase in the bonus accrual.

     General and administrative expenses were $11.0 million and $10.7 million
for the years ended December 31, 2005 and 2004, 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 $914,000 and $1.9 million were recorded for the years ended
December 31, 2005 and 2004, 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 $9.7
million and $3.1 million in 2005 and 2004, respectively, reflecting the
remaining 49.9% economic interest in the earnings from Hillcot.

     Castlewood Holdings reported consolidated net earnings of approximately
$80.7 million in 2005 compared to approximately $38.3 million in 2004. The
increase in 2005 from 2004 was primarily a result of higher underwriting and
investment income offset by higher salaries and benefits costs, a foreign
exchange loss and in 2004, the recording of $21.8 million in negative goodwill.

  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.

                                        22
<PAGE>

     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 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. 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
                                        23
<PAGE>

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.

  B.H. Acquisition

  2005 Compared to 2004

     B.H. Acquisition reported a net underwriting loss of $552,000 for the year
ended December 31, 2005 compared to net underwriting income of $428,000 for the
year ended December 31, 2004.

     Net investment income for the year ended December 31, 2005 was $2.4 million
compared to $1.5 million for the year ended December 31, 2004. Investment income
consists primarily of interest income earned from cash, cash equivalents and
investments. The increase in net investment income in 2005 was attributable to
an increase in the average cash balances along with an increase in interest
rates in the year.

     General and administrative expenses were $2.3 million for the year ended
December 31, 2005 compared to $2.8 million for the year ended December 31, 2004.
General and administrative expenses include professional fees (legal, audit and
actuarial), management and consulting expenses, and provisions for doubtful
accounts. The decrease in 2005 compared to 2004 was primarily a result of a
decrease in legal fees.

     B.H. Acquisition recorded foreign exchange losses of $67,000 and $142,000
for the years ended December 31, 2005 and 2004, respectively. 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.

     Amortization of the run-off provision was $667,000 and $1.3 million for the
years ended December 31, 2005 and 2004, 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 2005 an additional provision of
$667,000 was established and the expected life of the run-off was extended one
year.

     Net earnings for the year ended December 31, 2005 were $179,000 compared to
$359,000 for the year ended December 31, 2004.

  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

                                        24
<PAGE>

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.

RELATED PARTY TRANSACTIONS

     In 2002, the Company entered into an investment advisory agreement with
Castlewood Holdings and B.H. Acquisition for an annual fee of $400,000. This
amount is included in other income in the Company's consolidated statements of
income for each of the three years ended December 31, 2005.

     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 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, 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.

                                        25
<PAGE>

     In June 2005, the Company committed to contribute up to $10 million for a
14%, non-voting interest in Affirmative Investment LLC ("Affirmative
Investment"), a newly formed Delaware limited liability company. J.C. Flowers I
LP committed the capital necessary for the remaining 86% interest in Affirmative
Investment. Both J.C. Flowers I LP and Affirmative Associates LLC, the managing
member of Affirmative Investment, are controlled by Mr. Flowers, a member of the
Company's board of directors and the Company's largest shareholder. As of
December 31, 2005, the Company has funded capital contributions of approximately
$8.3 million.

     In September 2005, the Company entered into an agreement with J.C. Flowers
& Co. LLC continuing through October 2014 for the use of certain office space
and administrative services from J.C. Flowers & Co. LLC for monthly payments of
$4,146. Either party may, at its option with or without cause, terminate this
agreement upon thirty (30) days prior written notice to the other party.

     In December 2005, the Company invested approximately $3.5 million in New
NIB Partners LP ("NIB Partners"), a newly formed Province of Alberta limited
partnership, in exchange for an approximately .2% limited partnership interest.
Castlewood Holdings, through two of its wholly-owned subsidiaries, also invested
approximately $24.5 million in NIB Partners for an approximately 1.4% interest.
NIB Partners was formed for the purpose of purchasing, together with certain
affiliated entities, 100% of the outstanding share capital of NIBC N.V.
(formerly, NIB Capital N.V.) and its affiliated ("NIBC"). NIBC is a merchant
bank focusing on the mid-market segment in northwest Europe with a global
distribution network.

     New NIB Partners and certain related entities are indirectly controlled by
New NIB Limited, an Irish corporation. Mr. Flowers is a director of New NIB
Limited and is on the supervisory board of NIBC. Certain affiliates of J.C.
Flowers I LP also participated in the acquisition of NIBC.

     In December 2005, Castlewood Holdings and Shinsei signed definitive
agreements for the purchase of Aioi Europe, a London-based subsidiary of Aioi
Insurance Company, Limited. The aggregate purchase price to be paid for Aioi
Europe is L62 million (approximately $108 million), with L50 million in cash
upon the closing of the transaction and L12 million in the form of a promissory
note, payable twelve months from the date of the closing. The acquisition will
be effected through Hillcot, a Bermuda-based company, which is jointly owned by
Castlewood Holdings and Shinsei. Castlewood Holdings' commitment is
proportionate to its 50.1% ownership percentage in Hillcot. Subject to
regulatory approval, the acquisition is expected to be completed during the
first quarter of 2006. Mr. Flowers, a member of the Company's board of directors
and the Company's largest shareholder, is a director of Shinsei.

     Also in December 2005 JCF Re Holdings LP ("JCF Re"), a Cayman Limited
partnership, entered into a subscription and shareholders agreement with
Fitzwilliam (SAC) Insurance Limited ("Fitzwilliam"), a wholly owned subsidiary
of Castlewood Holdings, for the establishment of a segregated cell and paid
approximately $1.9 million to Fitzwilliam as capital and contributed surplus.
During 2005, Fitzwilliam booked management fees of $40,000 from JCF Re.

     In February 2006, the Company announced that it approved a commitment of up
to $25.0 million in J.C. Flowers II LP (the "J.C. Flowers Fund"), a private
investment fund to be formed by J.C. Flowers & Co. LLC. The transaction is
expected to close in the second quarter of 2006. The Company intends to use cash
on hand to fund its commitment.

     In March 2006, the Company announced that its partially owned equity
affiliate, Castlewood Holdings, approved a commitment of up to $75.0 million in
the J.C. Flowers Fund. Castlewood Holdings intends to use cash on hand to fund
its commitment.

     J.C. Flowers & Co. LLC is controlled by J. Christopher Flowers, a member of
the Company's board of directors and the Company's largest shareholder. No fees
will be payable by the Company or Castlewood Holdings to J.C. Flowers II LP,
J.C. Flowers & Co. LLC, or J. Christopher Flowers in connection with the
Company's or Castlewood Holdings' investment in the J.C. Flowers Fund.

                                        26
<PAGE>

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. There are a number of
important factors that could cause our actual results to differ materially from
those indicated by such forward-looking statements. These factors include,
without limitation, those set forth in Item 1A. "Risk Factors."

     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, 2005, the Company had cash and cash equivalents of approximately
$54.0 million in interest bearing accounts (interest at floating rates) and
approximately $19.7 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 $737,000 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, 2005 was approximately five 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 three types of market risk through its
holdings in partially owned equity affiliates and their subsidiaries: interest
rate risk, foreign currency risk and credit risk.

     The portfolios of fixed income securities of Castlewood Holdings and B.H.
Acquisition are exposed to interest rate risk. Fluctuation in interest rates
have a direct impact on the market valuation of these securities. In general,
the fair market value of a portfolio of fixed income securities increases or
decreases inversely with changes in market interest rates. Castlewood Holdings
and B.H Acquisition attempt to manage this interest rate risk by monitoring the
duration and structure of their investment portfolios relative to the duration
and structure of their liability portfolios.

     Foreign currency risk is the risk that the Company will incur economic
losses due to adverse changes in foreign currency exchange rates. Castlewood
Holdings and B.H. Acquisition 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. These entities attempt to
manage their exposure to foreign currency exchange risk by broadly matching
assets against liabilities. 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.

     Castlewood Holdings and B.H. Acquisition are also exposed to credit risk on
losses recoverable from reinsurers. These companies' credit risk exposure was
assumed at the time they acquired various subsidiaries. They manage this risk by
conducting a detailed review of each potential acquisition's reinsurance
portfolio during the due diligence process.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                        27
<PAGE>

         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, 2005 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, 2005.

     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.

<Table>
<S>                                                         <C>
                /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 16, 2006
                   March 16, 2006
</Table>

                                        28
<PAGE>

            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, 2005, 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, 2005, 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, 2005, 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, 2005 and the related consolidated
statements of income, comprehensive income, shareholders' equity, and cash flows
for the year then ended, and our report dated March 16, 2006 expressed an
unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP

Birmingham, Alabama
March 16, 2006

                                        29
<PAGE>

                                        30

            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, 2005 and 2004,
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, 2005. 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 interest of $4,235,824 in Green Tree Investment
Holdings II, LLC and Green Tree Investment Holdings III, LLC's net income for
the year ended December 31, 2003, is 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,
2005 and 2004, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2005, in conformity with
accounting principles generally accepted in the United States of America.

     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, 2005,
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 16, 2006 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 16, 2006

                                       30.1
<PAGE>

                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2005       2004
                                                              --------   --------
<S>                                                           <C>        <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 54,032   $ 81,675
  Certificates of deposit...................................    19,686      4,058
  Other current assets......................................       129        132
                                                              --------   --------
       Total current assets.................................    73,847     85,865
Partially owned equity affiliates...........................   107,329     72,618
Other investments...........................................     3,542         --
Other assets................................................       502        494
                                                              --------   --------
       Total assets.........................................  $185,220   $158,977
                                                              ========   ========

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued liabilities..................  $    595   $    345
  Accounts payable to affiliates............................        --        358
  Income taxes payable......................................     5,467        639
                                                              --------   --------
       Total current liabilities............................     6,062      1,342
Deferred income tax liabilities.............................    10,401      7,730
Accrued taxes...............................................     2,325      2,625
Deferred compensation.......................................       853        662
Other liabilities...........................................       456        444
                                                              --------   --------
       Total liabilities....................................    20,097     12,803
                                                              --------   --------
Commitments and contingencies (Note 6)
Shareholders' equity:
  Common stock ($.01 par value; 55,000,000 shares
     authorized, 5,960,260 shares issued at December 31,
     2005 and 2004..........................................        60         60
  Additional paid-in capital................................   190,008    190,008
  Deferred compensation of partially owned equity
     affiliate..............................................       (40)      (125)
  Accumulated other comprehensive income from partially
     owned equity affiliates, net...........................       210        391
  Accumulated deficit.......................................   (19,305)   (38,350)
  Treasury stock, at cost (442,351 shares)..................    (5,810)    (5,810)
                                                              --------   --------
     Total shareholders' equity.............................   165,123    146,174
                                                              --------   --------
     Total liabilities and shareholders' equity.............  $185,220   $158,977
                                                              ========   ========
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        31
<PAGE>

                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

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

<Table>
<Caption>
                                                                   YEAR ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                2005        2004        2003
                                                              ---------   ---------   ---------
<S>                                                           <C>         <C>         <C>
Interest income.............................................  $   2,333   $     983   $     821
Other investment income.....................................      1,824          --          --
Earnings of partially owned equity affiliates...............     26,513       8,348      15,860
Gain on sale of partially owned equity affiliates...........         --       6,911       3,256
Other income (includes related party income of $400 for
  2005, 2004 and 2003)......................................        402         498         484
General and administrative expenses.........................     (3,110)     (2,981)     (3,105)
                                                              ---------   ---------   ---------
Income before income taxes, minority interest and
  extraordinary gain........................................     27,962      13,759      17,316
Income taxes................................................     (8,917)     (4,809)     (2,987)
                                                              ---------   ---------   ---------
Income before minority interest and extraordinary gain......     19,045       8,950      14,329
Minority interest...........................................         --      (2,973)     (1,103)
                                                              ---------   ---------   ---------
Income before extraordinary gain............................     19,045       5,977      13,226
Extraordinary gain, net of income taxes of $2,741...........         --       4,415          --
                                                              ---------   ---------   ---------
Net income..................................................  $  19,045   $  10,392   $  13,226
                                                              =========   =========   =========
Weighted average shares outstanding -- basic................  5,517,909   5,496,819   5,465,753
                                                              =========   =========   =========
Weighted average shares outstanding -- assuming dilution....  5,856,144   5,800,993   5,881,410
                                                              =========   =========   =========
Income per common share before extraordinary gain --basic...  $    3.45   $    1.09   $    2.42
Extraordinary gain, net of income taxes -- basic............         --         .80          --
                                                              ---------   ---------   ---------
Net income per common share -- basic........................  $    3.45   $    1.89   $    2.42
                                                              =========   =========   =========
Income per common share before extraordinary gain --assuming
  dilution..................................................  $    3.25   $    1.03   $    2.25
Extraordinary gain, net of income taxes -- assuming
  dilution..................................................         --         .76          --
                                                              ---------   ---------   ---------
Net income per common share -- assuming dilution............  $    3.25   $    1.79   $    2.25
                                                              =========   =========   =========
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        32
<PAGE>

                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                             (DOLLARS IN THOUSANDS)

<Table>
<Caption>
                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                               2005      2004      2003
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
Net income..................................................  $19,045   $10,392   $13,226
Other comprehensive income (loss):
  Unrealized holding gains (losses) on investments, net of
     income tax expense (benefit) of $761, $0 and $(364)....    1,226        --      (586)
  Reclassification adjustment for (gains) losses included in
     net income, net of income tax (expense) benefit of
     $(761), $(199) and $548................................   (1,226)     (321)      882
  Unrealized gain (loss) on cash flow hedge, net of income
     tax (benefit) expense of $(41) and $41.................       --       (66)       66
  Currency translation adjustment, net of income tax
     (benefit) expense of $(112), $68 and $112..............     (181)      109       181
                                                              -------   -------   -------
Other comprehensive income (loss)...........................     (181)     (278)      543
                                                              -------   -------   -------
Comprehensive income........................................  $18,864   $10,114   $13,769
                                                              =======   =======   =======
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        33
<PAGE>

                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                             (DOLLARS IN THOUSANDS)

<Table>
<Caption>
                                                                        ACCUMULATED
                                                                           OTHER
                                                                       COMPREHENSIVE
                                                          DEFERRED        INCOME
                                                        COMPENSATION     (LOSS) OF
                                           ADDITIONAL   OF PARTIALLY     PARTIALLY
                                  COMMON    PAID-IN     OWNED EQUITY   OWNED EQUITY    ACCUMULATED   TREASURY
                                  STOCK     CAPITAL      AFFILIATES     AFFILIATES       DEFICIT      STOCK      TOTAL
                                  ------   ----------   ------------   -------------   -----------   --------   --------
<S>                               <C>      <C>          <C>            <C>             <C>           <C>        <C>
Balance at January 1, 2003......   $59      $188,425       $(583)         $   126       $(61,968)    $(5,810)   $120,249
  Net income....................                                                          13,226                  13,226
  Amortization of deferred
    compensation................                             299                                                     299
  Unrealized holding losses on
    investments.................                                             (586)                                  (586)
  Reclassification adjustment
    for losses included in net
    income......................                                              882                                    882
  Unrealized gain on hedge
    assets......................                                               66                                     66
  Currency translation
    adjustment..................                                              181                                    181
  Issuance of officers' stock
    options.....................                 166                                                                 166
                                   ---      --------       -----          -------       --------     -------    --------
Balance at December 31, 2003....    59       188,591        (284)             669        (48,742)     (5,810)    134,483
  Net income....................                                                          10,392                  10,392
  Amortization of deferred
    compensation................                             159                                                     159
  Reclassification adjustment
    for gains included in net
    income......................                                             (321)                                  (321)
  Unrealized loss on hedge
    assets......................                                              (66)                                   (66)
  Currency translation
    adjustment..................                                              109                                    109
  Exercise of stock options.....     1           554                                                                 555
  Issuance of shares from
    deferred compensation
    plan........................                 224                                                                 224
  Tax benefit from exercise of
    stock options and issuance
    of shares from deferred
    compensation plan...........                 606                                                                 606
  Issuance of officers' stock
    options.....................                  33                                                                  33
                                   ---      --------       -----          -------       --------     -------    --------
Balance at December 31, 2004....    60       190,008        (125)             391        (38,350)     (5,810)    146,174
  Net income....................                                                          19,045                  19,045
  Amortization of deferred
    compensation................                              85                                                      85
  Unrealized holding gains on
    investments.................                                            1,226                                  1,226
  Reclassification adjustment
    for gains included in net
    income......................                                           (1,226)                                (1,226)
  Currency translation
    adjustment..................                                             (181)                                  (181)
                                   ---      --------       -----          -------       --------     -------    --------
Balance at December 31, 2005....   $60      $190,008       $ (40)         $   210       $(19,305)    $(5,810)   $165,123
                                   ===      ========       =====          =======       ========     =======    ========
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        34
<PAGE>

                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2005       2004       2003
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
  Net income................................................  $ 19,045   $ 10,392   $ 13,226
  Adjustments to reconcile net income to net cash provided
     by operating activities:
     Earnings of partially owned equity affiliates..........   (26,513)    (8,348)   (15,860)
     Dividends and distributions received from partially
       owned equity affiliates..............................        11     10,216     20,826
     Minority interest in earnings of JCF CFN...............        --      2,973      1,103
     Gain on sale of marketable securities..................    (1,768)        --         --
     Gain on sale of partially owned equity affiliates......        --     (6,911)    (3,256)
     Extraordinary gain, net of income taxes................        --     (4,415)        --
     Noncash compensation expense...........................        --         33        166
     Deferred income taxes..................................     2,482      5,395        688
     Tax benefit from exercise of stock options and issuance
       of shares from deferred compensation plan............        --        606         --
  Changes in assets and liabilities:
     Accounts payable and accrued expenses..................     4,708     (1,594)    (3,014)
     Other, net.............................................        23        270        705
                                                              --------   --------   --------
       Net cash (used in) provided by operating
          activities........................................    (2,012)     8,617     14,584
                                                              --------   --------   --------
Cash flows from investing activities:
  Purchase of marketable securities.........................    (9,460)        --         --
  Proceeds from sale of marketable securities...............    11,228         --         --
  Proceeds from sale of partially owned equity affiliates...        --     32,831      7,766
  Capital contribution to Affirmative Investment LLC........    (8,406)        --         --
  Investment in NIB Partners................................    (3,542)        --         --
  Capital contribution to Castlewood Holdings Limited.......        --         --     (7,169)
  Investment of JCF CFN in Green Tree.......................        --         --    (24,744)
  Purchase of certificates of deposit.......................   (22,097)    (8,120)   (10,213)
  Maturities of certificates of deposit.....................     6,646      8,145     10,162
                                                              --------   --------   --------
       Net cash (used in) provided by investing
          activities........................................   (25,631)    32,856    (24,198)
                                                              --------   --------   --------
Cash flows from financing activities:
  Minority interest's capital contribution in JCF CFN,
     net....................................................        --         --     10,006
  Distributions to minority interest........................        --    (16,120)        --
  Proceeds from exercise of stock options...................        --        555         --
                                                              --------   --------   --------
       Net cash (used in) provided by financing
          activities........................................        --    (15,565)    10,006
                                                              --------   --------   --------
Increase (decrease) in cash and cash equivalents............   (27,643)    25,908        392
Cash and cash equivalents at the beginning of the year......    81,675     55,767     55,375
                                                              --------   --------   --------
Cash and cash equivalents at the end of the year............  $ 54,032   $ 81,675   $ 55,767
                                                              ========   ========   ========
Supplemental disclosures of cash flow information: Income
  taxes paid................................................  $  1,606   $    731   $  5,332
                                                              ========   ========   ========
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        35
<PAGE>

                    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 and since that time have been
inactive. See Note 4 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 subsidiaries, Enstar
Financial Services, Inc. and Enstar Group Operations, Inc, both of which are
currently inactive. 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

                                        36
<PAGE>
                    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, which consists of
leasehold improvements and furniture and fixtures, 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.
Property and equipment is included in other assets in the Company's consolidated
balance sheets. Property and equipment was immaterial as of December 31, 2005
and 2004.

     (f) Financial Instruments -- The Company holds certificates of deposit
("CDs") offered by commercial banks. These certificates had a weighted average
maturity of approximately five months at December 31, 2005. The estimated fair
value of CDs at December 31, 2005 and 2004, 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:

<Table>
<Caption>
                                                              DECEMBER 31,
                                                              -------------
                                                              2005    2004
                                                              -----   -----
<S>                                                           <C>     <C>
Currency translation adjustment, net of income tax expense
  of $130 and $243..........................................  $210    $391
                                                              ====    ====
</Table>

     (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 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. The JCF CFN Entities have been inactive since the sale of their
entire interests in Green Tree in July 2004.

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123R supersedes Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and amends SFAS No. 95, "Statement of Cash Flows." The

                                        37
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

approach in SFAS 123R generally is similar to the approach described in SFAS
123. However, SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the earnings
statements based on their grant date fair values. Pro forma disclosure will no
longer be an alternative.

     The Company adopted SFAS 123R as of January 1, 2006 using the
modified-prospective method. Under this transition method, compensation cost is
recognized beginning with the effective date (a) based on the requirements of
SFAS 123R for all share-based payments granted after the effective date and (b)
based on the requirements of SFAS 123 for all awards granted to employees prior
to the effective date of SFAS 123R that remain unvested on the effective date.
As permitted by SFAS 123, through December 31, 2005 the Company accounted for
share-based payments to employees using APB 25's intrinsic value method and, as
such, generally has not recognized compensation cost for employee stock options.
We estimate that 2006 pretax compensation expense for stock options will be
approximately $213,000.

     SFAS 123R also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as previously required. This requirement will
reduce net operating cash flows and increase net financing cash flows. While we
cannot estimate what those amounts will be in the future (because they depend
on, among other things, when stock options will be exercised), the amounts of
operating cash flows recognized in prior periods for such excess tax deductions
were $0 and $606,000 in 2005 and 2004, respectively.

     (k) Revenue Recognition -- Revenue includes interest income earned from
cash, cash equivalents and certificates of deposit, the Company's proportionate
share of earnings from partially owned equity affiliates, gains on sales of
marketable securities and other income. 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,
2005, 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

                                        38
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company's pro forma net income and net income per share for 2005, 2004 and 2003
would have been as follows:

<Table>
<Caption>
                                                           2005      2004      2003
                                                          -------   -------   -------
                                                            (DOLLARS IN THOUSANDS,
                                                            EXCEPT PER SHARE DATA)
<S>                                                       <C>       <C>       <C>
Net income, as reported.................................  $19,045   $10,392   $13,226
Add: Stock-based employee compensation expense included
  in reported net income, net of income taxes...........      118       138       102
Deduct: Total stock-based employee compensation expense
  determined under fair value based method for all
  awards, net of income taxes...........................     (365)     (555)     (361)
                                                          -------   -------   -------
Pro forma net income....................................  $18,798   $ 9,975   $12,967
                                                          =======   =======   =======
Income per common share:
  Basic -- as reported..................................  $  3.45   $  1.89   $  2.42
                                                          =======   =======   =======
  Basic -- pro forma....................................  $  3.41   $  1.81   $  2.37
                                                          =======   =======   =======
  Assuming dilution -- as reported......................  $  3.25   $  1.79   $  2.25
                                                          =======   =======   =======
  Assuming dilution -- pro forma........................  $  3.21   $  1.72   $  2.20
                                                          =======   =======   =======
</Table>

     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 straight-line vesting of such awards over the full vesting period.

     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:

<Table>
<Caption>
                                                              2005    2004    2003
                                                              -----   -----   -----
<S>                                                           <C>     <C>     <C>
Risk-free interest rate.....................................   3.03%   3.08%   3.88%
Dividend yield..............................................   0.00%   0.00%   0.00%
Expected volatility.........................................  21.74%  20.46%  22.58%
Expected life, in years.....................................   4.37    2.12    2.35
</Table>

     Based on these assumptions, the estimated weighted average fair value at
the date of grant for options vesting during the years ended December 31, 2005,
2004 and 2003 were $9.50, $5.15 and $5.14, respectively.

     (m) Other Income -- Other income includes $400,000 for each of the three
years ended December 31, 2005 in investment advisory fees charged to Castlewood
Holdings and BH Acquisition, partially owned equity affiliates of the Company.

     (n) Currency Translation Adjustment -- The Company records foreign currency
translation adjustments as its portion of other comprehensive income from its
partially owned equity affiliates. Through their subsidiaries, Castlewood
Holdings and B.H. Acquisition conduct 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 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.

NOTE 3:  MARKETABLE SECURITIES

     In June 2005, the Company purchased certain shares of common stock in a
publicly-traded U.S. corporation for approximately $9.5 million. The Company
sold these securities for total proceeds of

                                        39
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

approximately $11.2 million, resulting in a realized gain of approximately $1.8
million. This gain is included in other investment income in the Company's
consolidated statements of income.

NOTE 4:  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. 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.

     (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"). 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 32.63% 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, 2005, the Company's beneficial
ownership in B.H. Acquisition was 47.68%. The Company's combined voting interest
in B.H. Acquisition is limited to 50%.

     In conjunction with the closing of the Castlewood Holdings Transaction, a
wholly owned subsidiary of Castlewood Holdings 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.

     Also in 2002, Castlewood Holdings capitalized 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.

     In March 2003, Castlewood Holdings and Shinsei Bank, Limited ("Shinsei")
completed the acquisition of all of the outstanding capital stock of The Toa-Re
Insurance Company (UK) Limited ("Toa-UK"), a London-based subsidiary of The Toa
Reinsurance Company, Limited, for approximately $46 million. Toa-UK underwrote
reinsurance business throughout the world between 1980 and 1994, when it stopped
writing new business and is currently operating in run-off. The acquisition was
effected through Hillcot Holdings Ltd. ("Hillcot"), a newly formed Bermuda
company, in which Castlewood Holdings has a 50.1% economic interest and a 50%
voting interest. Upon completion of the transaction, Toa-UK's name was changed
to Hillcot Re Limited. Hillcot is included in Castlewood Holdings' consolidated
financial statements, with the remaining
                                        40
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 and the largest shareholder 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 implemented an employee stock-based
compensation plan. The plan allows for the award of Castlewood Holdings' Class D
non-voting shares to certain senior employees up to a maximum of 7.5% of the
total issued share capital of Castlewood Holdings. As a result of awards made in
2005 and 2004, the Company's economic interest in Castlewood Holdings of 33 1/3%
has been diluted by 0.70% to 32.63% as of December 31, 2005. As awarded shares
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 owned 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., Harper Insurance
Limited and Longmynd Insurance Company 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.

     In May 2005, Castlewood Holdings, through one of its subsidiaries,
purchased Fieldmill Insurance Company Limited (formerly known as Harleysville
Insurance Company (UK) Limited) for approximately $1.4 million.

     In December 2005, Castlewood Holdings and Shinsei signed definitive
agreements for the purchase of Aioi Insurance Company of Europe Limited ("Aioi
Europe"), a London-based subsidiary of Aioi Insurance Company, Limited. Aioi
Europe has underwritten general insurance and reinsurance business in Europe for
its own account until 2002 when it generally ceased underwriting, and placed
into run-off, its general insurance and reinsurance business. The aggregate
purchase price to be paid for Aioi Europe is L62 million (approximately $108
million), with L50 million in cash upon the closing of the transaction and L12
million in the form of a promissory note, payable twelve months from the date of
the closing. The acquisition will be effected through Hillcot, a Bermuda-based
company, which is jointly owned by Castlewood Holdings and Shinsei. Subject to
regulatory approval, the acquisition is expected to be completed during the
first quarter of 2006.

     (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.
                                        41
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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.

     (e) Affirmative Investment LLC -- In June 2005, the Company committed to
contribute up to $10 million for a 14%, non-voting interest in Affirmative
Investment LLC ("Affirmative Investment"), a newly formed Delaware limited
liability company. J.C. Flowers I LP committed the capital necessary for the
remaining 86% interest in Affirmative Investment. Both J.C. Flowers I LP and
Affirmative Associates LLC, the managing member of Affirmative Investment, are
controlled by Mr. Flowers, a member of the Company's board of directors and the
Company's largest shareholder. In July 2005, the Company funded its initial
capital contribution of approximately $2.6 million. Since that time, the Company
has funded additional capital contributions of approximately $5.7 million. At
December 31, 2005, the Company's total investment in Affirmative Investment was
approximately $8.5 million, including equity in earnings from July 1 to December
31, 2005. The Company's ownership in Affirmative Investment is accounted for
using the equity method of accounting.

     Also in June 2005, Affirmative Investment acquired 1,183,000 shares of
common stock of Affirmative Insurance Holdings, Inc. ("Affirmative Insurance"),
through open market purchases. In August, Affirmative Investment acquired 50% of
the membership interests of New Affirmative LLC ("NAL"), a newly formed Delaware
limited liability company, for approximately $40.7 million in cash and the
1,183,000 shares of Affirmative Insurance. The remaining 50% of the membership
interests of NAL were acquired by Delaware Street Capital Master Fund, LP or its
affiliates ("DSC") for approximately $37.5 million in cash and 1,459,699 shares
of Affirmative Insurance common stock. In turn, NAL, pursuant to a Stock
Purchase Agreement with Vesta Insurance Group, Inc. ("VIG") and Vesta Fire
Insurance Corporation, a subsidiary of VIG (together with VIG, "Vesta"),
acquired from Vesta an aggregate of 5,218,228 shares of Affirmative Insurance
common stock for a purchase price of $15.00 per share. Upon the closing of the
transaction with Vesta and the transfer of the shares of Affirmative Insurance
from Affirmative Investment and DSC, NAL's ownership percentage in Affirmative
Insurance was approximately 52.9%. Affirmative Investment's ownership in NAL is
accounted for using the equity method of accounting. Affirmative Investment
accounts for its investment in NAL three months in arrears.

     (f) 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, 2005 and 2004 and for each of the three years

                                        42
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ended December 31, 2005. Summarized financial information for Affirmative
Investment is presented as of December 31, 2005 and for the period from June 30,
2005 (date of formation) through December 31, 2005. 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 period 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 Affirmative Investment is
derived from its 2005 unaudited 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.

<Table>
<Caption>
                                                                DECEMBER 31, 2005
                                                      --------------------------------------
                                                         B.H.       CASTLEWOOD   AFFIRMATIVE
                                                      ACQUISITION    HOLDINGS    INVESTMENT
                                                      -----------   ----------   -----------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                   <C>           <C>          <C>
Total assets........................................   $105,578     $1,199,963     $60,199
Total liabilities...................................     66,733        898,513          --
Minority interest...................................         --         40,544          --
Total equity........................................     38,845        260,906      60,199
</Table>

<Table>
<Caption>
                                                                 DECEMBER 31, 2004
                                                              ------------------------
                                                                 B.H.       CASTLEWOOD
                                                              ACQUISITION    HOLDINGS
                                                              -----------   ----------
                                                               (DOLLARS IN THOUSANDS)
<S>                                                           <C>           <C>
Total assets................................................   $110,414     $1,347,853
Total liabilities...........................................     71,748      1,139,123
Minority interest...........................................         --         31,392
Total equity................................................     38,666        177,338
</Table>

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31, 2005
                                                       --------------------------------------
                                                          B.H.       CASTLEWOOD   AFFIRMATIVE
                                                       ACQUISITION    HOLDINGS    INVESTMENT
                                                       -----------   ----------   -----------
                                                               (DOLLARS IN THOUSANDS)
<S>                                                    <C>           <C>          <C>
Revenue..............................................                 $22,006
Underwriting income (loss)...........................     $(552)       96,007
Operating income.....................................        --            --       $2,246
Net income...........................................       179        80,710          856
</Table>

<Table>
<Caption>
                                                          YEAR ENDED DECEMBER 31, 2004
                                                      -------------------------------------
                                                         B.H.       CASTLEWOOD
                                                      ACQUISITION    HOLDINGS    GREEN TREE
                                                      -----------   ----------   ----------
                                                             (DOLLARS IN THOUSANDS)
<S>                                                   <C>           <C>          <C>
Revenue.............................................                 $23,703      $262,327
Underwriting income.................................     $428         13,706            --
Operating income....................................       --             --       123,842
Net income..........................................      359         38,294        99,114
</Table>

                                        43
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                      YEAR ENDED DECEMBER 31, 2003
                                             -----------------------------------------------
                                                          B.H.       CASTLEWOOD
                                             B-LINE    ACQUISITION    HOLDINGS    GREEN TREE
                                             -------   -----------   ----------   ----------
                                                         (DOLLARS IN THOUSANDS)
<S>                                          <C>       <C>           <C>          <C>
Revenue....................................  $67,958                  $24,746      $244,758
Underwriting income (loss).................       --      $(230)       24,044            --
Operating income...........................   20,215         --            --       100,699
Net income.................................   20,215        888        30,592        96,318
</Table>

     The Company's consolidated accumulated deficit includes undistributed
earnings of its partially owned equity affiliates of approximately $52.6 million
and approximately $26.1 million at December 31, 2005 and 2004, respectively.

NOTE 5:  OTHER INVESTMENTS

     In December 2005, the Company invested approximately $3.5 million in New
NIB Partners LP ("NIB Partners"), a newly formed Province of Alberta limited
partnership, in exchange for an approximately .2% limited partnership interest.
Castlewood Holdings, through two of its wholly-owned subsidiaries, also invested
approximately $24.5 million in NIB Partners for an approximately 1.4% interest.
NIB Partners was formed for the purpose of purchasing, together with certain
affiliated entities, 100% of the outstanding share capital of NIBC N.V.
(formerly, NIB Capital N.V.) and its affiliates ("NIBC"). NIBC is a merchant
bank focusing on the mid-market segment in northwest Europe with a global
distribution network. The Company's investment in NIB Partners is accounted for
at cost.

     New NIB Partners and certain related entities are indirectly controlled by
New NIB Limited, an Irish corporation. Mr. Flowers is a director of New NIB
Limited and is on the supervisory board of NIBC. Certain affiliates of J.C.
Flowers I LP also participated in the acquisition of NIBC.

NOTE 6:  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. In December 2005, the Company signed a one
year renewal option beginning January 1, 2006. 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 September 2005, the Company entered into an agreement with J.C.
Flowers & Co. LLC continuing through October 2014 for the use of certain office
space and administrative services from J.C. Flowers & Co. LLC for monthly
payments of $4,146. Either party may, at its option with or without cause,
terminate this agreement upon thirty (30) days prior written notice to the other
party. 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. Including payments made to J.C. Flowers & Co.
LLC, the Company incurred rent expense in the amount of $77,000, $80,000 and
$80,000 for the three years ended December 31, 2005, 2004 and 2003,
respectively.

     In February 2006, the Company announced that it approved a commitment of up
to $25.0 million in J.C. Flowers II LP (the "J.C. Flowers Fund"), a private
investment fund to be formed by J.C. Flowers & Co. LLC. The transaction is
expected to close in the second quarter. The Company intends to use cash on hand
to fund its commitment.

                                        44
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     J.C. Flowers & Co. LLC is controlled by J. Christopher Flowers, a member of
the Company's board of directors and the Company's largest shareholder. No fees
will be payable by the Company to J.C Flowers II LP, J.C. Flowers & Co. LLC, or
J. Christopher Flowers in connection with the Company's investment in the J.C.
Flowers Fund.

NOTE 7:  INCOME TAXES

     The provision for income taxes consists of the following components:

<Table>
<Caption>
                                                              2005     2004     2003
                                                             ------   ------   ------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                          <C>      <C>      <C>
Current tax expense (benefit)..............................  $6,134   $ (586)  $2,299
Deferred taxes.............................................   2,783    5,395      688
                                                             ------   ------   ------
                                                             $8,917   $4,809   $2,987
                                                             ======   ======   ======
</Table>

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

<Table>
<Caption>
                                                            2005     2004      2003
                                                           ------   -------   -------
                                                             (DOLLARS IN THOUSANDS)
<S>                                                        <C>      <C>       <C>
Federal income taxes at statutory rate...................  $9,507   $ 4,678   $ 5,887
State income taxes, net of federal benefit...............     (86)      502       291
Minority interest........................................      --    (1,011)     (375)
Change in valuation allowance............................    (189)      640    (2,818)
Other....................................................    (315)       --         2
                                                           ------   -------   -------
                                                           $8,917   $ 4,809   $ 2,987
                                                           ======   =======   =======
</Table>

     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, 2005 and 2004:

<Table>
<Caption>
                                                                 2005         2004
                                                              ----------   ----------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>          <C>
Deferred income tax assets:
  Alternative minimum tax credit carryforwards..............   $    631     $  4,850
  Losses of partially owned equity affiliates...............      6,172        5,171
  Other.....................................................      1,262          992
                                                               --------     --------
  Deferred tax assets.......................................      8,065       11,013
  Valuation allowance.......................................     (5,624)      (5,813)
                                                               --------     --------
                                                                  2,441        5,200
                                                               --------     --------
Deferred income tax liabilities:
  Undistributed earnings of partially owned equity
     affiliates.............................................    (12,712)     (12,687)
  Other.....................................................       (130)        (243)
                                                               --------     --------
                                                                (12,842)     (12,930)
                                                               --------     --------
     Net deferred tax liabilities...........................   $ 10,401     $  7,730
                                                               ========     ========
</Table>

     The Company provides U.S. taxes for the anticipated repatriation of certain
earnings of foreign subsidiaries. Losses incurred by those foreign subsidiaries
result in deferred tax assets. The ultimate realization of the deferred tax
assets depends on the ability to generate sufficient taxable income in the
future in the appropriate jurisdictions. 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 Company has provided a valuation allowance for
operating losses of partially owned foreign subsidiaries for the years 2005 and
2004, respectively. During 2005

                                        45
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and 2004, the Company changed the valuation allowance by approximately
$(189,000) and $640,000, respectively to approximately $5.6 million and $5.8
million, respectively. During 2003, the Company decreased the valuation
allowance by approximately $2.8 million to approximately $5.2 million 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, 2005, the accrual of $2.3 million for tax
contingencies is reflected in accrued taxes on the balance sheet.

NOTE 8:  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, 2005, 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,
2005.

     (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 9:  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
                                        46
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 $853,000 and $662,000 in stock compensation were
deferred under this plan as of December 31, 2005, and 2004, 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 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 and 2003 of $19,000 and $95,000, 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 and 2003 of $14,000 and $71,000,
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.

                                        47
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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, a member of the Company's board of directors. 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.

     In April 2005, under the Incentive Plan, the Company granted 5,000 options
to Paul J. Collins, a member of the Company's board of directors. The options
granted to Mr. Collins vest on April 4, 2006, have an exercise price of $57.81,
the closing market price on the date of grant, and expire in April 2015.

     Transactions under the Company's stock option/incentive plans as of and for
the three years ended December 31, 2005 are as follows:

<Table>
<Caption>
                                                             2005      2004      2003
                                                            -------   -------   -------
<S>                                                         <C>       <C>       <C>
Under option, January 1...................................  720,000   760,000   595,000
Granted...................................................    5,000        --   165,000
Exercised.................................................       --   (40,000)       --
                                                            -------   -------   -------
Under option, December 31.................................  725,000   720,000   760,000
                                                            =======   =======   =======
Exercisable, December 31..................................  600,000   560,000   540,000
                                                            =======   =======   =======
Available to be granted, December 31......................   52,500    57,500    57,500
                                                            =======   =======   =======
Weighted average exercise prices per share:
  Under option, January 1.................................  $ 20.21   $ 19.88   $ 14.30
  Granted.................................................    57.81        --     40.00
  Exercised...............................................       --     13.85        --
  Under option, December 31...............................    20.47     20.21     19.88
  Exercisable, December 31................................    16.25     14.56     13.85
</Table>

Stock options outstanding and exercisable under these plans as of December 31,
2005 were:

<Table>
<Caption>
                          OUTSTANDING                                    EXERCISABLE
---------------------------------------------------------------  ----------------------------
  RANGES OF                                    WEIGHTED AVERAGE
   EXERCISE     NUMBER OF   WEIGHTED AVERAGE      REMAINING      NUMBER OF   WEIGHTED AVERAGE
    PRICES       OPTIONS     EXERCISE PRICE    CONTRACTUAL LIFE   OPTIONS     EXERCISE PRICE
  ---------     ---------   ----------------   ----------------  ---------   ----------------
<S>             <C>         <C>                <C>               <C>         <C>
  $10 -- 20      555,000         $14.33           3.5 years       555,000         $14.33
   40 -- 60      170,000          40.52           7.7 years        45,000         $40.00
</Table>

NOTE 10:  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
2005, 2004 and 2003. 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

                                        48
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

under the Deferred Compensation and Stock Plan for Non-Employee Directors and
stock options granted under the Company's stock option/incentive plans (Note 9).

<Table>
<Caption>
                                                          2005        2004        2003
                                                        ---------   ---------   ---------
                                                             (DOLLARS IN THOUSANDS,
                                                             EXCEPT PER SHARE DATA)
<S>                                                     <C>         <C>         <C>
Income before extraordinary gain......................  $  19,045   $   5,977   $  13,226
Extraordinary gain, net of income taxes...............         --       4,415          --
                                                        ---------   ---------   ---------
Net income............................................  $  19,045   $  10,392   $  13,226
                                                        =========   =========   =========
Income per common share before extraordinary
  gain -- basic.......................................  $    3.45   $    1.09   $    2.42
Extraordinary gain, net of income taxes -- basic......         --         .80          --
                                                        ---------   ---------   ---------
Net income per common share -- basic..................  $    3.45   $    1.89   $    2.42
                                                        =========   =========   =========
Income per common share before extraordinary gain --
  assuming dilution...................................  $    3.25   $    1.03   $    2.25
Extraordinary gain, net of income taxes -- assuming
  dilution............................................         --         .76          --
                                                        ---------   ---------   ---------
Net income per common share -- assuming dilution......  $   3.252   $    1.79   $    2.25
                                                        =========   =========   =========
Weighted average shares outstanding -- basic..........  5,517,909   5,496,819   5,465,753
Common share equivalents..............................    338,235     304,174     415,657
                                                        =========   =========   =========
Weighted average shares outstanding -- assuming
  dilution............................................  5,856,144   5,800,993   5,881,410
                                                        =========   =========   =========
</Table>

     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, 2005 and 2004.

NOTE 11:  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. Because the Company separately evaluates the financial results of
each of its partially owned equity affiliates on a gross basis, the amounts
presented herein represent the gross results of each entity. The amounts in
excess of the Company's ownership percentage are eliminated as part of the
reconciliation from the gross amounts presented to the measure of profit or loss
included in the consolidated financial statements. Prior to the sale of the
Company's interests in Green Tree and B-Line in July 2004 and December 2003,
respectively, the Company separately evaluated the performance of the JCF CFN
Entities and B-Line. The Company also reviews separate financial results for
Affirmative Investment 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. Affirmative Investment was formed to facilitate the participation of
its members in the purchase, sale and ownership of membership interests of NAL
and common stock of Affirmative Insurance. The JCF CFN Entities were formed to
serve as a member of Green Tree which, in turn, was formed to effect the
acquisition of a portfolio of home equity and manufactured housing loan
securities and associated servicing businesses from Conseco Finance. 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.

                                        49
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The consolidated financial information for B.H. Acquisition and Castlewood
Holdings is reported for all years presented. Summarized financial information
for Affirmative Investment is presented as of December 31, 2005 and for the
period from June 30, 2005 (date of formation) to December 31, 2005. 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 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
period 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, 2005 and 2004 and
for each of the three years ended December 31, 2005 is as follows:

<Table>
<Caption>
                                                        DECEMBER 31, 2005
                                  -------------------------------------------------------------
                                                 B.H.       CASTLEWOOD   AFFIRMATIVE
                                  CORPORATE   ACQUISITION    HOLDINGS    INVESTMENT     TOTAL
                                  ---------   -----------   ----------   -----------   --------
                                                     (DOLLARS IN THOUSANDS)
<S>                               <C>         <C>           <C>          <C>           <C>
Total reportable segment assets:
  Partially owned equity
     affiliates.................                $12,906      $85,908       $8,515      $107,329
  Corporate assets..............   $77,891                                               77,891
                                   -------      -------      -------       ------      --------
     Total......................   $77,891      $12,906      $85,908       $8,515      $185,220
                                   =======      =======      =======       ======      ========
</Table>

<Table>
<Caption>
                                                           DECEMBER 31, 2004
                                            -----------------------------------------------
                                                           B.H.       CASTLEWOOD
                                            CORPORATE   ACQUISITION    HOLDINGS     TOTAL
                                            ---------   -----------   ----------   --------
                                                        (DOLLARS IN THOUSANDS)
<S>                                         <C>         <C>           <C>          <C>
Total reportable segment assets:
  Partially owned equity affiliates.......                $12,843      $59,775     $ 72,618
  Corporate assets........................   $86,359                                 86,359
                                             -------      -------      -------     --------
     Total................................   $86,359      $12,843      $59,775     $158,977
                                             =======      =======      =======     ========
</Table>

                                        50
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                   YEAR ENDED DECEMBER 31, 2005
                                   ------------------------------------------------------------
                                                  B.H.       CASTLEWOOD   AFFIRMATIVE
                                   CORPORATE   ACQUISITION    HOLDINGS    INVESTMENT     TOTAL
                                   ---------   -----------   ----------   -----------   -------
                                                      (DOLLARS IN THOUSANDS)
<S>                                <C>         <C>           <C>          <C>           <C>
Net underwriting (loss) income...                $  (552)     $ 96,007
Revenue..........................                               22,006
Net investment income............   $ 1,824        2,406        29,504      $(1,390)
Interest income..................     2,333                                       1
Share of net income of
  partly-owned companies.........                                  192        2,245
General and administrative
  expenses.......................    (3,110)      (2,275)      (51,783)
Amortization of run-off
  provision......................                    667
Other income.....................       402
Foreign exchange loss............                    (67)       (4,602)
                                    -------      -------      --------      -------
Income before income taxes.......     1,449          179        91,324          856
Income taxes.....................    (8,917)                      (914)
Minority interest................                               (9,700)
                                    -------      -------      --------      -------
Net income (loss)................   $(7,468)     $   179      $ 80,710      $   856
                                    =======
Company's economic ownership %...                     33%        32.63%          14%
                                                 -------      --------      -------
Earnings of partially owned
  equity affiliates..............                $    59      $ 26,334      $   120     $26,513
                                                 =======      ========      =======     =======
</Table>

     The Company's economic ownership percentage in Castlewood Holdings
decreased from 32.89% to 32.63% during the second quarter of 2005. The Company's
economic ownership percentage used in the above table represents a weighted
average for the year (Note 4).

                                        51
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                          YEAR ENDED DECEMBER 31, 2004
                                             -------------------------------------------------------
                                                            B.H.       CASTLEWOOD
                                             CORPORATE   ACQUISITION    HOLDINGS    JCF CFN   TOTAL
                                             ---------   -----------   ----------   -------   ------
                                                             (DOLLARS IN THOUSANDS)
<S>                                          <C>         <C>           <C>          <C>       <C>
Net underwriting income....................                $   428      $ 13,706
Revenue....................................                               23,703
Net investment income......................                  1,489        10,502
Interest income............................   $   983
Share of net income of partly-owned
  companies................................                                6,881    $4,255
General and administrative expenses........    (2,981)      (2,839)      (36,967)
Amortization of run-off provision..........                  1,333
Gain on sale of Green Tree.................     6,911
Other income...............................       498           90
Foreign exchange gain (loss)...............                   (142)        3,731
                                              -------      -------      --------    ------
Income before income taxes.................     5,411          359        21,556     4,255
Income taxes...............................    (7,550)                    (1,924)
Minority interest..........................    (2,973)                    (3,097)
                                              -------      -------      --------    ------
Income (loss) before extraordinary gain....    (5,112)         359        16,535     4,255
Extraordinary gain.........................                               21,759
                                              -------      -------      --------    ------
Net income (loss)..........................   $(5,112)     $   359      $ 38,294    $4,255
                                              =======
Company's economic ownership %.............                     33%        32.95%
                                                           -------      --------    ------
                                                                          12,618
Company's portion of earnings from JCF
  CFN......................................                               (1,487)
Company's portion of pre-tax extraordinary
  gain.....................................                               (7,156)
                                                                        --------
Earnings of partially owned equity
  affiliates...............................                $   118      $  3,975    $4,255    $8,348
                                                           =======      ========    ======    ======
</Table>

     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

                                        52
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 4).

<Table>
<Caption>
                                                    YEAR ENDED DECEMBER 31, 2003
                                 -------------------------------------------------------------------
                                                           B.H.       CASTLEWOOD
                                 CORPORATE    B-LINE    ACQUISITION    HOLDINGS    JCF CFN    TOTAL
                                 ---------   --------   -----------   ----------   -------   -------
                                                       (DOLLARS IN THOUSANDS)
<S>                              <C>         <C>        <C>           <C>          <C>       <C>
Net underwriting income
  (loss).......................                           $  (230)     $ 24,044
Revenue........................              $ 67,958                    24,746
Net investment income..........                             1,331         7,072
Interest income................   $   821
Share of net income of partly-
  owned companies..............                                           1,623    $4,236
General and administrative
  expenses.....................    (3,105)    (38,890)     (1,648)      (22,654)
Amortization of run-off
  provision....................                               500
Interest expense...............                (8,853)
Gain on sale of B-Line.........     3,256
Other income...................       484                       8
Foreign exchange gain..........                               927         2,362
                                  -------    --------     -------      --------    ------
Income before income taxes.....     1,456      20,215         888        37,193     4,236
Income taxes...................    (2,987)                               (1,490)
Minority interest..............    (1,103)                               (5,111)
                                  -------    --------     -------      --------    ------
Net income (loss)..............   $(2,634)   $ 20,215     $   888      $ 30,592    $4,236
                                  =======
Company's economic ownership
  %............................                  8.34%         33%       33 1/3%
                                             --------     -------      --------    ------
                                                                         10,197
Company's portion of earnings
  from JCF CFN.................                                            (552)
                                                                       --------
Earnings of partially owned
  equity affiliates............              $  1,686     $   293      $  9,645    $4,236    $15,860
                                             ========     =======      ========    ======    =======
</Table>

     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.

                                        53
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12:  UNAUDITED QUARTERLY FINANCIAL INFORMATION

     A summary of the Company's unaudited quarterly results of operations for
the years ended December 31, 2005 and 2004 is as follows:

<Table>
<Caption>
                                                                               QUARTER
                                                           -----------------------------------------------
                                                             FIRST      SECOND       THIRD        FOURTH
                                                           ---------   ---------   ----------   ----------
                                                            (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                             (UNAUDITED)
<S>                                                        <C>         <C>         <C>          <C>
YEAR ENDED DECEMBER 31, 2005:
Interest income..........................................   $  482      $  561      $   608      $   682
Other investment income..................................                  604          487          733
Earnings of partially owned equity affiliates............      265       1,046        1,186       24,016
Other income.............................................      100         101          100          101
General and administrative expenses......................     (780)       (861)        (617)        (852)
                                                            ------      ------      -------      -------
Income before income taxes...............................       67       1,451        1,764       24,680
Income taxes.............................................      (28)       (655)        (794)      (7,440)
                                                            ------      ------      -------      -------
Net income...............................................   $   39      $  796      $   970      $17,240
                                                            ======      ======      =======      =======
Net income per common share -- basic.....................   $ 0.01      $ 0.14      $  0.18      $  3.12
                                                            ======      ======      =======      =======
Net income per common share -- assuming dilution.........   $ 0.01      $ 0.14      $  0.17      $  2.93
                                                            ======      ======      =======      =======
YEAR ENDED DECEMBER 31, 2004:
Interest income..........................................   $  177      $  201      $   259      $   346
Earnings of partially owned equity affiliates............    3,000       1,980         (237)       3,605
Gain on sale of Green Tree...............................                             6,911
Other income.............................................      100         198          100          100
General and administrative expenses......................     (727)       (780)        (610)        (864)
                                                            ------      ------      -------      -------
Income before income taxes, minority interest and
  extraordinary gain.....................................    2,550       1,599        6,423        3,187
Income taxes.............................................     (829)       (450)      (2,093)      (1,437)
                                                            ------      ------      -------      -------
Income before minority interest and extraordinary gain...    1,721       1,149        4,330        1,750
Minority interest........................................     (623)       (446)      (1,904)
                                                            ------      ------      -------      -------
Income before extraordinary gain.........................    1,098         703        2,426        1,750
Extraordinary gain, net of income taxes..................                                          4,415
                                                            ------      ------      -------      -------
Net income...............................................   $1,098      $  703      $ 2,426      $ 6,165
                                                            ======      ======      =======      =======
Income per common share before extraordinary
  gain -- basic..........................................   $ 0.20      $ 0.13      $  0.44      $  0.32
Extraordinary gain, net of income taxes -- basic.........                                           0.80
                                                            ------      ------      -------      -------
Net income per common share -- basic.....................   $ 0.20      $ 0.13      $  0.44      $  1.12
                                                            ======      ======      =======      =======
Income per common share before extraordinary
  gain -- assuming dilution..............................   $ 0.19      $ 0.12      $  0.42      $  0.30
Extraordinary gain, net of income taxes -- assuming
  dilution...............................................                                           0.76
                                                            ------      ------      -------      -------
Net income per common share -- assuming dilution.........   $ 0.19      $ 0.12      $  0.42      $  1.06
                                                            ======      ======      =======      =======
</Table>

                                        54
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company recorded other investment income in the second, third and
fourth quarters of 2005. Other investment income is comprised of gains on sales
of marketable securities and dividend income.

     The substantial increase in earnings from partially owned equity affiliates
in the fourth quarter of 2005 was primarily attributable to an increase in
underwriting income by Castlewood Holdings. This increase in underwriting income
was attributable to the reduction in estimates of ultimate losses that arose
from commutations, policy buy-backs and settlement of losses in the year below
carried reserves and the resulting reductions in actuarial estimates of losses
incurred but not reported.

     The Company recorded a minority interest for Castlewood Holdings' portion
of earnings from the JCF CFN Entities in 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 13:  SUBSEQUENT EVENTS

     In December 2005, Castlewood Holdings and Shinsei signed definitive
agreements for the purchase of Aioi Insurance Company of Europe Limited ("Aioi
Europe"), a London-based subsidiary of Aioi Insurance Company, Limited. The
aggregate purchase price to be paid for Aioi Europe is L62 million
(approximately $108 million), with L50 million in cash upon the closing of the
transaction and L12 million in the form of a promissory note, payable twelve
months from the date of the closing. The acquisition will be effected through
Hillcot, a Bermuda-based company, which is jointly owned by Castlewood Holdings
and Shinsei. Castlewood Holdings' commitment is proportionate to its 50.1%
ownership percentage in Hillcot. Subject to regulatory approval, the acquisition
is expected to be completed during the first quarter of 2006.

     In February 2006, the Company announced that it approved a commitment of up
to $25.0 million in J.C. Flowers II LP (the "J.C. Flowers Fund"), a private
investment fund to be formed by J.C. Flowers & Co. LLC. The transaction is
expected to close in the second quarter of 2006. The Company intends to use cash
on hand to fund its commitment.

     In March 2006, the Company announced that its partially owned equity
affiliate, Castlewood Holdings, approved a commitment of up to $75.0 million in
the J.C. Flowers Fund. Castlewood Holdings intends to use cash on hand to fund
its commitment.

     J.C. Flowers & Co. LLC is controlled by J. Christopher Flowers, a member of
the Company's board of directors and the Company's largest shareholder. No fees
will be payable by the Company or Castlewood Holdings to J.C. Flowers II LP,
J.C. Flowers & Co. LLC, or J. Christopher Flowers in connection with the
Company's or Castlewood Holdings' investment in the J.C. Flowers Fund.

                                        55
<PAGE>

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.

ITEM 9B.  OTHER INFORMATION

     None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this Item with respect to directors and
executive officers of the Registrant is included under the sections entitled
"Election of Directors", "Executive Officers" and "Other Matters -- Section
16(a) Beneficial Ownership Reporting Compliance" of the Proxy Statement 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.

                                        56
<PAGE>

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, 2005.

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, 2005 and 2004.

Consolidated Statements of Income for the years ended December 31, 2005, 2004
and 2003.

Consolidated Statements of Comprehensive Income for the years ended December 31,
2005, 2004 and 2003.

Consolidated Statements of Shareholders' Equity for the years ended December 31,
2005, 2004 and 2003.

Consolidated Statements of Cash Flows for the years ended December 31, 2005,
2004 and 2003.

Notes to Consolidated Financial Statements.

        2. Financial Statement Schedules

                                        57
<PAGE>

     The following financial statements of Castlewood Holdings are filed as
schedules to this Annual Report and are for the fiscal period ended December 31,
2005.

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Registered Public Accounting Firm.....  F-2
Consolidated Balance Sheets as of December 31, 2005 and
  2004......................................................  F-3
Consolidated Statements of Earnings for the years ended
  December 31, 2005, 2004 and 2003..........................  F-4
Consolidated Statements of Comprehensive Income for the
  years ended December 31, 2005, 2004 and 2003..............  F-5
Consolidated Statements of Changes in Shareholders' Equity
  for the years ended December 31, 2005, 2004 and 2003......  F-6
Consolidated Statements of Cash Flows for the years ended
  December 31, 2005, 2004 and 2003..........................  F-7
Notes to the Consolidated Financial Statements..............  F-9
</Table>

     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,
2005.

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Registered Public Accounting Firm.....  F-25
Consolidated Balance Sheets as of December 31, 2005 and
  2004......................................................  F-26
Consolidated Statements of Earnings and Retained Earnings
  for the years ended December 31, 2005, 2004 and 2003......  F-27
Consolidated Statements of Cash Flows for the years ended
  December 31, 2005, 2004 and 2003..........................  F-28
Notes to the Consolidated Financial Statements..............  F-29
</Table>

                                        58
<PAGE>

          3. Exhibits

<Table>
<Caption>
REFERENCE
NUMBER                        DESCRIPTION OF EXHIBITS
---------                     -----------------------
<C>         <S>
   2.1      Shareholders Agreement, dated as of July 3, 2000, among B.H.
            Acquisition Limited, the Company and the other parties
            thereto (incorporated by reference to Exhibit 2.1 to the
            Current Report on Form 8-K, dated July 18, 2000).
   2.2      Investment Agreement, dated as of July 3, 2000, among B.H.
            Acquisition Limited, the Company and the other parties
            thereto (incorporated by reference to Exhibit 2.2 to the
            Current Report on Form 8-K, dated July 18, 2000).
   2.3      Share Sale and Purchase Agreement, dated as of March 31,
            2000, between PetroFina S.A. and B.H. Acquisition Limited
            (incorporated by reference to Exhibit 2.3 to the Current
            Report on Form 8-K, dated July 18, 2000).
   2.4      Share Sale and Purchase Agreement, dated as of March 31,
            2000, between PetroFina S.A., Brittany Holdings Limited and
            B.H. Acquisition Limited (incorporated by reference to
            Exhibit 2.4 to the Current Report on Form 8-K, dated July
            18, 2000).
   2.5      Share Purchase and Capital Commitment Agreement, dated as of
            October 1, 2001, between the Company, Castlewood Holdings,
            Trident, Marsh & McLennan Capital Professionals Fund, L.P.,
            Marsh & McLennan Employees' Securities Company, L.P. and the
            other parties thereto (incorporated by reference to Exhibit
            2.1 to the Current Report on Form 8-K, dated December 13,
            2001).
   2.6      Amendment No. 1 and Waiver of Certain Closing Conditions to
            the Share Purchase and Capital Commitment Agreement, dated
            as of November 29, 2001 (incorporated by reference to
            Exhibit 2.2 to the Current Report on Form 8-K, dated
            December 13, 2001).
   2.7      Purchase and Sale Agreement, dated March 10, 2004, by and
            among J.C. Flowers I L.P., JCF CFN LLC, JCF CFN II LLC, JCF
            AIV II LP, JCF AIV III LP, JCF Associates I LLC and FIT CFN
            Holdings LLC (incorporated by reference to Exhibit 99.2 to
            the Current Report on Form 8-K, dated March 23, 2004).
   2.8      Purchase and Sale Agreement, dated October 29, 2004, by and
            among Zurich Insurance Company, Harper Holding Sarl and
            Kenmare Holdings Limited (incorporated by reference to
            Exhibit 99.2 to the Current Report on Form 8-K, dated
            November 4, 2004).
   2.9      Sale and Purchase Agreement, dated October 29, 2004, by and
            among Zurich Insurance Company, Harper Holding Sarl, and
            Kenmare Holdings Limited (incorporated by reference to
            Exhibit 99.2 to the Current Report on Form 8-K/A dated
            November 12, 2004).
   3.1      Articles of Incorporation of the Company, as amended on June
            10, 1998 (incorporated by reference to Exhibit 3.1 to the
            Quarterly Report on Form 10-Q, dated August 4, 1998).
   3.2      Bylaws of the Company, as amended on May 20, 1999
            (incorporated by reference to Exhibit 3.2 to the Quarterly
            Report on Form 10-Q, dated August 6, 1999).
   4.1      Rights Agreement between the Company and American Stock
            Transfer & Trust Company, as Rights Agent, dated as of
            January 20, 1997 (incorporated by reference to Exhibit 4.1
            to Amendment No. 2 to the Registration Statement on Form 10,
            dated March 27, 1997).
   4.2      Amendment Agreement, dated as of October 20, 1998, to the
            Rights Agreement, dated as of January 20, 1997, between the
            Company and American Stock Transfer & Trust Company
            (incorporated by reference to Exhibit 10.2 to the Current
            Report on Form 8-K dated October 20, 1998).
  10.1      1997 Amended CEO Stock Option Plan (incorporated by
            reference to Appendix A to the Proxy Statement for the
            Annual Meeting of Shareholders, dated May 23, 1997).*
  10.2      1997 Amended Outside Directors' Stock Option Plan
            (incorporated by reference to Appendix B to the Proxy
            Statement for the Annual Meeting of Shareholders, dated May
            23, 1997).*
</Table>

                                        59
<PAGE>

<Table>
<Caption>
REFERENCE
NUMBER                        DESCRIPTION OF EXHIBITS
---------                     -----------------------
<C>         <S>
  10.3      1997 Amended Omnibus Incentive Plan (incorporated by
            reference to Exhibit 10.1 to the Quarterly Report on Form
            10-Q, dated August 14, 2001).*
  10.4      Amendment to 1997 Amended Omnibus Incentive Plan
            (incorporated by reference to Annex A to the Proxy Statement
            for the Annual Meeting of Shareholders, dated April 22,
            2003).*
  10.5      2001 Outside Directors' Stock Option Plan (incorporated by
            reference to Annex B to the Proxy Statement for the Annual
            Meeting of Shareholders, dated May 8, 2001).*
  10.6      Revolving Credit Note, dated July 31, 1997, made by the
            Company in favor of First Union National Bank (incorporated
            by reference to Exhibit 10.1 to the Quarterly Report on Form
            10-Q, dated August 14, 1997).
  10.7      Stock Pledge Agreement between the Company and First Union
            National Bank, dated July 31, 1997 (incorporated by
            reference to Exhibit 10.2 to the Quarterly Report on Form
            10-Q, dated August 14, 1997).
  10.8      Deferred Compensation and Stock Plan for Non-Employee
            Directors (incorporated by reference to Exhibit 99.1 to the
            Quarterly Report on Form 10-Q, dated October 30, 1997).*
  10.9      Investment Agreement, dated October 20, 1998, between the
            Company and J. Christopher Flowers, together with certain
            exhibits thereto (incorporated by reference to Exhibit 10.1
            to the Current Report on Form 8-K dated October 20, 1998).
  10.10     Form of Severance Benefits Agreement between the Company and
            each of Nimrod T. Frazer, Cheryl D. Davis and Amy M.
            Dunaway, each dated May 21, 1998 (incorporated by reference
            to Exhibit 10.8 to the Annual Report on Form 10-K, dated
            March 29, 1999).*
  10.11     Amended and Restated Employment Agreement between the
            Company and John Oros dated March 2, 2000 (incorporated by
            reference to Exhibit 10.9 to the Annual Report on Form 10-K,
            dated March 22, 2000).*
  10.12     Agreement Regarding Stock Purchase and Stock Options dated
            as of June 27, 2001 between the Company and Nimrod T. Frazer
            (incorporated by reference to Exhibit 10.1 to the Quarterly
            Report on Form 10-Q, dated November 14, 2001).*
  10.13     Agreement Regarding Stock Purchase and Stock Options dated
            as of June 27, 2001 between the Company and John Oros
            (incorporated by reference to Exhibit 10.2 to the Quarterly
            Report on Form 10-Q, dated November 14, 2001).*
  10.14     Limited Liability Company Agreement of JCF CFN LLC, dated as
            of December 19, 2002, between JCF Associates I, LLC and the
            Company (incorporated by reference to Exhibit 10.13 to the
            Annual Report on Form 10-K, dated March 31, 2003).
  10.15     Agreement Relating to the Sale and Purchase of the Entire
            Issued Share Capital of Toa-UK, dated as of March 27, 2003,
            between The Toa Reinsurance Company, Limited, Hillcot,
            Castlewood Holdings and Shinsei (incorporated by reference
            to the Amended Current Report on Form 8-K/A, dated June 12,
            2003).
  10.16     Amendment No. 1, dated as of June 20, 2003, to the Limited
            Liability Company Agreement of JCF CFN LLC, dated as of
            December 19, 2002 (incorporated by reference to Exhibit 2.2
            to the Current Report on Form 8-K, dated July 2, 2003).
  10.17     Limited Liability Company Agreement of JCF CFN II, LLC,
            dated as of June 20, 2003, between JCF Associates I, LLC,
            the Company and Castlewood Holdings Limited (incorporated by
            reference to Exhibit 2.3 to the Current Report on Form 8-K,
            dated July 2, 2003).
  10.18     Subscription Agreement, dated as of June 30, 2005, between
            Affirmative Investment LLC, J.C. Flowers I LP and the
            Company (incorporated by reference to Exhibit 10.1 to the
            Quarterly Report on Form 10-Q, dated August 9, 2005).
</Table>

                                        60
<PAGE>

<Table>
<Caption>
REFERENCE
NUMBER                        DESCRIPTION OF EXHIBITS
---------                     -----------------------
<C>         <S>
  10.19     Limited Liability Company Agreement of Affirmative
            Investment LLC, dated as of June 30, 2005, between
            Affirmative Associates LLC, J.C. Flowers I LP and the
            Company (incorporated by reference to Exhibit 10.2 to the
            Quarterly Report on Form 10-Q, dated August 9, 2005).
  14        Code of Ethics (incorporated by reference to Exhibit 14 to
            the Annual Report on Form 10-K, dated March 15, 2004).
  21        Subsidiaries of The Enstar Group, Inc. as of March 16, 2006.
  31.1      Certification of Chief Executive Officer pursuant to Rule
            13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act
            of 1934 as adopted under Section 302 of the Sarbanes-Oxley
            Act of 2002.
  31.2      Certification of Chief Financial Officer pursuant to Rule
            13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act
            of 1934 as adopted under Section 302 of the Sarbanes-Oxley
            Act of 2002.
  32.1      Certification of Chief Executive Officer pursuant to 18
            U.S.C. Section 1350, as adopted pursuant to Section 906 of
            the Sarbanes-Oxley Act of 2002.
  32.2      Certification of Chief Financial Officer pursuant to 18
            U.S.C. Section 1350, as adopted pursuant to Section 906 of
            the Sarbanes-Oxley Act of 2002.
</Table>

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

* Indicates a management contract or compensatory plan or arrangement.

                                        61
<PAGE>

                                   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 16, 2006

     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.

<Table>
<C>     <C>                                               <S>                               <C>

                  /s/ NIMROD T. FRAZER                    Chairman of the Board of          March 16, 2006
  ----------------------------------------------------      Directors and Chief Executive
                    Nimrod T. Frazer                        Officer (Principal Executive
                                                            Officer)

                  /s/ CHERYL D. DAVIS                     Chief Financial Officer, Vice     March 16, 2006
  ----------------------------------------------------      President of Corporate Taxes
                    Cheryl D. Davis                         and Secretary (Principal
                                                            Financial and Accounting
                                                            Officer)

                    /s/ JOHN J. OROS                      President and Chief Operating     March 16, 2006
  ----------------------------------------------------      Officer
                      John J. Oros

                 /s/ T. WHIT ARMSTRONG                    Director                          March 16, 2006
  ----------------------------------------------------
                   T. Whit Armstrong

                  /s/ PAUL J. COLLINS                     Director                          March 16, 2006
  ----------------------------------------------------
                    Paul J. Collins

                  /s/ GREGORY L. CURL                     Director                          March 16, 2006
  ----------------------------------------------------
                    Gregory L. Curl

                   /s/ T. WAYNE DAVIS                     Director                          March 16, 2006
  ----------------------------------------------------
                     T. Wayne Davis

               /s/ J. CHRISTOPHER FLOWERS                 Director                          March 16, 2006
  ----------------------------------------------------
                 J. Christopher Flowers
</Table>

                                        62
<PAGE>

                          CASTLEWOOD HOLDINGS LIMITED

 CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT REGISTERED PUBLIC
                                ACCOUNTING FIRM

              FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

                                       F-1
<PAGE>

            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, 2005 and
2004, and the related consolidated statements of earnings, comprehensive income,
changes in shareholders' equity and cash flows for the years ended December 31,
2005, 2004 and 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 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, 2005 and 2004 and the results of their
operations and their cash flows for the years ended December 31, 2005, 2004 and
2003 in conformity with accounting principles generally accepted in the United
States of America.

/s/ Deloitte & Touche

Hamilton, Bermuda
March 1, 2006

                                       F-2
<PAGE>

                          CASTLEWOOD HOLDINGS LIMITED

                          CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 2005 AND 2004
         (EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)

<Table>
<Caption>
                                                                 2005         2004
                                                              ----------   ----------
<S>                                                           <C>          <C>
                                       ASSETS
Cash and cash equivalents...................................  $  280,212   $  301,969
Restricted cash and cash equivalents........................      65,117       48,487
Investments classified as available for sale, at fair
  value.....................................................     216,624      304,558
Investments classified as held to maturity, at amortized
  cost......................................................     296,584      228,232
Investments classified as trading securities, at fair
  value.....................................................          --       58,845
Other investments...........................................      26,360           --
Accrued interest receivable.................................       2,805        2,861
Accounts receivable.........................................       8,227        7,479
Reinsurance balances receivable.............................     250,229      341,627
Investment in partly-owned companies........................      17,480       28,101
Goodwill....................................................      21,222       21,222
Other assets................................................      15,103        4,472
                                                              ----------   ----------
Total Assets................................................  $1,199,963   $1,347,853
                                                              ==========   ==========

                                     LIABILITIES
Losses and loss adjustment expenses.........................  $  806,559   $1,047,313
Reinsurance balances payable................................      30,844       62,396
Accounts payable and accrued liabilities....................      35,337       23,349
Income taxes payable........................................         282        1,101
Other liabilities...........................................      25,491        4,964
                                                              ----------   ----------
Total Liabilities...........................................     898,513    1,139,123
                                                              ----------   ----------
Minority Interest...........................................      40,544       31,392
                                                              ----------   ----------
                                SHAREHOLDERS' EQUITY
Share capital
Authorized issued and fully paid, par value $1 each
  (Authorized 2005: 99,000,000; 2004: 99,000,000)
  Ordinary shares (Issued 2005: 18,539; 2004: 18,395).......          19           18
  Ordinary non-voting redeemable shares (Issued 2005:
     22,641,774; 2004: 22,893,662)..........................      22,642       22,894
Additional paid-in capital..................................      89,090       85,341
Deferred compensation.......................................        (112)        (371)
Accumulated other comprehensive income......................       1,010        1,909
Retained earnings...........................................     148,257       67,547
                                                              ----------   ----------
Total Shareholders' Equity..................................     260,906      177,338
                                                              ----------   ----------
Total Liabilities and Shareholders' Equity..................  $1,199,963   $1,347,853
                                                              ==========   ==========
</Table>

        See accompanying notes to the consolidated financial statements

                                       F-3
<PAGE>

                          CASTLEWOOD HOLDINGS LIMITED

                      CONSOLIDATED STATEMENTS OF EARNINGS
              FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
                    (EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

<Table>
<Caption>
                                                                2005      2004      2003
                                                              --------   -------   -------
<S>                                                           <C>        <C>       <C>
Income
  Underwriting income.......................................  $ 96,007   $13,706   $24,044
  Consulting fees...........................................    22,006    23,703    24,746
  Net investment income.....................................    28,236    11,102     7,170
  Net realized gains (losses)...............................     1,268      (600)      (98)
  Net foreign exchange (loss) gain..........................    (4,602)    3,731     2,362
                                                              --------   -------   -------
                                                               142,915    51,642    58,224
                                                              --------   -------   -------
Expenses
  Salaries and benefits.....................................    40,821    26,290    15,661
  General and administrative expenses.......................    10,962    10,677     6,993
                                                              --------   -------   -------
                                                                51,783    36,967    22,654
                                                              --------   -------   -------
Earnings before income taxes, minority interest and share of
  net earnings of partly-owned companies....................    91,132    14,675    35,570
Income taxes................................................      (914)   (1,924)   (1,490)
Minority interest...........................................    (9,700)   (3,097)   (5,111)
Share of net earnings of partly-owned companies.............       192     6,881     1,623
                                                              --------   -------   -------
Net earnings before extraordinary gain......................    80,710    16,535    30,592
Extraordinary gain -- negative goodwill.....................        --    21,759        --
                                                              --------   -------   -------
Net earnings................................................  $ 80,710   $38,294   $30,592
                                                              ========   =======   =======
</Table>

        See accompanying notes to the consolidated financial statements

                                       F-4
<PAGE>

                          CASTLEWOOD HOLDINGS LIMITED

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
              FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
                    (EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

<Table>
<Caption>
                                                               2005      2004      2003
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
Net earnings................................................  $80,710   $38,294   $30,592
                                                              -------   -------   -------
Other comprehensive income:
  Unrealized holding gains (losses) on investments arising
     during the period......................................    1,268      (609)   (4,400)
  Reclassification adjustment for net realized (gains)
     losses included in net earnings........................   (1,268)      600     4,289
  Unrealized (losses) gains on investments of
     partially-owned equity affiliate arising during the
     year...................................................       --      (340)      340
  Currency translation adjustment...........................     (899)      539       879
                                                              -------   -------   -------
Other comprehensive income:.................................     (899)      190     1,108
                                                              -------   -------   -------
Comprehensive income........................................  $79,811   $38,484   $31,700
                                                              =======   =======   =======
</Table>

        See accompanying notes to the consolidated financial statements

                                       F-5
<PAGE>

                          CASTLEWOOD HOLDINGS LIMITED

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
                    (EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

<Table>
<Caption>
                                                                    ACCUMULATED
                                       ADDITIONAL                      OTHER
                             SHARE      PAID-IN       DEFERRED     COMPREHENSIVE   RETAINED
                            CAPITAL     CAPITAL     COMPENSATION   INCOME (LOSS)   EARNINGS    TOTAL
                            --------   ----------   ------------   -------------   --------   --------
<S>                         <C>        <C>          <C>            <C>             <C>        <C>
Opening balance, January
  1, 2003.................  $ 40,520    $67,878       $(1,748)        $  611       $ 60,212   $167,473
Redemption of Class E
  shares..................   (12,990)        --            --             --             --    (12,990)
Amortization of deferred
  compensation............        --         --           896             --             --        896
Contribution of capital...        --     14,338            --             --             --     14,338
Dividend paid.............        --         --            --             --        (53,801)   (53,801)
Net earnings..............        --         --            --             --         30,592     30,592
Other comprehensive
  income..................        --         --            --          1,108             --      1,108
                            --------    -------       -------         ------       --------   --------
December 31, 2003.........    27,530     82,216          (852)         1,719         37,003    147,616
Redemption of Class E
  shares..................    (4,618)        --            --             --             --     (4,618)
Amortization of deferred
  compensation............        --         --           481             --             --        481
Grant of Class D shares...        --      3,125            --             --             --      3,125
Dividend paid.............        --         --            --             --         (7,750)    (7,750)
Net earnings..............        --         --            --             --         38,294     38,294
Other comprehensive
  income..................        --         --            --            190             --        190
                            --------    -------       -------         ------       --------   --------
December 31, 2004.........    22,912     85,341          (371)         1,909         67,547    177,338
Redemption of Class E
  shares..................      (252)        --            --             --             --       (252)
Redemption of Class D
  shares..................        --        (30)           --             --             --        (30)
Amortization of deferred
  compensation............        --         --           259             --             --        259
Grant of Class D shares...         1      3,779            --             --             --      3,780
Net earnings..............        --         --            --             --         80,710     80,710
Other comprehensive
  income..................        --         --            --           (899)            --       (899)
                            --------    -------       -------         ------       --------   --------
December 31, 2005.........  $ 22,661    $89,090       $  (112)        $1,010       $148,257   $260,906
                            ========    =======       =======         ======       ========   ========
</Table>

        See accompanying notes to the consolidated financial statements

                                       F-6
<PAGE>

                          CASTLEWOOD HOLDINGS LIMITED

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
                    (EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

<Table>
<Caption>
                                                                2005       2004      2003
                                                              ---------   -------   -------
<S>                                                           <C>         <C>       <C>
OPERATING ACTIVITIES:
Net earnings................................................  $  80,710   $38,294   $30,592
  Adjustments to reconcile net earnings to net cash flows
     (used in) provided by operating activities:
     Minority interest......................................      9,700     3,097     5,111
     Negative goodwill......................................         --   (21,759)       --
     Share of net earnings of partly-owned companies........       (192)   (6,881)   (1,623)
     Depreciation and amortization..........................        493       462       375
     Amortization of deferred compensation..................        259       481       896
     Amortization of bond premiums and discounts............        564       304       581
     Net realized (gains) losses on sale of securities
       available-for-sale...................................     (1,768)      600        98
     Net realized loss on trading securities................        500        --        --
     Change in net unrealized holding losses on trading
       securities...........................................         --       471        --
     Class D share stock compensation.......................      3,780     3,125        --
     Changes in assets and liabilities:
       Proceeds on sale of trading securities...............     76,695        --        --
       Accrued interest receivable..........................         56     1,275     3,531
       Accounts receivable..................................     (1,397)    1,536    (2,906)
       Reinsurance balances receivable......................    116,887    33,349    13,030
       Other assets.........................................    (10,579)   (1,088)     (167)
       Losses and loss adjustment expenses..................   (282,718)  (56,084)  (31,262)
       Reinsurance balances payable.........................    (31,552)       91     9,776
       Accounts payable and accrued liabilities.............     12,424     2,758    (5,560)
       Income taxes payable.................................       (802)      (46)      406
       Other liabilities....................................     20,619       959       726
                                                              ---------   -------   -------
       Net cash flows (used in) provided by operating
          activities........................................     (6,321)      944    23,604
                                                              ---------   -------   -------
</Table>

                                  (Continued)

                                       F-7
<PAGE>

                          CASTLEWOOD HOLDINGS LIMITED

                      CONSOLIDATED STATEMENT OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
                    (EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

<Table>
<Caption>
                                                               2005        2004       2003
                                                             ---------   --------   ---------
<S>                                                          <C>         <C>        <C>
Investing activities:
  Cash acquired on purchase of subsidiaries................  $  18,006   $109,149   $  25,734
  Cash used for purchase of subsidiaries...................     (1,445)    (4,455)    (46,426)
  Cash used for investment in partly-owned companies.......         --     (9,147)    (10,200)
  Distributions from partly-owned companies................     10,813     16,395         193
  Proceeds from sale of available-for-sale securities......    201,712    184,973     234,565
  Purchase of available-for-sale securities................   (112,010)   (76,600)   (210,151)
  Maturity of held-to-maturity securities..................     46,220     14,563      53,042
  Purchase of held-to-maturity securities..................   (133,492)        --          --
  Purchase of other investments............................    (26,360)        --          --
  Movement in restricted cash & cash equivalents...........    (16,630)   (37,279)     (4,650)
  Purchase of fixed assets.................................       (887)      (571)       (441)
                                                             ---------   --------   ---------
       Net cash flows (used in) provided by investing
          activities.......................................    (14,073)   197,028      41,666
                                                             ---------   --------   ---------
Financing activities:
  Contribution of capital..................................         --         --      14,338
  Redemption of Class E shares.............................       (252)    (4,618)    (12,990)
  Redemption of Class D shares.............................        (30)        --          --
  Dividend paid............................................         --     (7,750)    (53,801)
  Dividend paid to minority interest.......................       (548)        --          --
  Acquisition of shares and contribution to surplus of
     subsidiary by minority interest.......................         --         --      23,184
                                                             ---------   --------   ---------
       Net cash flows used in financing activities.........       (830)   (12,368)    (29,269)
                                                             ---------   --------   ---------
Translation adjustment.....................................       (533)       345         661
                                                             ---------   --------   ---------
Net (decrease) increase in cash and cash equivalents.......    (21,757)   185,949      36,662
Cash and cash equivalents, beginning of year...............    301,969    116,020      79,358
                                                             ---------   --------   ---------
Cash and cash equivalents, end of year.....................  $ 280,212   $301,969   $ 116,020
                                                             =========   ========   =========
SUPPLEMENT CASH FLOW INFORMATION
Income taxes paid..........................................  $  (1,733)  $ (1,932)  $    (978)
                                                             =========   ========   =========
</Table>

        See accompanying notes to the consolidated financial statements

                                       F-8
<PAGE>

                          CASTLEWOOD HOLDINGS LIMITED

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005, 2004 AND 2003
         (EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)

1.  DESCRIPTION OF BUSINESS

     Castlewood Holdings Limited ("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, 2005 and 2004 and for
the years ended December 31, 2005, 2004 and 2003. 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

     Mutual funds, whose underlying assets consist of investments having
maturities of greater than six and less than twelve months when purchased, are
classified as available-for-sale securities and are carried at fair value, with
unrealized holding gains and losses excluded from net earnings and reported as a
separate component of accumulated other comprehensive income. 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.

     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
<PAGE>
                          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.

  OTHER INVESTMENTS

     The Company accounts for its other investments at fair value based on the
most recently available financial information. The Company has no significant
influence and does not participate in the management of these investments.
Interest, dividend income, income distributions and realized gains and losses
are included in net investment income.

  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.
Reinstatement premiums are recognized at the time a loss event occurs where
coverage limits for the remaining life of the contract are reinstated under
pre-defined contract terms and are earned on a pro-rata basis over the remaining
risk period.

  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.

                                       F-10
<PAGE>
                          CASTLEWOOD HOLDINGS LIMITED

         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  RECLASSIFICATIONS

     Certain balances of the 2004 and 2003 figures have been reclassified to
conform to the 2005 presentation.

  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. 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 2005, 2004 and 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, 2005 and 2004.

  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
2005 and 2004.

                                       F-11
<PAGE>
                          CASTLEWOOD HOLDINGS LIMITED

         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3.  ACQUISITIONS

  2003

     In 2003, a 50.1% owned subsidiary of Castlewood Holdings, Hillcot Holdings
Ltd., completed the acquisition of Hillcot Reinsurance Company Limited
("Hillcot"), (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:

<Table>
<S>                                                           <C>
Purchase price..............................................  $45,820
Direct costs of acquisition.................................      606
                                                              -------
Total purchase price........................................  $46,426
                                                              =======
Net assets acquired at fair value...........................  $46,426
                                                              =======
</Table>

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

<Table>
<S>                                                           <C>
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
                                                              =========
</Table>

  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 Ltd. (formerly Security Insurance (UK) Ltd.).

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

<Table>
<S>                                                            <C>
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)
                                                               ========
</Table>

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

<Table>
<S>                                                           <C>
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
                                                              =========
</Table>

                                       F-12
<PAGE>
                          CASTLEWOOD HOLDINGS LIMITED

         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

  2005

     In 2005, Castlewood Holdings, through its wholly owned subsidiary, Kenmare
Holdings Ltd., completed the acquisition of Fieldmill Insurance Company Limited
(formerly Harleysville Insurance Company (UK) Limited).

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

<Table>
<S>                                                           <C>
Purchase price..............................................  $1,403
Direct costs of the acquisition.............................      42
                                                              ------
Total purchase price........................................  $1,445
                                                              ======
Net assets acquired at fair value...........................  $1,445
                                                              ======
</Table>

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

<Table>
<S>                                                           <C>
Cash and investments........................................  $ 18,006
Reinsurance balances receivable.............................    25,489
Losses and loss adjustment expenses.........................   (41,965)
Accounts payable and accrued liabilities....................       (85)
                                                              --------
Net assets acquired at fair value...........................  $  1,445
                                                              ========
</Table>

     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.

     In December 2005, a 50.1% owned subsidiary of Castlewood Holdings reached
agreement to purchase AIOI Insurance Company of Europe, a reinsurance company
based in London, England, for total consideration of L62 million. The purchase
is scheduled to close by March 31, 2006.

4.  RESTRICTED CASH AND CASH EQUIVALENTS

     Cash and cash equivalents in the amount of $65,117 and $48,487 as of
December 31, 2005 and 2004 respectively, are restricted for use as collateral
against letters of credit, in the amount of $47,848 and $45,287 as of December
31, 2005 and 2004, respectively, and as guarantee under trust agreements.
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 cost and fair value of investments in mutual funds classified as
available-for-sale as at December 31, 2005 and 2004 were $216,624 and $304,558,
respectively.

     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.

                                       F-13
<PAGE>
                          CASTLEWOOD HOLDINGS LIMITED

         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  HELD-TO-MATURITY:

     The amortized cost and estimated fair value of investments in debt
securities held-to-maturity are as follows:

<Table>
<Caption>
                                                           GROSS        GROSS
                                                         UNREALIZED   UNREALIZED
                                             AMORTIZED    HOLDING      HOLDING       FAIR
                                               COST        GAINS        LOSSES      VALUE
                                             ---------   ----------   ----------   --------
<S>                                          <C>         <C>          <C>          <C>
As at December 31, 2005
U.S. Treasury securities...................  $120,568     $    --      $(2,075)    $118,493
U.S. Agencies securities...................    98,409          --       (1,229)      97,180
Corporate debt securities..................    77,607          --       (2,010)      75,597
                                             --------     -------      -------     --------
                                             $296,584     $    --      $(5,314)    $291,270
                                             ========     =======      =======     ========
</Table>

<Table>
<Caption>
                                                           GROSS        GROSS
                                                         UNREALIZED   UNREALIZED
                                             AMORTIZED    HOLDING      HOLDING       FAIR
                                               COST        GAINS        LOSSES      VALUE
                                             ---------   ----------   ----------   --------
<S>                                          <C>         <C>          <C>          <C>
As at December 31, 2004
U.S. Treasury securities...................  $151,436     $    --      $(1,003)    $150,433
U.S. Agencies securities...................    20,414          --         (135)      20,279
Corporate debt securities..................    56,382           3         (426)      55,959
                                             --------     -------      -------     --------
                                             $228,232     $     3      $(1,564)    $226,671
                                             ========     =======      =======     ========
</Table>

     The gross unrealized losses on held-to-maturity debt securities are split
as follows:

<Table>
<Caption>
                                                               2005     2004
                                                              ------   ------
<S>                                                           <C>      <C>
Due within one year.........................................  $  666   $  181
After 1 through 5 years.....................................   3,674      991
After 5 through 10 years....................................     283       61
After 10 years..............................................     691      331
                                                              ------   ------
                                                              $5,314   $1,564
                                                              ======   ======
</Table>

     As at December 31, 2005 and 2004, the number of securities in an unrealized
loss position is 70 and 87, respectively, with a fair value of $268,870 and
$225,993, respectively. Of these securities, the number of securities that have
been in an unrealized loss position of 12 months or greater is 57 and Nil,
respectively, with a fair value of $137,143 and $Nil, respectively. As of
December 31, 2005, none (2004: none) of these securities were considered to be
other than temporarily impaired. The unrealized losses from these securities
were not a result of credit, collateral or structural issues.

                                       F-14
<PAGE>
                          CASTLEWOOD HOLDINGS LIMITED

         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                              AMORTIZED
                                                                COST      FAIR VALUE
                                                              ---------   ----------
<S>                                                           <C>         <C>
Due within one year.........................................  $ 81,552     $ 80,886
After 1 through 5 years.....................................   181,826      178,152
After 5 through 10 years....................................    15,170       14,887
After 10 years..............................................    18,036       17,345
                                                              --------     --------
                                                              $296,584     $291,270
                                                              ========     ========
</Table>

     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:

     In 2005, the entire investment portfolio classified as trading securities
was sold. The estimated fair value of investments in debt securities classified
as trading securities for 2004 was as follows:

<Table>
<Caption>
                                                                FAIR
                                                                VALUE
                                                               -------
<S>                                                            <C>
As at December 31, 2004
Corporate debt securities...................................   $41,718
U.S. Agencies securities....................................    17,127
                                                               -------
                                                               $58,845
                                                               =======
</Table>

  OTHER INVESTMENTS:

     The estimated fair value of other investments as at December 31, 2005 is as
follows:

<Table>
<Caption>
                                                                FAIR
                                                                VALUE
                                                               -------
<S>                                                            <C>
As at December 31, 2005
Partnership investment......................................   $24,532
Mezzanine investment fund...................................     1,828
                                                               -------
                                                               $26,360
                                                               =======
</Table>

     In 2005, Fitzwilliam Insurance Company Limited ("Fitzwilliam") and River
Thames Insurance Company Limited ("River Thames"), subsidiaries of Castlewood
Holdings, invested $24,532 in an Alberta limited partnership, New NIB Partners
LP ("New NIB"). A consortium of investors acquired NIBC N.V. (formerly NIB
Capital Bank N.V.) ("NIB Capital") a Dutch bank, for approximately $2,156,000.
New NIB funded approximately 81% of the cost ($1,746,000). Fitzwilliam and River
Thames, combined, own 1.3801% of New NIB.

     In 2005, Overseas Reinsurance Corporation Limited ("Overseas Re"), a
subsidiary of Castlewood Holdings, made a capital commitment of up to $10,000 in
the GSC European Mezzanine Fund II, LP ("the Fund"). The Fund invests in
mezzanine securities of middle and large market companies throughout Western
Europe. As at December 31, 2005, the capital contributed to the Fund was $1,828
with the remaining of the commitment being $8,172. Overseas Re's commitment of
$10,000 represents 8.9% of the total commitments made to the Fund.

                                       F-15
<PAGE>
                          CASTLEWOOD HOLDINGS LIMITED

         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Major categories of net investment income are summarized as follows:

<Table>
<Caption>
                                                            2005      2004      2003
                                                           -------   -------   ------
<S>                                                        <C>       <C>       <C>
Interest from debt securities and mutual funds...........  $17,635   $ 8,679   $7,007
Interest on cash and cash equivalents....................   12,251     3,540    1,875
Dividends from equity securities.........................       39        --       --
Change in net unrealized holding loss on trading
  securities.............................................       --      (471)      --
Net realized loss on derivative instruments..............       --        --     (862)
Amortization of bond premiums or discounts...............     (564)     (304)    (581)
Investment expenses (Note 16)............................   (1,125)     (342)    (269)
                                                           -------   -------   ------
                                                           $28,236   $11,102   $7,170
                                                           =======   =======   ======
</Table>

     During the years ended December 31, 2005, 2004 and 2003, gross realized
gains on sale of available-for-sale securities were $1,768, $68 and $64,
respectively, and gross realized losses on sale of available-for-sale securities
were $Nil, $668 and $162, respectively.

6.  REINSURANCE BALANCES RECEIVABLE

<Table>
<Caption>
                                                                2005        2004
                                                              ---------   ---------
<S>                                                           <C>         <C>
Recoverable from reinsurers on:
  Paid losses...............................................  $  36,830   $  30,974
  Outstanding losses........................................     77,676     101,316
  Losses incurred but not reported..........................    244,011     393,373
  Fair value adjustment.....................................   (108,288)   (184,036)
                                                              ---------   ---------
                                                              $ 250,229   $ 341,627
                                                              =========   =========
</Table>

     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 5.0%, and is amortized over the
estimated payout period, as adjusted for accelerations on commutation
settlements, using the constant yield method.

     The Company's acquired reinsurance subsidiaries used retrocessional
agreements to reduce their 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 $102,559 and
$120,956 at December 31, 2005 and 2004, respectively.

     At December 31, 2005 and 2004, reinsurance receivables with a carrying
value of $164,363 and $149,255, respectively were associated with a single
reinsurer which represented 10% or more of total reinsurance balances
receivable. In the event that all or any of the reinsuring companies are unable
to meet their obligations under existing reinsurance agreements, the Company
will be liable for such defaulted amounts.

                                       F-16
<PAGE>
                          CASTLEWOOD HOLDINGS LIMITED

         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7.  INVESTMENT IN PARTLY-OWNED COMPANIES

<Table>
<Caption>
                                                               2005      2004
                                                              -------   -------
<S>                                                           <C>       <C>
Investment in BH............................................  $17,480   $17,400
Investment in Cassandra.....................................       --    10,701
                                                              -------   -------
                                                              $17,480   $28,101
                                                              =======   =======
</Table>

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.

<Table>
<Caption>
                                                               2005      2004
                                                              -------   -------
<S>                                                           <C>       <C>
Balance at January 1........................................  $17,400   $17,237
Share of net earnings.......................................       80       163
                                                              -------   -------
Balance at December 31......................................  $17,480   $17,400
                                                              =======   =======
</Table>

CASSANDRA:

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

     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.

<Table>
<Caption>
                                                               2005      2004
                                                              -------   -------
<S>                                                           <C>       <C>
Investment..................................................  $10,701   $ 9,147
Share of net earnings.......................................      112     1,830
Distributions...............................................  (10,813)     (276)
                                                              -------   -------
Balance at December 31......................................  $    --   $10,701
                                                              =======   =======
</Table>

     As of December 31, 2005 and 2004, consolidated retained earnings include
$6,611 and $11,465, respectively of undistributed earnings of companies
accounted for by the equity method.

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.

                                       F-17
<PAGE>
                          CASTLEWOOD HOLDINGS LIMITED

         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                              2005     2004
                                                              -----   -------
<S>                                                           <C>     <C>
Balance at January 1........................................  $ --    $11,571
Investment..................................................    --         --
Share of net earnings.......................................    --      4,888
Share of other comprehensive income.........................    --       (340)
Distributions...............................................    --    (16,119)
                                                              -----   -------
Balance at December 31......................................  $ --    $    --
                                                              =====   =======
</Table>

8.  LOSSES AND LOSS ADJUSTMENT EXPENSES

<Table>
<Caption>
                                                                2005         2004
                                                              ---------   ----------
<S>                                                           <C>         <C>
Outstanding.................................................  $ 433,722   $  564,183
Incurred but not reported...................................    645,969      821,555
Fair value adjustment.......................................   (273,132)    (338,425)
                                                              ---------   ----------
                                                              $ 806,559   $1,047,313
                                                              =========   ==========
</Table>

     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, 2005 and 2004 included $438,418 and $525,642, 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,
2005 and 2004 was $578,079 and $743,294, 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.
In view of the changes in the legal and tort environment that affect the
development of such claims, the uncertainties inherent in valuing asbestos and
environmental claims are not likely to be resolved in the near future. Ultimate
values for such claims cannot be estimated using traditional reserving
techniques and there are significant uncertainties in estimating the amount of
the Company's potential losses for these claims. 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-18
<PAGE>
                          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:

<Table>
<Caption>
                                                                 2005         2004
                                                              ----------   ----------
<S>                                                           <C>          <C>
Balance as at January 1.....................................  $1,047,313   $  381,531
  Less reinsurance recoverables.............................     310,653      151,376
                                                              ----------   ----------
                                                                 736,660      230,155
  Effect of exchange rate movement..........................       3,652        4,124
  Incurred related to prior years...........................     (94,705)     (13,568)
  Paid related to prior years...............................     (70,309)     (19,157)
  Acquired on purchase of subsidiaries......................      17,862      535,106
                                                              ----------   ----------
  Net balance as at December 31.............................     593,160      736,660
  Plus reinsurance recoverables.............................     213,399      310,653
                                                              ----------   ----------
  Balance as at December 31.................................  $  806,559   $1,047,313
                                                              ==========   ==========
</Table>

     Reductions in estimates of ultimate losses arise from commutations, policy
buy-backs and 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. In 2005, the company paid $22,000
as final settlement of these rights to distributions from certain acquired
companies. The payable reflected in the financial statements as at December 31,
2004 was $19,757.

10.  SHARE CAPITAL

     Authorized shares of par value $1 each

<Table>
<Caption>
                                                                 2005         2004
                                                              ----------   ----------
<S>                                                           <C>          <C>
Class A ordinary voting shares..............................       6,000        6,000
Class B ordinary voting shares..............................       6,000        6,000
Class C ordinary voting shares..............................       6,153        6,153
Class D ordinary non-voting shares..........................         741          744
Class E ordinary non-voting redeemable shares...............  40,501,552   40,501,552
Shares not allocated to a class.............................  58,479,554   58,479,551
                                                              ----------   ----------
                                                              99,000,000   99,000,000
                                                              ==========   ==========
</Table>

                                       F-19
<PAGE>
                          CASTLEWOOD HOLDINGS LIMITED

         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Issued and fully paid shares of par value $1 each

<Table>
<Caption>
                                                               2005      2004
                                                              -------   -------
<S>                                                           <C>       <C>
Class A ordinary voting shares..............................  $     6   $     6
Class B ordinary voting shares..............................        6         6
Class C ordinary voting shares..............................        6         6
Class D ordinary non-voting shares..........................        1        --
Class E ordinary non-voting redeemable shares...............   22,642    22,894
                                                              -------   -------
                                                              $22,661   $22,912
                                                              =======   =======
</Table>

     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.

11.  ADDITIONAL PAID-IN CAPITAL

     During the years ended December 31, 2005, 2004 and 2003, shareholders of
the Company have made contributions in the amount of $Nil, $Nil and $14,338,
respectively.

12.  ACCUMULATED OTHER COMPREHENSIVE INCOME

     Other comprehensive income for the years ended December 31, 2005, 2004 and
2003 is comprised of cumulative translation adjustments and unrealized gains and
losses on investments as shown in the table below:

<Table>
<Caption>
                                                              2005     2004     2003
                                                             ------   ------   ------
<S>                                                          <C>      <C>      <C>
Cumulative translation adjustments.........................  $1,010   $1,909   $1,379
Unrealized gains and losses on investments.................      --       --      340
                                                             ------   ------   ------
                                                             $1,010   $1,909   $1,719
                                                             ======   ======   ======
</Table>

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
$259, $481 and $896 relating to these restricted share awards in 2005, 2004 and
2003, respectively.

     During 2004, the Company established an employee share plan. Employee stock
awards for 17 and 744 Class D common shares were granted to employees in the
2005 and 2004 years, respectively. The shares vest over a period of 5 years. The
Company has charged compensation expense of $3,780 and $3,125 relating to these
restricted share awards in 2005 and 2004, respectively.

                                       F-20
<PAGE>
                          CASTLEWOOD HOLDINGS LIMITED

         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14.  UNDERWRITING INCOME

     Underwriting income is summarized as follows:

<Table>
<Caption>
                                                         2005        2004      2003
                                                       ---------   --------   -------
<S>                                                    <C>         <C>        <C>
Net written and earned premiums......................  $     (55)  $     78   $  (567)
                                                       ---------   --------   -------
Losses and loss adjustment expenses..................    225,332     38,238    12,953
Reinsurance recoveries...............................   (130,627)   (24,670)   10,383
                                                       ---------   --------   -------
Net losses and loss adjustment expenses..............     94,705     13,568    23,336
Commissions and brokerage............................      1,357         60     1,275
                                                       ---------   --------   -------
                                                          96,062     13,628    24,611
                                                       ---------   --------   -------
Net underwriting income..............................  $  96,007   $ 13,706   $24,044
                                                       =========   ========   =======
</Table>

     Net underwriting income primarily arises from commutations, policy
buy-backs and settlement of losses below carried reserves and consequent net
reductions in actuarial estimates of losses incurred but not reported.

15.  PENSIONS

     The Company provides pension benefits to eligible employees through various
plans sponsored by the Company. All pension plans, except as described below,
are structured as defined contribution plans. Pension expense for the years
ended December 31, 2005, 2004 and 2003 was $1,342, $1,126 and $835,
respectively.

     Hillcot 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 to
further fund the plan prior to its liquidation. During 2003, plan liabilities of
Hillcot'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 was treated as a reduction in general
and administrative expenses in 2003. The liquidation of the plan is scheduled to
be completed during 2006.

16.  RELATED PARTY TRANSACTIONS

     During the years ended December 31, 2005, 2004 and 2003, Castlewood earned
consulting fees of $1,250, $1,250 and $1,250, respectively from subsidiaries of
BH.

     During the year, the Company and certain of its subsidiaries have entered
into certain transactions with companies and partnerships managed or controlled
by Mr. J. Christopher Flowers. Mr. Flowers is a member of the Company's Board of
Directors and the largest shareholder of The Enstar Group, Inc ("Enstar"), who
have a one-third economic and 50% voting interest in the Company.

     The transactions involving companies and partnerships where Mr. Flowers has
an involvement are as follows:

     - On March 1, 2006, the Company approved a commitment of up to $75,000 to
       J.C. Flowers II LP, a private investment fund to be formed by J.C.
       Flowers & Co. LLC ("Flowers LLC")

     - In December 2005 JCF Re Holdings LP ("JCF Re"), a Cayman Limited
       partnership, entered into a subscription and shareholders agreement with
       Fitzwilliam for the establishment of a segregated cell and paid $1,932 to
       Fitzwilliam as capital and contributed surplus. During the year,
       Fitzwilliam booked management fees of $40 from JCF Re.

                                       F-21
<PAGE>
                          CASTLEWOOD HOLDINGS LIMITED

         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     - In December 2005 Fitzwilliam and River Thames, subsidiaries of Castlewood
       Holdings, invested $24,532 in an Alberta Limited Partnership, New NIB
       Partners LP ("New NIB"). Mr Flowers serves on the supervisory board of
       NIB Capital.

     - In June 2005 the Company, through its subsidiary Castlewood (US) Inc.,
       entered into a license agreement with Flowers LLC for the use of certain
       office space and administrative services from Flowers LLC for an annual
       payment of $50 running through 2014.

     - During 2003, the Company invested $10,000 in the JCF CFN entities. Each
       of the JCF CFN entities were controlled by JCF Associates I, LLC, the
       managing member of which was Mr Flowers. In 2004, the JCF CFN entities
       were sold.

     - In 2003, the Company and Shinsei Bank, Limited, through their jointly
       owned company, Hillcot Holdings Ltd., completed the acquisition of
       Hillcot Re. Mr. Flowers is a director of Shinsei Bank, Limited.

     In 2002, the Company and BH entered into an investment advisory agreement
with Enstar for an agreed annual fee of $400. For the years ended December 31,
2005, 2004 and 2003 the Company incurred fees relating to this agreement of
$365, $362 and $330.

     In April 2005, Castlewood (US) Inc. entered into a lease agreement for use
of certain office space with one of its directors running through to 2008 for an
annual cost of $131. For the year ended December 31, 2005 Castlewood (US) Inc.
incurred rent expense of $119.

     As at December 31, 2005 and 2004, no amounts on account of investment fees
and other expenses were payable to these related parties and $40K and $Nil,
respectively, were receivable from them.

17.  LITIGATION

     The Company, 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, 2005,
the Company was not a party to any material litigation or arbitration.

18.  TAXATION

     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.

     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, 2005 and 2004, UK insurance subsidiaries and branch
operations had tax loss carry-forwards, which do not expire, and deductions
available for tax purposes of approximately $272,254 and

                                       F-22
<PAGE>
                          CASTLEWOOD HOLDINGS LIMITED

         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$223,060, respectively. A valuation allowance, using an assumed 30% tax rate,
has been provided for the tax benefit of these items as follows:

<Table>
<Caption>
                                                                2005       2004
                                                              --------   --------
<S>                                                           <C>        <C>
Benefit of loss carry-forward...............................  $ 81,676   $ 66,941
Valuation allowance.........................................   (81,676)   (66,941)
                                                              --------   --------
                                                              $     --   $     --
                                                              ========   ========
</Table>

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, 2005 and 2004, 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, 2005 and 2004, retained earnings of $8,510
and $8,494 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 2015. 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, 2005:

<Table>
<S>                                                           <C>
2006........................................................  $1,420
2007........................................................     880
2008........................................................     719
2009........................................................     445
2010........................................................     229
2011 through 2015...........................................     955
                                                              ------
                                                              $4,648
                                                              ======
</Table>

     Rent expense for the years ended December 31, 2005, 2004 and 2003 was
$1,696, $1,402 and $1,272, respectively.

                                       F-23
<PAGE>

                             B.H. ACQUISITION LTD.

 CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT REGISTERED PUBLIC
                                ACCOUNTING FIRM

              FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

                                       F-24
<PAGE>

            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, 2005 and
2004, and the related consolidated statements of earnings and retained earnings
and cash flows for the years ended December 31, 2005, 2004 and 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 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, 2005 and 2004 and the results of their
operations and their cash flows for the years ended December 31, 2005, 2004 and
2003 in conformity with accounting principles generally accepted in the United
States of America.

/s/ Deloitte & Touche

Hamilton, Bermuda
March 1, 2006

                                       F-25
<PAGE>

                             B.H. ACQUISITION LTD.

                          CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 2005 AND 2004
                    (EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

<Table>
<Caption>
                                                                2005       2004
                                                              --------   --------
<S>                                                           <C>        <C>
                                     ASSETS
Cash and cash equivalents...................................  $ 22,219   $ 24,724
Restricted cash and cash equivalents........................    11,321      9,388
Investments at fair value...................................    66,462     45,077
Reinsurance balances receivable.............................     3,800     29,736
Funds withheld by ceding companies..........................     1,776      1,489
                                                              --------   --------
Total Assets................................................  $105,578   $110,414
                                                              ========   ========

                                   LIABILITIES
Losses and loss adjustment expenses.........................  $ 58,470   $ 62,349
Reinsurance balances payable................................     5,558      8,841
Accounts payable and accrued liabilities....................     2,705        558
                                                              --------   --------
Total Liabilities...........................................    66,733     71,748
                                                              --------   --------

                              SHAREHOLDERS' EQUITY
Share capital Authorized, issued and fully paid 12,000
  common shares of par value $l each........................        12         12
Additional paid-in capital..................................    17,242     17,242
Retained earnings...........................................    21,591     21,412
                                                              --------   --------
Total Shareholders' Equity..................................    38,845     38,666
                                                              --------   --------
Total Liabilities and Shareholders' Equity..................  $105,578   $110,414
                                                              ========   ========
</Table>

        See accompanying notes to the consolidated financial statements

                                       F-26
<PAGE>

                             B.H. ACQUISITION LTD.

           CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
              FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
                    (EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

<Table>
<Caption>
                                                               2005      2004      2003
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
Income
Underwriting (loss) income..................................  $  (552)  $   428   $  (230)
Net investment income.......................................    2,406     1,489     1,331
Other income................................................       --        90         8
                                                              -------   -------   -------
                                                                1,854     2,007     1,109
                                                              -------   -------   -------
Expenses
General and administrative expenses.........................    2,275     2,839     1,648
Foreign exchange loss (gain)................................       67       142      (927)
Amortization of run-off provision...........................     (667)   (1,333)     (500)
                                                              -------   -------   -------
                                                                1,675     1,648       221
                                                              -------   -------   -------
Net Earnings................................................      179       359       888
Retained earnings, beginning of year........................   21,412    21,053    20,165
                                                              -------   -------   -------
Retained earnings, end of year..............................  $21,591   $21,412   $21,053
                                                              =======   =======   =======
</Table>

        See accompanying notes to the consolidated financial statements

                                       F-27
<PAGE>

                             B.H. ACQUISITION LTD.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
                    (EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

<Table>
<Caption>
                                                                2005       2004       2003
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Operating Activities:
  Net earnings..............................................  $    179   $    359   $    888
  Adjustments to reconcile net earnings to net cash flows
     used in operating activities:
     Amortization of run-off provision......................      (667)    (1,333)      (500)
     Amortization of fair value adjustment..................     1,286      3,518      3,153
     Unrealized loss on holding of trading securities.......        41         --         --
                                                              --------   --------   --------
                                                                   839      2,544      3,541
  Changes in assets and liabilities:
     Purchase of trading securities.........................   (36,382)   (12,666)   (15,167)
     Proceeds on sale of trading securities.................    14,956      7,000      4,030
     Reinsurance balances receivable........................    28,400      7,755      3,061
     Funds withheld by ceding companies.....................      (287)       952        353
     Losses and loss adjustment expenses....................    (6,962)   (12,191)    (4,867)
     Reinsurance balances payable...........................    (3,283)    (1,391)    (5,028)
     Accounts payable and accrued liabilities...............     2,147       (160)       390
                                                              --------   --------   --------
          Net cash flows used in operating activities.......      (572)    (8,157)   (13,687)
                                                              --------   --------   --------
Investing Activity:
  Movement in restricted cash & cash equivalents, being net
     cash flow (used in) provided by investing activity.....    (1,933)       764      1,516
                                                              --------   --------   --------
Net decrease in cash and cash equivalents...................    (2,505)    (7,393)   (12,171)
Cash and cash equivalents, beginning of year................    24,724     32,117     44,288
                                                              --------   --------   --------
Cash and cash equivalents, end of year......................  $ 22,219   $ 24,724   $ 32,117
                                                              ========   ========   ========
</Table>

        See accompanying notes to the consolidated financial statements

                                       F-28
<PAGE>

                             B.H. ACQUISITION LTD.

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005, 2004 AND 2003
                    (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-29
<PAGE>
                             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.

  RECLASSIFICATIONS

     Certain balances of the 2004 and 2003 figures have been reclassified to
conform to the 2005 presentation.

3.  RESTRICTED CASH & CASH EQUIVALENTS

     Cash equivalents and investments in the amount of $11,321 and $9,388 as of
December 31, 2005 and 2004, respectively, are restricted as collateral against
letters of credit in the amount of $6,034 and $6,090 as of December 31, 2005 and
2004, respectively. Letters of credit are issued to ceding insurers as security
for the obligations of insurance subsidiaries under reinsurance agreements with
those ceding insurers.

4.  INVESTMENTS

     Trading investments with estimated fair values of $66,462 and $45,077 as of
December 31, 2005 and 2004, respectively, consist of mutual funds.

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

     Major categories of net investment income are summarized as follows:

<Table>
<Caption>
                                                              2005     2004     2003
                                                             ------   ------   ------
<S>                                                          <C>      <C>      <C>
Interest from debt securities and mutual funds.............  $1,983   $  916   $  624
Interest on cash and cash equivalents......................     499      631      881
Unrealized loss on holding of trading security.............     (41)      --       --
Investment expenses........................................     (35)     (58)    (174)
                                                             ------   ------   ------
                                                             $2,406   $1,489   $1,331
                                                             ======   ======   ======
</Table>

                                       F-30
<PAGE>
                             B.H. ACQUISITION LTD.

         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5.  REINSURANCE BALANCES RECEIVABLE

<Table>
<Caption>
                                                               2005     2004
                                                              ------   -------
<S>                                                           <C>      <C>
Paid losses recoverable.....................................  $1,042   $ 6,219
Losses and loss adjustment expenses recoverable.............   3,457    26,680
Fair value adjustment.......................................    (699)   (3,163)
                                                              ------   -------
                                                              $3,800   $29,736
                                                              ======   =======
</Table>

     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's acquired reinsurance subsidiaries used retrocessional
agreements to reduce their 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 $11,165 and $11,869 at December 31, 2005 and 2004,
respectively.

     At December 31, 2005 and 2004, reinsurance receivables with a carrying
value of $886 and $20,225, respectively, were associated with two and one
reinsurers, respectively, who represented 10% or more of total reinsurance
balances receivable. In the event that all or any of the reinsuring companies
are unable to meet their obligations under existing reinsurance agreements, the
Company will be liable for such defaulted amounts.

6.  LOSSES AND LOSS ADJUSTMENT EXPENSES

<Table>
<Caption>
                                                                2005       2004
                                                              --------   --------
<S>                                                           <C>        <C>
Outstanding.................................................  $ 33,394   $ 35,702
Incurred but not reported...................................    32,941     36,661
Run-off costs provision.....................................     3,496      4,367
Fair value adjustment.......................................   (11,361)   (14,381)
                                                              --------   --------
                                                              $ 58,470   $ 62,349
                                                              ========   ========
</Table>

                                       F-31
<PAGE>
                             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:

<Table>
<Caption>
                                                               2005      2004
                                                              -------   -------
<S>                                                           <C>       <C>
Balance as at January 1.....................................  $62,349   $71,217
Less reinsurance recoverables...............................   23,517    28,505
                                                              -------   -------
                                                               38,832    42,712
Effect of exchange rate movement............................   (2,344)      270
Incurred related to prior years.............................      617      (380)
Paid related to prior years.................................   19,274    (2,437)
Amortization of run-off provision...........................     (667)   (1,333)
                                                              -------   -------
Net balance as at December 31...............................   55,712    38,832
  Plus reinsurance recoverables.............................    2,758    23,517
                                                              -------   -------
Balance as at December 31...................................  $58,470   $62,349
                                                              =======   =======
</Table>

     The Company's reserve for unpaid losses and loss adjustment expenses as of
December 31, 2005 and 2004 included $29,763 and $14,112, 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,
2005 and 2004 was $33,635 and $34,403, 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.
In view of the changes in the legal and tort environment that affect the
development of such claims, the uncertainties inherent in valuing asbestos and
environmental claims are not likely to be resolved in the near future. Ultimate
values for such claims cannot be estimated using traditional reserving
techniques and there are significant uncertainties in estimating the amount of
the Company's potential losses for these claims. 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.

     Reductions in estimates of ultimate losses arise from commutations, policy
buy-backs and loss settlements below carried reserves and the resulting
reductions in actuarial estimates of losses incurred but not reported.

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

                                       F-32
<PAGE>
                             B.H. ACQUISITION LTD.

         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7.  UNDERWRITING INCOME (LOSS)

     Underwriting income is summarized as follows:

<Table>
<Caption>
                                                           2005      2004      2003
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Net written and earned premiums.........................  $    92   $    12   $   347
                                                          -------   -------   -------
Losses and loss adjustment expenses.....................   (4,468)   (1,218)   (1,308)
Reinsurance recoveries..................................    3,851     1,598       814
                                                          -------   -------   -------
Net losses and loss adjustment expenses.................     (617)      380      (494)
Commissions and brokerage...............................      (27)       36       (83)
                                                          -------   -------   -------
                                                             (644)      416      (577)
                                                          -------   -------   -------
Net underwriting (loss) income..........................  $  (552)  $   428   $  (230)
                                                          =======   =======   =======
</Table>

     Net underwriting income primarily arises from commutations, policy
buy-backs and settlement of losses below carried reserves and consequent net
reductions in actuarial estimates of losses incurred but not reported.

8.  RELATED PARTY TRANSACTIONS

     In 2002, the Company and Castlewood Holdings Limited ("Castlewood") entered
into an investment advisory agreement with The Enstar Group, Inc ("Enstar") for
an agreed annual fee of $400. For the years ended December 31, 2005, 2004 and
2003 the Company incurred fees relating to this agreement of $35, $56 and $174.
Enstar and Castlewood are shareholders in the Company.

     The Company was charged by Castlewood administration fees for the years
ended December 31, 2005, 2004 and 2003 amounting to $1,250, $1,250 and $1,250,
respectively. As at December 31, 2005, and 2004, amounts included in accounts
payable and accrued liabilities were $Nil and $Nil, respectively.

9.  LITIGATION

     B.H. 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, 2005, 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-33
<PAGE>
                             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, 2005 and 2004 of approximately $9,062 and $9,654
respectively, which do not expire. A valuation allowance has been provided for
the tax benefit of these loss carry-forwards as follows:

<Table>
<Caption>
                                                               2005      2004
                                                              -------   -------
<S>                                                           <C>       <C>
Benefit of loss carry-forward...............................  $ 3,625   $ 3,862
Valuation allowance.........................................   (3,625)   (3,862)
                                                              -------   -------
                                                              $    --   $    --
                                                              =======   =======
</Table>

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, 2005 and 2004, 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, 2005 and 2004, retained earnings of $18,911 and
$18,876 requires regulatory approval prior to distribution.

                                       F-34