FORM S-4
As filed with the Securities and Exchange Commission on
July 11, 2006
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-4
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
CASTLEWOOD HOLDINGS
LIMITED
(Exact name of registrant as
specified in its charter)
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Bermuda
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6331
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Not Applicable
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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P.O. Box HM 2267
Windsor Place,
3rd Floor
18 Queen Street
Hamilton HM JX
Bermuda
(441) 292-3645
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Richard J. Harris
Chief Financial
Officer
Castlewood Holdings
Limited
P.O. Box HM 2267
Windsor Place,
3rd Floor
18 Queen Street
Hamilton HM JX
Bermuda
(441) 292-3645
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies
to:
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John J. Oros
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Robert C. Juelke, Esq.
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Robert F. Quaintance, Jr.,
Esq.
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President and Chief Operating
Officer
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Drinker Biddle & Reath
LLP
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Debevoise & Plimpton
LLP
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The Enstar Group, Inc.
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One Logan Square
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919 Third Avenue
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401 Madison Avenue
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18th & Cherry
Street
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New York, New York
10022
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Montgomery, Alabama
36104
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Philadelphia, Pennsylvania
19103
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(212) 909-6000
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(334) 834-5483
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(215)
988-2700
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after this
registration statement becomes effective and the satisfaction or
waiver of all other conditions to the merger of a direct
wholly-owned subsidiary of the registrant with and into The
Enstar Group, Inc., or Enstar, pursuant to the Agreement and
Plan of Merger, dated as of May 23, 2006, or the merger
agreement, attached as Annex A to the proxy
statement/prospectus forming part of this registration statement.
If any of the securities being registered on this Form are being
offered in connection with the formation of a holding company
and there is compliance with General Instruction G, check
the following box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
CALCULATION OF REGISTRATION
FEE
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Proposed Maximum
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Amount of
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Title of Each Class of
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Amount to be
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Offering Price
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Proposed Maximum Aggregate
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Registration
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Securities to be
Registered
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Registered(1)
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per Share
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Offering Price(2)
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Fee
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Ordinary Shares, $1.00 par
value
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6,275,654 shares
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Not Applicable
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$561,733,790
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$60,106
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(1)
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Represents the maximum number of
ordinary shares that the registrant may be required to issue in
the merger, calculated as the product of (a) the sum of
(i) 5,739,384, the aggregate number of shares of Enstar
common stock outstanding as of May 23, 2006,
(ii) 500,000 shares of Enstar common stock issuable
pursuant to the exercise of options outstanding as of
May 23, 2006 and (iii) 36,270 restricted stock units
of Enstar to be converted in the merger; and (b) an
exchange ratio of 1.0000 ordinary share of the registrant for
each share of Enstar common stock.
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(2)
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Estimated solely for the purposes
of calculating the registration fee required by
Section 6(b) of the Securities Act of 1933, as amended, or
the Securities Act, and calculated pursuant to Rule 457(f)
under the Securities Act. Pursuant to Rule 457(f)(1) under
the Securities Act, the proposed maximum aggregate offering
price of the registrants ordinary shares was calculated
based upon (a) the market value of shares of Enstar common
stock to be exchanged in the merger, determined in accordance
with Rule 457(c), as the product of (i) $89.51, the
average of the high and low prices per share of Enstar common
stock as of July 3, 2006, as reported on the NASDAQ Global
Select Market, and (ii) 6,275,654, the estimated maximum
number of shares of Enstar common stock that may be cancelled in
the merger.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this proxy statement/prospectus is not complete
and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This proxy statement/prospectus is not
an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or
sale is not permitted.
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SUBJECT TO COMPLETION DATED
JULY 11, 2006
THE ENSTAR GROUP,
INC.
PROXY STATEMENT
FOR ANNUAL MEETING OF
SHAREHOLDERS
To Be Held
on ,
2006
MERGER
PROPOSED YOUR VOTE IS VERY IMPORTANT
This proxy statement/prospectus is being furnished to the
shareholders of The Enstar Group, Inc., or Enstar, in connection
with the solicitation of proxies by the board of directors of
Enstar for use at the Annual Meeting of Shareholders to be held
on ,
2006, or the Annual Meeting, at Flowers Hall, Huntingdon
College, at 1500 East Fairview Avenue, Montgomery, Alabama
36106, at 9:00 a.m., local time, and at any adjournment
thereof.
Enstar and Castlewood Holdings Limited, or Castlewood, have
agreed on a merger transaction involving the two companies. In
order to consummate the merger, Enstars shareholders must
approve the merger agreement and the transactions contemplated
by the merger agreement. As of May 23, 2006, Enstars
directors and executive officers owned 1,904,753 shares of
Enstar common stock, representing approximately 33.19% of the
voting power of Enstar common stock on that date. Three of those
directors, who owned Enstar common stock representing 30.1% of
the voting power on that date, have entered into a support
agreement with Castlewood pursuant to which such directors have
agreed to vote their shares of Enstar common stock in favor of
the merger agreement and the transactions contemplated by the
merger agreement. All other Enstar directors and officers have
also indicated that they intend to vote their shares of Enstar
common stock in favor of the merger agreement and the
transactions contemplated by the merger agreement.
Enstars annual meeting was originally scheduled for
June 2, 2006. On May 21, 2006, Enstars board of
directors voted to postpone the June 2, 2006 annual
meeting. Enstars board of directors determined that the
disclosure in the proxy statement delivered in connection with
the June 2, 2006 annual meeting required amendment to
describe certain terms and implications of the contemplated
merger transaction. This proxy statement/prospectus includes
such additional disclosure. Enstars board of directors is
asking shareholders of Enstar to vote in favor of the merger
agreement and the transactions contemplated by the merger
agreement.
If the merger agreement and the transactions contemplated by the
merger agreement are approved and the merger is consummated:
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Castlewood, which will be renamed Enstar Group Limited and which
we sometimes refer to in this proxy statement/prospectus as New
Enstar, will be a publicly-traded company engaged in the
acquisition and management of insurance and reinsurance
companies in run-off and the provision of management,
consultancy and other services to the insurance and reinsurance
industry;
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Enstar shareholders as of the applicable record date will
receive a $3.00 per share cash dividend on their Enstar
common stock, which will be paid immediately prior to the merger;
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immediately before the effective time of the merger, Castlewood
will complete a recapitalization in which, among other things,
all of Castlewoods issued shares will be exchanged for
newly-created ordinary shares; and
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after the merger, current shareholders of Enstar will own
approximately 48.7% of New Enstars issued ordinary shares,
and current Castlewood shareholders, other than Enstar, will own
the remaining approximately 51.3% of New Enstars issued
ordinary shares.
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Castlewood will apply to have the New Enstar ordinary shares
listed on the NASDAQ Global Select Market under the ticker
symbol ESGR.
After careful consideration, Enstars board of directors
has determined that the merger agreement and the transactions
contemplated by the merger agreement are fair and in the best
interest of Enstar and its shareholders. Enstars board of
directors has unanimously approved the merger agreement and the
transactions contemplated by the merger agreement and
unanimously recommends that you vote for the approval of the
merger agreement and the transactions contemplated by the merger
agreement.
Enstars board of directors also recommends that you vote
for T. Whit Armstrong and T. Wayne Davis to hold office as
directors of Enstar until the 2009 annual meeting of
shareholders of Enstar, or until their successors are duly
elected and qualified, and to vote for the proposal to ratify
the appointment of Deloitte & Touche LLP as the
independent registered public accounting firm of Enstar for
2006. If the merger is consummated, New Enstar, as the sole
shareholder of Enstar, will be able to determine the composition
of the board of directors of Enstar in accordance with the
merger agreement and select the independent auditors of Enstar
in the future.
All shareholders of Enstar are invited to attend the Annual
Meeting. Your participation at the Annual Meeting, in person
or by proxy, is very important. Even if you only own a few
shares, we want your shares to be represented at the Annual
Meeting. The merger cannot be consummated without the approval
of the holders of a majority of the outstanding voting power of
the common stock of Enstar.
The affirmative vote of a plurality of the shares of Enstar
common stock present in person or by proxy at the Annual Meeting
and entitled to vote is required to elect directors. The
affirmative vote of the majority of the shares of Enstar common
stock represented at the Annual Meeting and entitled to vote on
the subject matter is required with respect to the ratification
of the appointment of Deloitte & Touche LLP as
Enstars independent registered public accounting firm and
any other matter that may properly come before the Annual
Meeting.
Whether or not you plan to attend the Annual Meeting, please
take the time to vote by completing, signing, dating and
returning the enclosed proxy card in the enclosed
postage-prepaid envelope. If you sign, date and mail your proxy
card without indicating how you want to vote, your proxy will be
counted as a vote for approval of the merger agreement and the
transactions contemplated by the merger agreement, for the
election of T. Whit Armstrong and T. Wayne Davis as directors
and for the ratification of the appointment of
Deloitte & Touche LLP as the independent registered
public accounting firm of Enstar for 2006. If you fail to return
your card, the effect will be a vote against the merger. Each
proxy is revocable and will not affect your right to vote in
person in the event you attend the Annual Meeting.
This document is a prospectus of Castlewood relating to the
issuance of its ordinary shares in connection with the merger
and a proxy statement for Enstar to use in soliciting proxies
for its Annual Meeting. It contains answers to frequently asked
questions beginning on
page Q-1
and a summary description of the merger beginning on
page 1, followed by a more detailed discussion of the
merger and related matters. You should also consider the
matters discussed under RISK FACTORS commencing on
page 19 of the enclosed proxy statement/prospectus. We
urge you to review the entire document carefully.
Nimrod T. Frazer
Chairman of the Board and Chief Executive Officer
The Enstar Group, Inc.
None of the Securities and Exchange Commission, any state
securities regulators, the Registrar of Companies in Bermuda or
the Bermuda Monetary Authority has approved or disapproved of
these securities or passed on the adequacy or accuracy of this
proxy statement/prospectus. Any representation to the contrary
is a criminal offense.
This proxy statement/prospectus is
dated ,
2006, and is first being mailed to shareholders on or
about ,
2006.
THE ENSTAR GROUP,
INC.
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS
To Be Held
on ,
2006
To the Shareholders of The Enstar Group, Inc.:
The Annual Meeting of Shareholders of The Enstar Group, Inc., or
Enstar, will be held
on ,
2006 at Flowers Hall, Huntingdon College, at 1500 East Fairview
Avenue, Montgomery, Alabama 36106, at 9:00 a.m., local
time, for the following purposes:
(i) to consider and vote upon a proposal to approve the
Agreement and Plan of Merger, or merger agreement, dated as of
May 23, 2006, by and among Castlewood Holdings Limited,
CWMS Subsidiary Corp. and Enstar, and the transactions
contemplated by the merger agreement;
(ii) to elect two directors for three-year terms expiring
at the annual meeting of shareholders in 2009 or until their
successors are duly elected and qualified;
(iii) to ratify the appointment of Deloitte &
Touche LLP as the independent registered public accounting firm
of Enstar to serve for 2006; and
(iv) to transact such other business as may properly come
before the Annual Meeting or any adjournment thereof.
Enstar will not be able to consummate the merger unless its
shareholders approve the merger agreement and the transactions
contemplated by the merger agreement.
The board of directors of Enstar has fixed the close of business
on ,
2006 as the record date for the determination of shareholders
entitled to receive notice of, and to vote at, the Annual
Meeting and any adjournment thereof. A list of shareholders as
of the record date will be open for examination during the
Annual Meeting.
The board of directors of Enstar has unanimously approved the
merger agreement and the transactions contemplated by the merger
agreement and unanimously recommends that the shareholders of
Enstar vote for the approval of the merger agreement and the
transactions contemplated by the merger agreement. The board of
directors of Enstar also recommends that you vote for T. Whit
Armstrong and T. Wayne Davis to hold office until the 2009
annual meeting of shareholders, or until their successors are
duly elected and qualified, and that you vote for the proposal
to ratify the appointment of Deloitte & Touche LLP as
the independent registered public accounting firm of Enstar for
2006.
Your attention is directed to the proxy statement/prospectus
submitted with this notice. This notice is being given at the
direction of the board of directors of Enstar.
By Order of the Board of Directors
Cheryl D. Davis
Chief Financial Officer, Vice-President of
Corporate Taxes and Secretary
Montgomery, Alabama
,
2006
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING,
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE. IF YOU ATTEND THE MEETING,
YOU MAY REVOKE THE PROXY AND VOTE IN PERSON IF YOU WISH, EVEN IF
YOU HAVE PREVIOUSLY RETURNED YOUR PROXY.
Table of
Contents
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Page
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Q-1
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1
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2
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2
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5
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5
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5
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5
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5
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6
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6
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6
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6
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6
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7
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8
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8
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9
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9
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9
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10
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10
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10
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10
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11
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12
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13
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15
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21
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26
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29
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32
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34
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34
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34
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34
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i
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Page
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35
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35
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36
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39
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41
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ii
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Page
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71
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71
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98
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Quantitative and Qualitative
Information about Market Risk
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124
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125
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125
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131
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133
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134
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iii
NOTE ON
REFERENCES TO ADDITIONAL INFORMATION
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES IMPORTANT BUSINESS
AND FINANCIAL INFORMATION ABOUT THE ENSTAR GROUP, INC. THAT MAY
NOT BE INCLUDED IN OR DELIVERED WITH THE DOCUMENT. THIS
INFORMATION IS AVAILABLE WITHOUT CHARGE TO SHAREHOLDERS OF
ENSTAR AT A WEBSITE MAINTAINED BY THE SECURITIES AND EXCHANGE
COMMISSION AT HTTP://WWW.SEC.GOV, AS WELL AS UPON WRITTEN OR
ORAL REQUEST TO:
THE ENSTAR GROUP, INC.
CORPORATE SECRETARY
401 MADISON AVENUE
MONTGOMERY, ALABAMA 36104
(334) 834-5483
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO
BY ,
2006 IN ORDER TO RECEIVE THEM BEFORE THE ANNUAL MEETING.
iv
QUESTIONS
AND ANSWERS ABOUT THE MERGER AND THE ANNUAL MEETING
The following are some questions that you, as a shareholder of
The Enstar Group, Inc., or Enstar, may have regarding the merger
and the other matters being considered at the Annual Meeting of
Enstars shareholders and the answers to those questions.
You are urged to read carefully the remainder of this proxy
statement/prospectus because information in this section does
not provide all the information that might be important to you
with respect to the merger and the other matters being
considered at the Annual Meeting. Additional important
information is contained in the remainder of this proxy
statement/prospectus, the annexes to this proxy
statement/prospectus and the documents referred to or
incorporated by reference in this proxy statement/prospectus.
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Q: |
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When is the Annual Meeting? |
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A: |
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Enstars Annual Meeting of shareholders will take place
on ,
2006, at 9:00 a.m., local time, at Flowers Hall, Huntingdon
College, at 1500 East Fairview Avenue, Montgomery, Alabama 36106. |
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Q: |
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What am I being asked to vote upon? |
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A: |
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You are being asked to approve the merger agreement entered into
among Enstar, Castlewood Holdings Limited, or Castlewood, and
CWMS Subsidiary Corp., or Merger Sub, and the transactions
contemplated by that agreement. Castlewood, after the merger, is
sometimes referred to in this proxy statement/prospectus as
New Enstar. You are also being asked to vote for T. Whit
Armstrong and T. Wayne Davis to hold office as directors of
Enstar until the 2009 annual meeting of shareholders of Enstar,
or until their successors are duly elected and qualified, and to
vote for the proposal to ratify the appointment of
Deloitte & Touche LLP as the independent registered
public accounting firm of Enstar for 2006. If the merger is
consummated, the composition of the board of directors of New
Enstar will be different from the current composition of
Enstars board of directors. Following the merger,
New Enstars board of directors will consist of ten
members. Four of these
individuals Messrs. T. Whit Armstrong,
Paul J. Collins, Gregory L. Curl and T. Wayne
Davis are current directors of Enstar, three of
these individuals Messrs. J. Christopher
Flowers, Nimrod T. Frazer and John J. Oros are
current directors of both Enstar and Castlewood, and the other
three individuals Messrs. Nicholas A.
Packer, Paul J. OShea and Dominic F.
Silvester are current directors
and/or
executive officers of Castlewood. In addition, New Enstar, as
the sole shareholder of Enstar following the merger, will be
able to determine the composition of Enstars board of
directors in accordance with the merger agreement and select the
independent auditors of Enstar after the merger. |
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Q: |
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What will happen in the merger? |
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A: |
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In the merger, Merger Sub, a direct wholly-owned subsidiary of
Castlewood, will merge with and into Enstar, with Enstar
surviving as a direct wholly-owned subsidiary of Castlewood.
Current Enstar shareholders will own approximately 48.7% of New
Enstars issued ordinary shares after the merger. Current
Castlewood shareholders, other than Enstar, will own the
remaining approximately 51.3% of New Enstars issued
ordinary shares after the merger. In the merger, New Enstar will
issue approximately 5.7 million ordinary shares to holders
of Enstar common stock. After the merger, New Enstar will have
outstanding approximately 11.8 million ordinary shares. |
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Immediately before the effective time of the merger, Castlewood
will complete a recapitalization in which, among other things,
all of Castlewoods issued shares will be exchanged for
newly-created ordinary shares. Upon the consummation of the
recapitalization, Enstar will own approximately 3.0 million
non-voting convertible ordinary shares of Castlewood. Unless
otherwise indicated, the ownership percentage calculations set
forth above and throughout this proxy statement/prospectus treat
such non-voting convertible ordinary shares of Castlewood owned
by Enstar as if they were treasury shares and not outstanding
because Enstar will be a wholly-owned subsidiary of Castlewood. |
Q-1
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Q: |
|
Does the Enstar board of directors support the merger? |
|
A: |
|
Yes. The Enstar board of directors has determined that the
merger agreement and the transactions contemplated by the merger
agreement are fair and in the best interests of Enstar and its
shareholders and that the merger agreement is advisable. The
Enstar board of directors, by unanimous vote, has approved the
merger agreement and the transactions contemplated by the merger
agreement and recommends that the Enstar shareholders vote
FOR the approval of the merger agreement and the
transactions contemplated by the merger agreement. Some of
Enstars directors and executive officers have interests in
the merger that are different from, or in addition to, yours.
These interests are discussed in Interests of Certain
Persons in the Merger beginning on page 51. |
|
Q: |
|
Why are Castlewood and Enstar proposing the merger and the
transactions contemplated by the merger agreement? |
|
A: |
|
The boards of directors of Castlewood and Enstar believe that
the merger will result in potential increased revenues and
enhanced shareholder value for New Enstar. Specifically, the
Enstar board of directors believes that the merger will: |
|
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|
enhance the existing and proven close working
relationship between Enstar and Castlewood management and
further align the incentives of Castlewood management with the
interests of Enstars shareholders;
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|
provide a positive economic result for Enstars
shareholders, as a result of a one-time $3.00 per share
dividend, the
one-for-one
exchange ratio contemplated by the merger agreement and the
opportunity for Enstars shareholders to participate in
approximately 48.7% (on an undiluted basis) of the earnings and
cash flows of New Enstar; |
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simplify the ownership and management structure of
Castlewood, Enstar and B.H. Acquisition Ltd., a company they
partially own with an affiliate of Trident II, L.P., by
forming one public company with one board of directors and a
consolidated management team; |
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consolidate the financial and management resources
and thereby expand the capabilities of Castlewood and Enstar to
pursue additional acquisitions in the insurance and reinsurance
run-off business; |
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|
enhance New Enstars access to capital as a
result of both its larger asset base and simplified ownership
structure; |
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expand the opportunities for New Enstar to deploy
its capital in attractive investments; and |
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increase the focus of the time and energy of the
directors and management of New Enstar on identifying and
consummating attractive acquisitions and managing existing
businesses. |
|
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For a more detailed description of the background and reasons
for the merger, see The Proposed Merger beginning on
page 41. |
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Q: |
|
What will I receive in the merger for my Enstar common
stock? |
|
A: |
|
If the merger is consummated, as an Enstar shareholder, you will
receive one ordinary share of New Enstar in exchange for each
share of Enstar common stock, including the associated rights
issued under the Enstar shareholder rights plan, that you own.
Also, if the merger is consummated, the Enstar shareholders as
of the applicable record date will receive a one-time
$3.00 per share dividend on their Enstar common stock,
payable immediately prior to the merger. |
|
Q: |
|
Will I be able to trade New Enstar ordinary shares that I
receive in connection with the merger? |
|
A: |
|
Yes. The New Enstar ordinary shares issued in connection with
the merger will be freely tradeable, unless you are an affiliate
of Enstar. Generally, persons who are deemed to be affiliates of
Enstar must comply with Rule 145 under the
U.S. Securities Act of 1933, as amended, if they wish to
sell or otherwise transfer any of the New Enstar ordinary shares
received in connection with the merger. You will be notified if
you are an affiliate of Enstar. |
Q-2
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|
Q: |
|
Will Enstars shares of common stock continue to be
traded on the NASDAQ Global Select Market after the merger is
consummated? |
|
A: |
|
No, but the ordinary shares of New Enstar that you receive in
the merger are expected to be. Castlewood will apply for listing
of the New Enstar ordinary shares on the NASDAQ Global Select
Market, or Nasdaq, under the ticker symbol ESGR. If
the merger is consummated, Enstars common stock will no
longer be listed for trading on Nasdaq. |
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Q: |
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What are the tax consequences of the merger? |
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A: |
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The merger should not be a taxable transaction to you for
U.S. federal income tax purposes. See The Proposed
Merger Material U.S. Federal Income Tax
Consequences of the Merger on page 46. You are urged
to consult your own tax advisor as to the tax effects of the
merger in your particular circumstances. |
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Q: |
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Can I dissent and require appraisal of my shares of Enstar
common stock? |
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A: |
|
No. Enstar shareholders have no dissenters rights
under Georgia law in connection with the merger. |
|
Q: |
|
When should I send in my Enstar share certificates? |
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A: |
|
After the merger is consummated, the exchange agent for the
merger will send written instructions to Enstar shareholders
that explain how to exchange Enstar share certificates for New
Enstar share certificates. The exchange agent will also send a
letter of transmittal that must be executed by Enstar
shareholders in order to obtain New Enstar share certificates.
Please do not send in any share certificates until you receive
these written instructions and the letter of transmittal. |
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Q: |
|
When do you expect to consummate the merger? |
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A: |
|
We expect to consummate the merger as quickly as possible once
all the conditions to the merger, including obtaining the
required approval of Enstars shareholders at the Annual
Meeting, are fulfilled. Fulfilling some of these conditions,
such as required regulatory approvals, is not entirely within
our control. We hope to consummate the merger in the third
quarter of 2006. |
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Q: |
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Are there risks associated with the merger that I should
consider in deciding how to vote? |
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A: |
|
Yes. There are risks associated with all business combinations,
including this merger. In particular, you should be aware that
the exchange ratio determining the number of New Enstar ordinary
shares that Enstar shareholders will receive is fixed and will
not change as the market price of shares of Enstar common stock
fluctuates in the period before the merger. Accordingly, the
value of the New Enstar ordinary shares that you as an Enstar
shareholder will receive in the merger in return for your shares
of Enstar common stock may be either less than or more than the
current fair market value of the shares of Enstar common stock
that you currently hold. There are also a number of other risks
that are discussed in this proxy statement/prospectus. Please
read with particular care the more detailed description of the
risks associated with the merger under Risk Factors
beginning on page 19. |
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Q: |
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Who will manage New Enstar? |
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A: |
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Pursuant to the recapitalization agreement, Castlewood, Enstar
and certain other shareholders of Castlewood have agreed that
New Enstars board of directors will consist of ten members
following the merger. Four of these
individuals Messrs. T. Whit Armstrong,
Paul J. Collins, Gregory L. Curl and T. Wayne
Davis are current directors of Enstar, three of
these individuals Messrs. J. Christopher
Flowers, Nimrod T. Frazer and John J. Oros are
current directors of both Enstar and Castlewood, and the other
three individuals Messrs. Nicholas A.
Packer, Paul J. OShea and Dominic F.
Silvester are current directors
and/or
executive officers of Castlewood. The proposed Chief Executive
Officer of New Enstar following the merger is Dominic F.
Silvester and the proposed Executive Chairman is John J. Oros. |
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Q: |
|
Will I receive the one-time $3.00 per share dividend on
my Enstar common stock if the merger is not consummated? |
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A: |
|
No. The one-time $3.00 per share cash dividend will be
paid to the Enstar shareholders as of the applicable record date
only if the merger is consummated. |
Q-3
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Q: |
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What will happen at the Annual Meeting? |
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A: |
|
At the Annual Meeting, holders of Enstar common stock will vote
on whether to approve the merger agreement and the transactions
contemplated by the merger agreement. Approval of the merger
agreement and the transactions contemplated by the merger
agreement requires the affirmative vote of the holders of a
majority of the outstanding voting power of Enstars common
stock on the Record Date. |
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As of May 23, 2006, Enstars directors and executive
officers owned 1,904,753 shares of Enstar common stock,
representing approximately 33.19% of the voting power of Enstar
common stock on that date. Three of those directors, who owned
Enstar common stock representing 30.1% of the voting power on
that date, have entered into a support agreement with Castlewood
pursuant to which such directors have agreed to vote their
shares of Enstar common stock in favor of the merger agreement
and the transactions contemplated by the merger agreement. All
other Enstar directors and officers have also indicated that
they intend to vote their shares of Enstar common stock in favor
of the merger agreement and the transactions contemplated by the
merger agreement. For a more detailed description of the support
agreement, see Material Terms of Related
Agreements Support Agreement beginning on
page 66. |
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The holders of Enstar common stock will also vote at the Annual
Meeting on the election of T. Whit Armstrong and T. Wayne Davis
to hold office as directors of Enstar until the 2009 annual
meeting of Enstars shareholders, or until their successors
are duly elected and qualified, and on the proposal to ratify
the appointment of Deloitte & Touche LLP as the
independent registered public accounting firm of Enstar for 2006. |
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Q: |
|
What do I need to do to vote? |
|
A: |
|
Mail your signed and dated proxy card in the enclosed return
envelope as soon as possible so that your shares may be
represented at the Annual Meeting. In order to assure that
Enstar obtains your vote, please follow the voting instructions
on your proxy card even if you currently plan to attend the
Annual Meeting in person. The Enstar board of directors
recommends that Enstars shareholders vote FOR
the approval of the merger agreement and the transactions
contemplated by the merger agreement. The Enstar board also
recommends that Enstars shareholders vote FOR
T. Whit Armstrong and T. Wayne Davis to hold office as directors
until the 2009 annual meeting of Enstars shareholders, or
until their successors are duly elected and qualified, and that
Enstars shareholders vote FOR the proposal to
ratify the appointment of Deloitte & Touche LLP as the
independent registered public accounting firm of Enstar for 2006. |
|
Q: |
|
How do I vote my shares of Enstar common stock if they are
held in the name of a bank, broker or other fiduciary? |
|
A: |
|
Your bank, broker or other fiduciary will vote your shares of
Enstar common stock with respect to the merger agreement and the
transactions contemplated by the merger agreement, the election
of T. Whit Armstrong and T. Wayne Davis as directors
and the ratification of the appointment of Deloitte &
Touche LLP as the independent registered public accounting firm
of Enstar for 2006 only if you provide written instructions to
them on how to vote, so it is important that you provide them
with instructions. If you wish to vote in person at the Annual
Meeting and hold your shares of Enstar common stock in the name
of a bank, broker or other fiduciary, you must contact your
bank, broker or other fiduciary and request a legal proxy. You
must bring this legal proxy to the Annual Meeting in order to
vote in person. Shares of Enstar common stock held by a broker,
bank or other fiduciary that are not voted because the
beneficial owner has not provided instructions to the broker,
bank or other fiduciary will have the same effect as a vote
against the merger agreement and the transactions
contemplated by the merger agreement but will have no effect on
the results of the election of T. Whit Armstrong and T. Wayne
Davis as directors or the ratification of the appointment of
Deloitte & Touche LLP as the independent registered
public accounting firm of Enstar for 2006. |
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Q: |
|
May I change my vote even after returning a proxy card? |
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A: |
|
Yes. If you are a record holder, you can change your vote by: |
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completing, signing and dating a new proxy card and
returning it by mail so that it is received before the Annual
Meeting;
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sending a written notice to Enstars Secretary
that is received before the Annual Meeting stating that you
revoke your proxy; or |
Q-4
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attending the Annual Meeting and voting in person or
by legal proxy.
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If your shares of Enstar common stock are held in the name of a
bank, broker or other fiduciary and you have directed such
person(s) to vote your shares of Enstar common stock, you should
instruct such person(s) to change your vote or obtain a legal
proxy to do so yourself. |
|
Q: |
|
What if I do not vote, abstain from voting or do not instruct
my broker to vote my shares of Enstar common stock? |
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A: |
|
If you do not vote your shares, it will have the same effect as
a vote against the merger agreement and the transactions
contemplated by the merger agreement, but will not affect the
outcome of the voting on any other matter presented to
Enstars shareholders at the Annual Meeting assuming that a
quorum for the transaction of business at the Annual Meeting has
been achieved. |
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If you return your proxy card, but mark it that you wish to
ABSTAIN from the vote on the proposal to approve the
merger agreement and the transactions contemplated by the merger
agreement it will also have the same effect as a vote against
the merger agreement and the transactions contemplated by the
merger agreement. Similarly, if you mark your proxy card
ABSTAIN on the proposal to ratify the appointment of
Deloitte & Touche LLP as the independent registered
public accounting firm of Enstar for 2006, it will have the same
effect as a vote against that proposal. If you
ABSTAIN on these proposals, your shares will still
be counted for purposes of determining the presence of a quorum
for the transaction of business at the Annual Meeting. |
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Broker non-votes are proxies from brokers or
nominees indicating that those persons have not received
instructions from the beneficial owners of the shares as to
certain proposals on which the beneficial owners are entitled to
vote, but with respect to which the brokers or nominees have no
discretionary power to vote without instructions. Broker
non-votes will be counted for purposes of
determining the presence of a quorum for the transaction of
business at the Annual Meeting but will not be counted for
purposes of determining the number of votes cast with respect to
the particular proposal on which the broker has expressly not
voted. Consequently, if you do not instruct your broker to vote
your shares, it too will have the same effect as a vote against
the merger agreement and the transactions contemplated by the
merger agreement. Brokers or nominees, however, can exercise
their discretion to vote your shares in favor of T. Whit
Armstrong and T. Wayne Davis to hold office as directors
until the 2009 annual meeting of Enstars shareholders, or
until their successors are duly elected and qualified, as well
as in favor of the ratification of the appointment of Deloitte
& Touche LLP as the independent registered public accounting
firm of Enstar for 2006. |
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If you sign your proxy card but do not indicate how you want to
vote, your shares of Enstar common stock will be voted
FOR the approval of the merger agreement and the
transactions contemplated by the merger agreement,
FOR T. Whit Armstrong and T. Wayne Davis to hold
office as directors until the 2009 annual meeting of
Enstars shareholders, or until their successors are duly
elected and qualified, and FOR the proposal to
ratify the appointment of Deloitte & Touche LLP as the
independent registered public accounting firm of Enstar for 2006. |
|
Q: |
|
Where can I find more information about Enstar and
Castlewood? |
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A: |
|
Business and financial information about Enstar and Castlewood
is contained in this proxy statement/prospectus. You can also
find more information about Enstar and Castlewood from various
sources described under Where You Can Find More
Information on page 198. |
Q-5
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information
that is important to you. To understand the merger agreement and
the transactions contemplated by the merger agreement fully and
for a more complete description of the legal terms of the merger
agreement, you should carefully read this entire document and
the documents to which we refer you. See Where You Can
Find More Information on page 198.
In this proxy statement/prospectus, the following terms have the
meanings as set forth below:
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Annual Meeting |
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Enstars Annual Meeting to be held
on ,
2006. |
|
B.H. Acquisition |
|
B.H. Acquisition Ltd., a Bermuda company and partially-owned
affiliate of Castlewood, Enstar and an affiliate of Trident II,
L.P. which will become a wholly-owned subsidiary of New Enstar
upon completion of the merger. |
|
Castlewood |
|
The registrant, Castlewood Holdings Limited, a Bermuda company,
and its subsidiaries, prior to the merger. |
|
Code |
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U.S. Internal Revenue Code of 1986, as amended. |
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Commission |
|
U.S. Securities and Exchange Commission. |
|
Direct Foreign Shareholder Group |
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A shareholder or group of commonly controlled shareholders of
New Enstar that are not U.S. persons. |
|
Enstar |
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The Enstar Group, Inc., a Georgia corporation, and its
subsidiaries, prior to the merger. |
|
Exchange Act |
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U.S. Securities Exchange Act of 1934, as amended. |
|
merger agreement |
|
Agreement and Plan of Merger, dated as of May 23, 2006,
among Castlewood, Merger Sub and Enstar. |
|
Merger Sub |
|
CWMS Subsidiary Corp., a Georgia corporation and a direct
wholly-owned subsidiary of Castlewood. |
|
merger |
|
The merger of Merger Sub with and into Enstar, with Enstar
surviving as a direct wholly-owned subsidiary of Castlewood. |
|
Nasdaq |
|
NASDAQ Global Select Market. |
|
New Enstar, we, us and
our |
|
Castlewood following the merger. |
|
recapitalization |
|
The recapitalization of Castlewood pursuant to the
recapitalization agreement. |
|
recapitalization agreement |
|
Recapitalization Agreement, dated as of May 23, 2006, among
Castlewood, Enstar, Trident, Dominic F. Silvester, Paul J.
OShea, Nicholas A. Packer, and certain other shareholders
of Castlewood. |
|
Record Date |
|
Close of business
on ,
2006. |
|
registration rights agreement |
|
Registration Rights Agreement, between and among New Enstar,
Trident, J. Christopher Flowers, Dominic F. Silvester and
certain other shareholders of New Enstar. |
|
Securities Act |
|
U.S. Securities Act of 1933, as amended. |
|
support agreement |
|
Support Agreement, dated as of May 23, 2006, among
Castlewood, J. Christopher Flowers, Nimrod T. Frazer and John J.
Oros. |
|
Trident |
|
Collectively, Trident II, L.P., Marsh & McLennan
Capital Professionals Fund, L.P. and Marsh & McLennan
Employees Securities Company. |
See the Glossary of Selected Insurance and Reinsurance
Terms beginning on
page G-1
for an explanation of terms related to the insurance industry.
1
The
Companies (see Information About Castlewood on
page 71 and Information About Enstar on
page 125)
Castlewood Holdings Limited
P.O. Box HM 2267
Windsor Place,
3rd Floor
18 Queen Street
Hamilton HM JX
Bermuda
(441) 292-3645
Castlewood is a Bermuda company that acquires and manages
insurance and reinsurance companies in run-off and provides
management, consultancy and other services to the insurance and
reinsurance industry. Castlewood currently is privately owned,
and its shares do not trade on any stock exchange or other
quotation system. After the merger, Castlewood will change its
name to Enstar Group Limited. Castlewood will apply
to have New Enstars ordinary shares listed on the NASDAQ
Global Select Market, or Nasdaq, under the symbol
ESGR. The listing will take effect at the effective
time of the merger.
CWMS Subsidiary Corp.
401 Madison Avenue
Montgomery, Alabama 36104
(334) 834-5483
Merger Sub is a recently-formed Georgia corporation that is a
direct wholly-owned subsidiary of Castlewood. At the time of the
merger, Merger Sub will have conducted no business other than in
connection with the merger agreement. After the merger of Merger
Sub with and into Enstar, Enstar will be the surviving entity
and will change its name to Enstar USA, Inc.
The Enstar Group, Inc.
401 Madison Avenue
Montgomery, Alabama 36104
(334) 834-5483
Internet address: www.enstargroup.com
Enstar is a Georgia corporation engaged in the operation of
several equity affiliates in the financial services industry.
Enstars common stock trades on Nasdaq under the symbol
ESGR.
The
Proposed Merger (see page 41)
Under the terms of the proposed merger, Merger Sub, a direct
wholly-owned subsidiary of Castlewood, will merge with and into
Enstar with Enstar surviving as a direct wholly-owned subsidiary
of Castlewood. The merger agreement is attached as Annex A
to this proxy statement/prospectus. We encourage you to read the
merger agreement carefully and fully as it is the legal document
that governs the merger.
2
The following charts depict (1) the organizational
structures of Castlewood and Enstar, prior to the merger, and
(2) the organizational structure of New Enstar upon
consummation of the merger.
Prior to
the Merger
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* |
|
Percentages are not calculated on a fully-diluted basis. Unless
otherwise indicated, percentages reflect voting and economic
interest. Inactive subsidiaries of The Enstar Group, Inc. are
omitted. |
3
Upon
Consummation of the Merger
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|
|
* |
|
Percentages are not calculated on a fully-diluted basis. Unless
otherwise indicated, percentages reflect voting and economic
interest, except that the ownership percentages of New Enstar
may, in some cases, be subject to the limitations on voting
power that will be set forth in New Enstars bye-laws.
Inactive subsidiaries of Enstar USA, Inc. are omitted. |
4
Recommendation
of Enstars Board of Directors Relating to the Merger (see
page 44)
Enstars board of directors has determined that the merger
agreement and the transactions contemplated by the merger
agreement are fair and in the best interests of Enstar and its
shareholders and that the merger agreement is advisable.
Enstars board of directors, by unanimous vote, has
approved the merger agreement and the transactions contemplated
by the merger agreement and recommends that Enstar shareholders
vote FOR the approval of the merger agreement and
the transactions contemplated by the merger agreement. Some of
Enstars directors and executive officers have interests in
the merger that are different from, or in addition to, yours.
These interests are discussed in Interests of Certain
Persons in the Merger beginning on page 51.
Reasons
for the Merger (see page 43)
The boards of directors of Castlewood and Enstar believe that
the merger will result in potential increased revenues and
enhanced shareholder value for New Enstar. Specifically,
Enstars board of directors believes that the merger will:
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enhance the existing and proven close working relationship
between Enstar and Castlewood management and further align the
incentives of Castlewood management with the interests of
Enstars shareholders;
|
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|
|
provide a positive economic result for Enstars
shareholders, as a result of a one-time $3.00 per share
dividend, the
one-for-one
exchange ratio contemplated by the merger agreement and the
opportunity for Enstars shareholders to participate in
approximately 48.7% (on an undiluted basis) of the earnings and
cash flows of New Enstar;
|
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|
simplify the ownership and management structure of Castlewood,
Enstar and B.H. Acquisition, a company they partially own with
an affiliate of Trident II, L.P., by forming one public company
with one board of directors and a consolidated management team;
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consolidate the financial and management resources and thereby
expand the capabilities of Castlewood and Enstar to pursue
additional acquisitions in the insurance and reinsurance run-off
business;
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|
enhance New Enstars access to capital as a result of both
its larger asset base and simplified ownership structure;
|
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|
|
expand the opportunities for New Enstar to deploy its capital in
attractive investments; and
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|
increase the focus of the time and energy of the directors and
management of New Enstar on identifying and consummating
attractive acquisitions and managing existing businesses.
|
What
Enstar Shareholders Will Receive in the Merger
If the merger is consummated, as an Enstar shareholder you will
receive one New Enstar ordinary share in exchange for each share
of Enstar common stock, including the associated rights issued
under the Enstar shareholder rights plan, that you own.
The
Enstar Dividend
If the merger is consummated, Enstar shareholders as of the
applicable record date will receive a one-time $3.00 per
share dividend on their Enstar common stock, payable immediately
prior to the merger.
Treatment
of Enstar Stock Options and Restricted Stock Units (see
page 53)
Each outstanding option to purchase shares of Enstar common
stock granted under the Enstar stock plans will be assumed by
New Enstar and converted into an option to purchase ordinary
shares of New Enstar. The per share exercise price of each new
option will be set at a ratio to the trading price of the
ordinary shares of New Enstar immediately following the closing
of the merger that equals the ratio of the exercise price of the
corresponding Enstar stock option to the trading price of the
shares of Enstar common stock immediately prior
5
to the closing of the merger. The number of New Enstar ordinary
shares underlying the new option will be set so that the
aggregate spread value of the new option approximately equals
the spread value of the former Enstar stock option.
Each restricted stock unit issued under Enstars Deferred
Compensation and Stock Plan for Non-employee Directors that is
outstanding immediately prior to the closing of the merger will
automatically convert from a right in respect of a share of
Enstar common stock into a right in respect of one ordinary
share of New Enstar.
Ownership
of New Enstar after the Merger
Immediately following the consummation of the merger, New Enstar
will have approximately 11.8 million ordinary shares
issued, of which current Enstar shareholders will own
approximately 48.7% and current Castlewood shareholders, other
than Enstar, will own the remaining approximately 51.3%. Unless
otherwise indicated, the ownership percentage calculations set
forth above and throughout this proxy statement/prospectus treat
the non-voting convertible shares of New Enstar owned by Enstar
as if they were treasury shares and not outstanding because
Enstar will be a wholly-owned subsidiary of Castlewood.
Listing
of New Enstar Ordinary Shares
Castlewood will file an application to have New Enstars
ordinary shares listed on Nasdaq under the ticker symbol
ESGR.
Effects
of the Merger on the Rights of Enstar Shareholders
If the merger is consummated, New Enstar will be governed by its
memorandum of association and second amended and restated
bye-laws. The memorandum of association and form of the second
amended and restated bye-laws have been filed by Castlewood as
exhibits to the registration statement of which this
proxy statement/prospectus is a part. The memorandum of
association and second amended and restated bye-laws of New
Enstar differ from Enstars current articles of
incorporation, as amended, and amended and restated bylaws. In
addition, while Enstar is presently governed by Georgia
corporate law, New Enstar will be governed by Bermuda corporate
law.
Risk
Factors (see page 19)
Shareholders voting on the merger should consider, among other
things, the risks associated with ownership of New Enstar
ordinary shares and the other risks set forth in the Risk
Factors section of this proxy statement/prospectus.
Conditions
to the Consummation of the Merger (see page 58)
Castlewoods and Enstars respective obligations to
consummate the merger are subject to the satisfaction or, to the
extent legally permissible, the waiver of the following
conditions:
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the receipt of all governmental and regulatory consents,
clearances, approvals and actions necessary for the merger and
the other transactions contemplated by the merger agreement
unless failure to obtain those consents, clearances, approvals
and actions would not reasonably be expected to have a material
adverse effect on New Enstar;
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the absence of any law, order or injunction prohibiting
consummation of the merger in the United States, Bermuda or the
European Union;
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the Commission having declared effective the Castlewood
registration statement of which this
proxy statement/prospectus is a part;
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the approval for listing by Nasdaq of the New Enstar ordinary
shares to be issued in the merger, subject to official notice of
issuance;
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6
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the approval of the merger agreement and the transactions
contemplated by the merger agreement by the Enstar shareholders;
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the approval of the recapitalization agreement and certain
actions contemplated by the recapitalization agreement by the
Castlewood shareholders;
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the completion of the recapitalization of Castlewood pursuant to
the recapitalization agreement (see Material Terms of
Related Agreements Recapitalization
Agreement beginning on page 62);
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no event having occurred which would trigger a distribution
under Enstars shareholders rights plan;
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the receipt by Enstar and Castlewood of an opinion of
Enstars tax counsel to the effect that the merger should
qualify as a reorganization within the meaning of
section 368(a) of the Code;
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the representations and warranties of the parties contained in
the merger agreement which are qualified as to material adverse
effect being true and correct as of the date of the merger
agreement and as of the closing date of the merger, except to
the extent that such representation or warranty speaks as of
another date, and the representations and warranties of the
parties which are not qualified as to material adverse effect
being true and correct (disregarding materiality qualifiers),
except where the failure to be true and correct, individually or
in the aggregate, would not have a material adverse effect on
the party making the representation, as of the date of the
merger agreement and as of the closing date of the merger as if
they were made on that date, except to the extent that such
representation or warranty speaks as of another date; and
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the parties having performed or complied in all material
respects with all agreements or covenants required to be
performed by them under the merger agreement (other than such
partys covenants regarding the issuance of securities, and
Enstars covenant regarding dividends and changes in share
capital, which must be complied with in all respects), in each
case, on or before the closing date.
|
Termination
of Merger Agreement (see page 60)
The merger agreement may be terminated at any time before the
consummation of the merger in any of the following ways:
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by mutual written consent of Enstar and Castlewood;
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by either Enstar or Castlewood:
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if the merger has not been consummated by January 31, 2007;
except that a party may not terminate the merger agreement if
the cause of the merger not being consummated is that
partys failure to fulfill its material obligations under
the merger agreement;
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if a governmental authority or a court in the United States or
European Union permanently enjoins or prohibits the consummation
of the merger, except that a party that seeks to terminate the
merger agreement upon such an event must have used its
reasonable best efforts to obtain the government approvals
required for the consummation of the merger; or
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if Enstars shareholders fail to approve the merger
agreement and the transactions contemplated by the merger
agreement.
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if Enstar has breached in any material respect any of its
representations or warranties, or has failed to perform in any
material respect any of its covenants or other agreements under
the merger agreement and such breach:
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is incapable of being cured by or remains uncured prior to
January 31, 2007; or
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would result in the failure of certain closing conditions to the
merger being satisfied; or
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7
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Enstar or Enstars board of directors materially breaches
the covenant regarding no solicitation of competing acquisition
proposals and such breach is not cured within five business days
after receiving notice of such breach;
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Enstars board of directors changes its recommendation to
the Enstar shareholders to approve the merger agreement and the
transactions contemplated by the merger agreement; or
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Enstar fails to call the annual meeting of shareholders to vote
on the merger by November 23, 2006; or
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if Castlewood or Merger Sub has breached in any material respect
any of its representations or warranties, or has failed to
perform in any material respect any of its covenants or other
agreements under the merger agreement and such breach:
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is incapable of being cured by or remains uncured prior to
January 31, 2007; or
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would result in the failure of certain closing conditions to the
merger being satisfied; or
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if there has been a change in the recommendation by
Enstars board of directors in respect of the merger
agreement and the transactions contemplated by the merger
agreement and:
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Enstar notifies Castlewood in writing that it intends to approve
and enter into an agreement concerning a different business
combination transaction that constitutes a superior proposal,
attaching the most current version of such agreement or a
description of its material terms; and
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Castlewood, within five business days of receiving such notice
from Enstar, does not make an offer that Enstars board of
directors determines is at least as favorable to the Enstar
shareholders as the superior proposal Enstar received from the
third party.
|
Termination of the merger agreement also terminates certain
obligations under the support agreement described below.
Support
Agreement (see page 66)
Castlewood and Messrs. Flowers, Oros and Frazer, three of
Enstars largest shareholders, have entered into the
support agreement pursuant to which such shareholders have
agreed to vote all of their shares of Enstar common stock in
favor of the approval of the merger agreement and the
transactions contemplated by the merger agreement and against
any business combination with a third party.
The support agreement is attached as Annex B to this proxy
statement/prospectus.
Recapitalization
Agreement (see page 62)
In connection with the merger, Castlewood, Enstar, Trident, and
certain other shareholders of Castlewood entered into a
recapitalization agreement which provides, among other things,
for:
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|
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a recapitalization of Castlewood in which all issued shares will
be exchanged for newly-created ordinary shares;
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the appointment of the board of directors of New Enstar
immediately following the merger;
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the repurchase of certain shares of Castlewood from Trident;
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payments to certain officers and employees of Castlewood;
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|
the purchase by Castlewood or its designee of the shares of B.H.
Acquisition beneficially owned by an affiliate of
Trident II, L.P.; and
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|
|
the adoption of new bye-laws that will include, among other
things, certain restrictions on transfers and voting of the
ordinary shares.
|
8
Castlewood shareholders holding the number of shares required to
approve the recapitalization agreement and the transactions
contemplated thereby have agreed to vote in favor of such
agreement and transactions.
The recapitalization agreement also restricts the transfer by
the Castlewood shareholders party thereto of the New Enstar
ordinary shares they receive in the recapitalization for one
year, subject to certain exceptions. The recapitalization
agreement also provides that at the time of the
recapitalization, certain shareholders of Castlewood will enter
into a registration rights agreement entitling them, after the
expiration of one year from the date of the registration rights
agreement, to require that New Enstar effect the registration
under the Securities Act of their New Enstar ordinary shares,
although after the expiration of 90 days from the date of
the registration rights agreement and prior to the first
anniversary of such date, Trident has the right to require that
Castlewood register up to 750,000 of Tridents New Enstar
ordinary shares. The directors of Enstar have agreed to similar
transfer restrictions on their shares of New Enstar, and will
receive registration rights pursuant to the same registration
rights agreement.
The recapitalization agreement is attached as Annex C to
this proxy statement/prospectus.
Other
Related Agreements
Castlewood has agreed, subject to the consummation of the merger
agreement, to repurchase from two directors of Enstar,
Messrs. T. Whit Armstrong and T. Wayne Davis, upon their
request, during a
30-day
period commencing January 15, 2007, at the then prevailing
market price, such number of ordinary shares as provides an
amount sufficient for Mr. Armstrong and Mr. Davis to pay
taxes on compensation income resulting from the exercise of
options by them on May 23, 2006 for 50,000 shares of
Enstar common stock in the aggregate. Castlewoods
obligation to repurchase ordinary shares is limited to 25,000
ordinary shares from each of Mr. Armstrong and
Mr. Davis.
Castlewood has also entered into a tax indemnification agreement
with J. Christopher Flowers, a director and Enstars
largest shareholder, pursuant to which Castlewood will reimburse
and indemnify Mr. Flowers for, and hold him harmless on an
after-tax basis against, any increase in Mr. Flowers
U.S. federal, state or local income tax liability
(including any interest or penalties relating thereto), and
reasonable attorneys fees, incurred by Mr. Flowers as
a result of certain dispositions of shares of Enstar or
dispositions of all or substantially all of the Enstar assets by
New Enstar, Enstar or any successor or assign of either, within
the period beginning immediately after the effective time of the
merger and ending five years after the last day of the taxable
year that includes the effective time.
Regulatory
Approvals (see page 48)
Castlewood is required to obtain approval of the merger and/or
the recapitalization from the insurance regulatory authorities
in certain foreign jurisdictions, including the United Kingdom
and Belgium. In addition, Castlewood must provide notice of the
merger and the recapitalization to the insurance regulatory
authorities in Switzerland. Castlewood has already received
approval from the Bermuda Monetary Authority to issue the
ordinary shares in connection with the recapitalization and the
merger.
Material
U.S. Federal Income Tax Consequences of the Merger (see
page 46)
The merger is intended to qualify as a reorganization for
U.S. federal income tax purposes. Accordingly, it is
expected that the exchange of Enstar common stock for New Enstar
ordinary shares in the merger should not result in the
recognition of gain or loss for U.S. federal income tax
purposes.
However, this proxy statement/prospectus does not address all
tax consequences that may be relevant to persons who exchange
Enstar common stock for New Enstar ordinary shares in the
merger. In particular, this proxy statement/prospectus does not
address any of the tax consequences associated with:
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the exercise of options to purchase Enstar common stock before
the effective time of the merger;
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|
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the exchange of options to purchase Enstar common stock for
options to purchase New Enstar ordinary shares in the
merger; or
|
9
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the exchange of Enstar restricted stock units for a right to
receive restricted stock units in respect of New Enstar ordinary
shares.
|
Any person who may exchange Enstar common stock for New Enstar
ordinary shares in the merger is urged to carefully read the
discussions under The Proposed
Merger Material U.S. Federal Income Tax
Consequences of the Merger and Material Tax
Considerations of Holding and Disposing of New Enstar Ordinary
Shares beginning on pages 46 and 186, respectively,
and to consult his or her tax advisor with respect to the tax
consequences of participating in the merger and holding and
disposing of New Enstar ordinary shares.
Accounting
Treatment of the Merger (see page 46)
New Enstar will account for the merger under the purchase method
of accounting for business combinations under accounting
principles generally accepted in the United States.
No
Dissenters Rights
Under Georgia law, Enstar shareholders are not entitled to
dissenters rights in connection with the merger.
Information
about the Enstar Annual Meeting and Voting (see
page 34)
The Annual Meeting will be held
on ,
2006, at 9:00 a.m., local time, at Flowers Hall, Huntingdon
College at 1500 East Fairview Avenue, Montgomery, Alabama 36106,
for the following purposes:
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|
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to consider and vote upon a proposal to approve the merger
agreement and the transactions contemplated by the merger
agreement;
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to elect two directors for three-year terms expiring at the
annual meeting of shareholders of Enstar in 2009 or until their
successors are duly elected and qualified;
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to ratify the appointment of Deloitte & Touche LLP as
the independent registered public accounting firm of Enstar to
serve for 2006; and
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to transact such other business as may properly come before the
Annual Meeting or any adjournment thereof.
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Enstar will not be able to consummate the merger unless its
shareholders approve the merger agreement and the transactions
contemplated by the merger agreement.
If the merger is consummated, the composition of the board of
directors of New Enstar will be different from the current
composition of Enstars board of directors. Following the
merger, four of these
individuals Messrs. T. Whit Armstrong,
Paul J. Collins, Gregory L. Curl and T. Wayne
Davis are current directors of Enstar, three of
these individuals Messrs. J. Christopher
Flowers, Nimrod T. Frazer and John J. Oros are
current directors of both Enstar and Castlewood, and the other
three individuals Messrs. Nicholas A.
Packer, Paul J. OShea and Dominic F.
Silvester are current directors
and/or
executive officers of Castlewood. In addition, New Enstar, as
the sole shareholder of Enstar, will be able to determine the
composition of Enstars board of directors and select
independent auditors of Enstar after the merger.
Enstar
Shareholder Votes Required
Approval of the merger agreement and the transactions
contemplated by the merger agreement requires the affirmative
vote of the holders of a majority of the outstanding voting
power of Enstars common stock on the Record Date.
As of May 23, 2006, Enstars directors and executive
officers owned 1,904,753 shares of Enstar common stock,
representing approximately 33.19% of the voting power of Enstar
common stock on that date. Three of those directors, who owned
Enstar common stock representing 30.1% of the voting power on
that date, have entered into a support agreement with Castlewood
pursuant to which such directors have agreed to vote their
shares of Enstar common stock in favor of the merger agreement
and the transactions contemplated by the merger agreement. All
other Enstar directors and officers have also indicated that
they intend to vote their
10
shares of Enstar common stock in favor of the merger agreement
and the transactions contemplated by the merger agreement.
Interests
of Certain Persons in the Merger (see page 51)
When you consider the recommendation of Enstars board of
directors that you vote in favor of approval of the merger
agreement and the transactions contemplated by the merger
agreement, you should be aware that some of Enstars
directors and executive officers have interests in the merger
that are different from, or in addition to, yours. These
interests include:
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a new employment agreement between New Enstar and John J. Oros,
Enstars President and Chief Operating Officer, that will
take effect at the effective time of the merger;
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accelerated vesting of 80,000 options granted to certain Enstar
directors and officers pursuant to one of Enstars equity
incentive plans;
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|
a severance payment of $350,000 to Nimrod T. Frazer,
Enstars Chief Executive Officer;
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|
a tax indemnification by Castlewood of J. Christopher Flowers, a
director of Enstar, pursuant to which Castlewood will reimburse
and indemnify Mr. Flowers for, and hold him harmless on an
after-tax basis against, any increase in Mr. Flowers
U.S. federal, state or local income tax liability
(including any interest or penalties relating thereto), and
reasonable attorneys fees, incurred by Mr. Flowers as a
result of certain dispositions of shares of Enstar or
dispositions of all or substantially all of the Enstar assets by
New Enstar, Enstar or any successor or assign of either, within
the period beginning immediately after the effective time of the
merger and ending five years after the last day of the taxable
year that includes the effective time;
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registration rights expected to be granted by New Enstar to
Mr. Flowers, pursuant to which Mr. Flowers may request
that New Enstar effect the registration under the Securities Act
of certain of his ordinary shares of New Enstar, and the
registration rights expected to be granted by New Enstar to the
other directors of Enstar pursuant to which they may participate
in certain registration statements filed by New Enstar under the
Securities Act and sell their ordinary shares of New Enstar
pursuant to such registration statements;
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rights of T. Whit Armstrong and T. Wayne Davis,
directors of Enstar, to each sell up to 25,000 ordinary shares
of New Enstar to New Enstar;
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service of the current Enstar directors on New Enstars
board of directors following the merger; and
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indemnification by New Enstar of past and present directors and
officers of Enstar for losses in connection with any action
arising out of or pertaining to acts or omissions, or alleged
acts or omissions, by them in their capacities as such at or
before the effective time of the merger.
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Enstars board of directors considered these interests in
making its recommendation.
11
Recent
Developments (see page 98)
On June 16, 2006, a wholly-owned subsidiary of Castlewood
entered into a definitive agreement for the purchase of Cavell
Holdings Limited, or Cavell, a U.K. company, from Dukes Place
Holdings, L.P., a portfolio company of GSC Partners, for a
purchase price of approximately £32 million
(approximately $59 million). Cavell owns a U.K. reinsurance
company and a Norwegian reinsurer, both of which are currently
in run-off. Cavell had total consolidated assets of
approximately £101 million at March 31, 2006, as
reported in its U.K. regulatory statements. Completion of the
transaction is conditioned on, among other things, governmental
and regulatory approvals and satisfaction of various other
closing conditions. The transaction is expected to close in the
third quarter of 2006.
In an unrelated transaction, on June 16, 2006, a
wholly-owned subsidiary of Castlewood also entered into a
definitive agreement with Dukes Place Holdings, L.P. for the
purchase of a minority interest in a U.S. holding company
that owns two property and casualty insurers based in the United
States, both of which are in run-off. Completion of the
transaction is conditioned on, among other things, governmental
and regulatory approvals and satisfaction of various other
closing conditions. The transaction is expected to close in the
fourth quarter of 2006.
12
SUMMARY
HISTORICAL AND PRO FORMA FINANCIAL DATA
Castlewood and Enstar are providing the following financial data
to assist you in your analysis of the financial aspects of the
proposed merger. The information is only a summary and should be
read in conjunction with each companys historical
consolidated financial statements and related notes included or
incorporated by reference in this proxy statement/prospectus, as
well as the Unaudited Pro Forma Condensed Combined Financial
Information for New Enstar beginning on page 133.
Castlewood
Summary Historical Financial Data
The following selected historical financial information of
Castlewood for each of the past five fiscal years has been
derived from Castlewoods audited historical financial
statements, which were audited by Deloitte & Touche, an
independent registered public accounting firm. The financial
information as of March 31, 2006 and 2005, and for each of
the three-month periods then ended, has been derived from
Castlewoods unaudited financial statements which include,
in managements opinion, all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the
results of operations and financial position of Castlewood for
the periods and dates presented. This information is only a
summary and should be read in conjunction with managements
discussion and analysis of results of operations and financial
condition of Castlewood and the audited and unaudited
consolidated financial statements and notes thereto of
Castlewood included elsewhere in this proxy statement/prospectus.
Since its inception, Castlewood has made several acquisitions
which impact the comparability of the information reflected in
the Castlewood Summary Historical Financial Data. See
Information About
Castlewood Business Acquisitions
to Date beginning on page 74 for information about
Castlewoods acquisitions.
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|
|
|
|
|
|
|
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Three Months Ended
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|
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|
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|
|
March 31,
|
|
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Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001(1)
|
|
|
|
(in thousands of U.S. dollars, except per share data)
|
|
|
Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in loss and loss
adjustment expense liabilities
|
|
$
|
2,457
|
|
|
$
|
1,550
|
|
|
$
|
96,007
|
|
|
$
|
13,706
|
|
|
$
|
24,044
|
|
|
$
|
48,758
|
|
|
$
|
90
|
|
Consulting fee income
|
|
6,349
|
|
|
4,488
|
|
|
22,006
|
|
|
23,703
|
|
|
24,746
|
|
|
20,627
|
|
|
983
|
|
Net investment income, net realized
gains (losses) and foreign exchange (loss) gain
|
|
10,130
|
|
|
3,971
|
|
|
24,902
|
|
|
14,233
|
|
|
9,434
|
|
|
13,457
|
|
|
395
|
|
Total expenses
|
|
(10,873
|
)
|
|
(8,733
|
)
|
|
(52,697
|
)
|
|
(38,891
|
)
|
|
(24,144
|
)
|
|
(32,302
|
)
|
|
(2,264
|
)
|
Share of income of partly owned
companies
|
|
112
|
|
|
48
|
|
|
192
|
|
|
6,881
|
|
|
1,623
|
|
|
10,079
|
|
|
389
|
|
Minority interest
|
|
(212
|
)
|
|
(380
|
)
|
|
(9,700
|
)
|
|
(3,097
|
)
|
|
(5,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing
operations
|
|
7,963
|
|
|
944
|
|
|
80,710
|
|
|
16,535
|
|
|
30,592
|
|
|
60,619
|
|
|
(407
|
)
|
Extraordinary
gain Negative goodwill (net of minority
interest)
|
|
4,347
|
|
|
|
|
|
|
|
|
21,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
12,310
|
|
|
$
|
944
|
|
|
$
|
80,710
|
|
|
$
|
38,294
|
|
|
$
|
30,592
|
|
|
$
|
60,619
|
|
|
$
|
(407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share before
extraordinary gains basic
|
|
$
|
433.08
|
|
|
$
|
51.75
|
|
|
$
|
4,397.89
|
|
|
$
|
914.49
|
|
|
$
|
1,699.56
|
|
|
$
|
3,367.72
|
|
|
$
|
(22.61
|
)
|
Extraordinary
gain basic
|
|
236.42
|
|
|
|
|
|
|
|
|
1,203.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per
share basic
|
|
$
|
669.50
|
|
|
$
|
51.75
|
|
|
$
|
4,397.89
|
|
|
$
|
2,117.91
|
|
|
$
|
1,699.56
|
|
|
$
|
3,367.72
|
|
|
$
|
(22.61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share before
extraordinary gain
|
|
$
|
424.90
|
|
|
$
|
50.36
|
|
|
$
|
4,304.30
|
|
|
$
|
906.13
|
|
|
$
|
1,699.56
|
|
|
$
|
3,367.72
|
|
|
$
|
(22.61
|
)
|
Extraordinary
gain diluted
|
|
231.95
|
|
|
|
|
|
|
|
|
1,192.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per
share diluted
|
|
$
|
656.85
|
|
|
$
|
50.36
|
|
|
$
|
4,304.30
|
|
|
$
|
2,098.53
|
|
|
$
|
1,699.56
|
|
|
$
|
3,367.72
|
|
|
$
|
(22.61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding basic
|
|
18,387
|
|
|
18,242
|
|
|
18,352
|
|
|
18,081
|
|
|
18,000
|
|
|
18,000
|
|
|
18,000
|
|
Weighted average
shares outstanding diluted
|
|
18,741
|
|
|
18,744
|
|
|
18,751
|
|
|
18,248
|
|
|
18,000
|
|
|
18,000
|
|
|
18,000
|
|
Cash dividends paid per share
|
|
|
|
|
|
|
|
|
|
|
645.83
|
|
|
4,483.41
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
March 31,
|
|
|
As of
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(in thousands of U.S. dollars,
except per share data)
|
|
|
Summary Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
434,993
|
|
|
$
|
345,329
|
|
|
$
|
350,456
|
|
|
$
|
127,228
|
|
|
$
|
85,916
|
|
|
$
|
71,906
|
|
Investments
|
|
|
724,045
|
|
|
|
539,568
|
|
|
|
591,635
|
|
|
|
268,417
|
|
|
|
258,429
|
|
|
|
175,068
|
|
Reinsurance recoverable
|
|
|
319,414
|
|
|
|
250,229
|
|
|
|
341,627
|
|
|
|
175,091
|
|
|
|
122,937
|
|
|
|
238,162
|
|
Total assets
|
|
|
1,560,445
|
|
|
|
1,199,963
|
|
|
|
1,347,853
|
|
|
|
632,347
|
|
|
|
514,597
|
|
|
|
527,845
|
|
Reserves for losses and loss
adjustment expenses
|
|
|
1,042,608
|
|
|
|
806,559
|
|
|
|
1,047,313
|
|
|
|
381,531
|
|
|
|
284,409
|
|
|
|
419,717
|
|
Total shareholder equity
|
|
|
273,604
|
|
|
|
260,906
|
|
|
|
177,338
|
|
|
|
147,616
|
|
|
|
167,473
|
|
|
|
63,696
|
|
Book Value per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,880.30
|
|
|
|
14,189.70
|
|
|
|
9,721.41
|
|
|
|
8,200.89
|
|
|
|
9,304.06
|
|
|
|
3,538.67
|
|
Diluted
|
|
|
14,599.49
|
|
|
|
13,921.67
|
|
|
|
9,461.05
|
|
|
|
8,200.89
|
|
|
|
9,304.06
|
|
|
|
3,538.67
|
|
|
|
|
(1)
|
|
For the period between
August 16, 2001 (date of incorporation) and
December 31, 2001.
|
|
(2)
|
|
Earnings per share is a measure
based on net earnings divided by weighted average ordinary
shares outstanding. Basic earnings per share is defined as net
earnings available to ordinary shareholders divided by the
weighted average number of ordinary shares outstanding for the
period, giving no effect to dilutive securities. Diluted
earnings per share is defined as net earnings available to
ordinary shareholders divided by the weighted average number of
shares and share equivalents outstanding calculated using the
treasury stock method for all potentially dilutive securities.
When the effect of dilutive securities would be anti-dilutive,
these securities are excluded from the calculation of diluted
earnings per share.
|
|
(3)
|
|
Basic book value per share is
defined as total shareholders equity available to ordinary
shareholders divided by the number of ordinary shares
outstanding as at the end of the period, giving no effect to
dilutive securities. Diluted book value per share is defined as
total shareholders equity available to ordinary
shareholders divided by the number of ordinary shares and
ordinary share equivalents outstanding at the end of the period,
calculated using the treasury stock method for all potentially
dilutive securities. When the effect of dilutive securities
would be anti-dilutive, these securities are excluded from the
calculation of diluted book value per share.
|
14
Enstar
Summary Historical Financial Data
The following selected historical financial information of
Enstar for each of the past five fiscal years has been derived
from Enstars audited historical financial statements,
which were audited by Deloitte & Touche LLP, an
independent registered public accounting firm. The financial
information as of March 31, 2006 and 2005, and for each of
the three-month periods then ended, has been derived from
Enstars unaudited financial statements which include, in
managements opinion, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the
results of operations and financial position of Enstar for the
periods and dates presented. This information is only a summary
and should be read in conjunction with managements
discussion and analysis of results of operations and financial
condition of Enstar and the audited and unaudited consolidated
financial statements and notes thereto of Enstar incorporated by
reference into this proxy statement/prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(in thousands of U.S. dollars,
except per share data)
|
|
Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary gain
and cumulative effect of a change in accounting principle
|
|
$
|
1,828
|
|
|
$
|
39
|
|
|
$
|
19,045
|
|
|
$
|
5,977
|
|
|
$
|
13,226
|
|
|
$
|
21,526
|
|
|
$
|
1,574
|
|
Extraordinary gain, net of income
taxes
|
|
|
875
|
|
|
|
|
|
|
|
|
|
|
|
4,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of a change in
accounting principle, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,703
|
|
|
$
|
39
|
|
|
$
|
19,045
|
|
|
$
|
10,392
|
|
|
$
|
13,226
|
|
|
$
|
22,493
|
|
|
$
|
1,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per
Share Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share before
extraordinary gain and cumulative effect of a change in
accounting principle basic
|
|
$
|
0.33
|
|
|
$
|
0.01
|
|
|
$
|
3.45
|
|
|
$
|
1.09
|
|
|
$
|
2.42
|
|
|
$
|
3.94
|
|
|
$
|
0.30
|
|
Extraordinary
gain basic
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of a change in
accounting principle basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share basic
|
|
$
|
0.49
|
|
|
$
|
0.01
|
|
|
$
|
3.45
|
|
|
$
|
1.89
|
|
|
$
|
2.42
|
|
|
$
|
4.12
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding basic
|
|
|
5,517,909
|
|
|
|
5,517,909
|
|
|
|
5,517,909
|
|
|
|
5,496,819
|
|
|
|
5,465,753
|
|
|
|
5,465,753
|
|
|
|
5,277,808
|
|
Income per
Share Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share before
extraordinary gain and cumulative effect of a change in
accounting principle diluted
|
|
$
|
0.31
|
|
|
$
|
0.01
|
|
|
$
|
3.25
|
|
|
$
|
1.03
|
|
|
$
|
2.25
|
|
|
$
|
3.74
|
|
|
$
|
0.29
|
|
Extraordinary
gain diluted
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
0.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of a change in
accounting principle diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share diluted
|
|
$
|
0.46
|
|
|
$
|
0.01
|
|
|
$
|
3.25
|
|
|
$
|
1.79
|
|
|
$
|
2.25
|
|
|
$
|
3.91
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding diluted
|
|
|
5,881,058
|
|
|
|
5,849,053
|
|
|
|
5,856,144
|
|
|
|
5,800,993
|
|
|
|
5,881,410
|
|
|
|
5,753,553
|
|
|
|
5,449,627
|
|
Cash dividends paid per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
189,097
|
|
|
$
|
159,054
|
|
|
$
|
185,220
|
|
|
$
|
158,977
|
|
|
$
|
152,620
|
|
|
$
|
128,609
|
|
|
$
|
99,621
|
|
Total liabilities
|
|
|
21,207
|
|
|
|
12,844
|
|
|
|
20,097
|
|
|
|
12,803
|
|
|
|
6,688
|
|
|
|
8,360
|
|
|
|
1,964
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,449
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
167,890
|
|
|
|
146,210
|
|
|
|
165,123
|
|
|
|
146,174
|
|
|
|
134,483
|
|
|
|
120,249
|
|
|
|
97,657
|
|
|
|
(1) |
Income per share is a measure based on net income divided by
weighted average shares of common stock outstanding. Basic
income per share is defined as net income available to common
stockholders divided by the weighted average number of shares of
common stock outstanding for the period, giving no effect to
dilutive securities. Diluted income per share is defined as net
income available to common stock divided by the weighted average
number of shares of common stock and common stock equivalents
outstanding calculated using the treasury stock method for all
potentially dilutive securities. When the effect of dilutive
securities would be anti-dilutive, these securities are excluded
from the calculation of diluted income per share.
|
15
Summary
Unaudited Pro Forma Condensed Combined Financial Data
The following summary unaudited pro forma condensed combined
financial information was prepared using the purchase method of
accounting, with Castlewood treated as the acquirer for
accounting purposes. The table below presents summary financial
information from the unaudited pro forma condensed combined
financial statements as of and for the three months ended
March 31, 2006 and for the year ended December 31,
2005 included elsewhere in this proxy statement/prospectus. The
unaudited pro forma condensed combined financial information is
presented as if the merger and related transactions had occurred
on March 31, 2006 for purposes of the unaudited pro forma
condensed combined balance sheet data and as of January 1,
2005 for purposes of the unaudited pro forma condensed combined
operating data.
The unaudited pro forma condensed combined financial information
are based on estimates and assumptions set forth in the notes to
such financial information, which are preliminary and have been
made solely for the purpose of developing such pro forma
information. The unaudited pro forma condensed combined
financial information are not necessarily indicative of the
financial position or operating results of New Enstar that would
have been achieved had the merger and related transactions been
consummated as of the dates noted above, nor are they
necessarily indicative of the future financial position or
operating results of New Enstar. This information should be read
in conjunction with the unaudited pro forma condensed combined
financial information and related notes and the historical
financial statements and related notes included elsewhere or
incorporated by reference in this proxy statement/prospectus.
Enstar
Group Limited
Summary Unaudited Pro Forma Condensed
Combined Financial Information
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Year Ended
|
|
|
|
Ended March 31,
2006
|
|
|
December 31, 2005
|
|
|
|
(in thousands of U.S.
dollars)
|
|
|
Income
|
|
|
|
|
|
|
|
|
Income before extraordinary gain
|
|
$
|
8,885
|
|
|
$
|
81,859
|
|
Cash dividends paid per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
|
|
2006
|
|
|
Balance sheet data:
|
|
|
|
|
Total assets
|
|
$
|
1,657,921
|
|
Total liabilities
|
|
|
1,281,592
|
|
Minority interest
|
|
|
68,002
|
|
Shareholders equity
|
|
|
308,327
|
|
16
Comparative
Per Share Information
The following table presents historical per share data for
Castlewood and Enstar individually and on a pro forma basis
after giving effect to the merger. The pro forma combined
amounts are based on using the purchase method of accounting.
The pro forma combined per share data of New Enstar was derived
from the Unaudited Pro Forma Condensed Combined Financial
Statements beginning on page 133. The assumptions related
to the preparation of the Unaudited Pro Forma Condensed Combined
Financial Statements are described beginning at page 137.
The data presented below should be read in conjunction with the
historical consolidated financial statements of Enstar
incorporated by reference in this proxy statement/prospectus and
with the historical consolidated financial statements of
Castlewood included in this proxy statement/prospectus. The pro
forma data below is presented for informational purposes. You
should not rely on the pro forma amounts as being indicative of
the operating results or financial position of New Enstar that
would have actually occurred had the merger and related
transactions been consummated as of the dates noted above, nor
are the pro forma amounts necessarily indicative of the future
operating results or financial position of New Enstar.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Castlewood
|
|
|
Enstar
|
|
|
Combined
|
|
|
Equivalent
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
Pro Forma(1)
|
|
|
Net income per ordinary share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4,397.89
|
|
|
$
|
3.45
|
|
|
$
|
6.95
|
|
|
$
|
6.95
|
|
Diluted
|
|
$
|
4,304.30
|
|
|
$
|
3.25
|
|
|
$
|
6.59
|
|
|
$
|
6.59
|
|
Three months ended March 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
699.50
|
|
|
$
|
0.49
|
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
Diluted
|
|
$
|
656.85
|
|
|
$
|
0.46
|
|
|
$
|
0.72
|
|
|
$
|
0.72
|
|
Book value per ordinary share as
of March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
14,880.30
|
|
|
$
|
30.43
|
|
|
$
|
26.16
|
|
|
$
|
26.16
|
|
Diluted
|
|
$
|
14,599.49
|
|
|
$
|
28.46
|
|
|
$
|
24.83
|
|
|
$
|
24.83
|
|
Cash dividends per ordinary share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Three months ended March 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(2)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3.84
|
|
|
$
|
3.84
|
|
Diluted(2)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3.65
|
|
|
$
|
3.65
|
|
|
|
|
(1) |
|
Equivalent pro forma is equal to the combined pro forma because
the share exchange ratio is
one-to-one. |
|
(2) |
|
Cash dividends include the proposed $3 per share dividend to be
paid by Enstar to its shareholders as of the applicable record
date if the merger is consummated and dividends paid by
Castlewood to its shareholders in April of 2006. |
Per Share
Market Price Information
The closing price per share of Enstar common stock on
May 23, 2006, the last trading day before the announcement
of the execution of the merger agreement, was $76.36. The
closing price per share of Enstar common stock as reported on
Nasdaq
on ,
the most recent trading day practicable before the printing of
this proxy statement/prospectus,
was .
There is no established public trading market for
Castlewoods shares. In connection with the merger, New
Enstars ordinary shares are anticipated to be approved for
listing on Nasdaq under the symbol ESGR, subject to
official notice of issuance.
17
Dividend
Information
If the merger is consummated, Enstar shareholders as of the
applicable record date will receive a one-time $3.00 per
share cash dividend on their Enstar common stock, payable
immediately prior to the merger. Enstar has not declared or paid
any other cash dividend on any of its securities since 1989. If
the merger is not consummated, Enstar 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. If the merger is not consummated, the
payment of cash dividends in the future will depend upon such
factors as Enstar earnings, capital requirements, financial
condition, contractual restrictions and other factors deemed
relevant by Enstars board of directors.
In March 2003, Castlewoods board of directors declared a
dividend of $3,471 per share to holders of Class A Shares
and $5,495.83 per share to holders of its Class B Shares,
which dividends were paid on March 24, 2003.
In March 2004, Castlewoods board of directors declared a
dividend of $500 per share to holders of its Class A Shares
and $791.67 per share to holders of its Class B
Shares, which dividends were paid on May 10, 2004.
In April 2006, Castlewoods board of directors declared a
dividend of $3,356 per share to holders of its Class A
Shares, $490.75 per share to holders of its Class B
Shares and $811.22 per share to holders of its Class C
Shares, which dividends were paid on April 26, 2006. Also
in April 2006, Castlewoods board of directors approved the
redemption of all of Castlewoods outstanding Class E
shares for $22.6 million.
Castlewood paid no dividends during the fiscal years ended
December 31, 2001, 2002 and 2005.
18
RISK
FACTORS
Shareholders of Enstar voting in favor of the merger
agreement and the transactions contemplated by the merger
agreement will be choosing to invest in New Enstars
ordinary shares and to combine the business of Enstar with that
of Castlewood. In deciding whether to vote in favor of the
merger and the transactions contemplated by the merger
agreement, you should consider the following risks related to
the merger, to New Enstars business and to certain other
matters. You should carefully consider these risks along with
the other information included in this proxy
statement/prospectus, including the matters addressed in the
section entitled Forward-Looking Statements
beginning on page 32, and the other information
incorporated by reference into this proxy
statement/prospectus.
Risks
Relating to the Merger
The
value of the New Enstar ordinary shares that you receive in the
merger may be less than the current value of your shares of
Enstar common stock.
The value of the New Enstar ordinary shares that you will
receive in the merger may be less than the market price of your
Enstar common stock on the date of this proxy
statement/prospectus or on the date of the Enstar Annual
Meeting. If the merger is consummated, each share of Enstar
common stock will be converted into one ordinary share of New
Enstar. The exchange ratio is a fixed ratio that will not be
adjusted as a result of any increase or decrease in the market
price of shares of Enstar common stock. The value of the New
Enstar ordinary shares that you receive in the merger will
depend on the public trading price of the New Enstar ordinary
shares after the merger. The New Enstar ordinary shares will not
be publicly traded until the merger is consummated. As a result,
at the time of the Annual Meeting, you will not know the market
value of the New Enstar ordinary shares that you will receive in
the merger.
We may
not realize the anticipated benefits of the
merger.
The success of the merger will depend, in part, on the ability
of New Enstar to realize the anticipated growth opportunities,
expanded market visibility and increased access to capital that
we expect to result from combining the business of Enstar with
that of Castlewood. If we fail to realize the anticipated
benefits of the merger, holders of New Enstar ordinary shares
may receive lower returns.
Regulatory
agencies may delay or impose conditions on approval of the
merger, which may diminish the anticipated benefits of the
merger.
Consummation of the merger is conditioned upon the receipt of
required governmental consents, approvals, orders and
authorizations, including required approvals from foreign
regulatory agencies. Although we intend to pursue vigorously all
required governmental approvals and do not know of any reason
why we would not be able to obtain the necessary approvals in a
timely manner, the requirement to receive these approvals before
the merger may delay the consummation of the merger, possibly
for a significant period of time after Enstar shareholders have
approved the merger agreement and the transactions contemplated
by the merger agreement at the Annual Meeting. In addition,
these government agencies may attempt to condition their
approval of the merger on the imposition of conditions that may
have a material adverse effect on our operating results or the
value of our ordinary shares after the merger is consummated.
Any delay in the consummation of the merger may diminish
anticipated benefits of the merger or may result in additional
transaction costs, loss of revenue or other effects associated
with uncertainty about the transaction. Any uncertainty
regarding the consummation of the merger may make it more
difficult for us to retain key employees or to pursue business
strategies. In addition, until the merger is consummated, the
attention of Enstars and Castlewoods management may
be diverted from ongoing business concerns and regular business
responsibilities to the extent that management is focused on
matters relating to the transaction, such as obtaining
regulatory approvals.
19
If the
merger does not constitute a reorganization under
section 368(a) of the Code, then Enstar shareholders may be
responsible for payment of U.S. federal income
taxes.
The merger is conditioned upon the receipt by Castlewood and
Enstar of an opinion of Debevoise & Plimpton LLP,
counsel to Enstar, to the effect that the merger should
constitute a reorganization under section 368(a) of the
Code. This opinion of counsel will be based on, among other
things, current law and certain representations as to factual
matters made by Castlewood and Enstar, which, if incorrect, may
jeopardize the conclusions reached by such counsel in its
opinion. In addition, this legal opinion will not be binding
upon the U.S. Internal Revenue Service. If for any reason
the merger does not qualify as a tax-free reorganization under
section 368(a) of the Code, then each Enstar shareholder
would recognize a gain or loss equal to the difference between
the fair market value of the New Enstar ordinary shares received
by the shareholder in the merger and the shareholders
adjusted tax basis in the shares of Enstar common stock
exchanged therefor.
Certain
of Enstars officers and directors have interests in the
merger that may have influenced their approval of the merger
agreement and the transactions contemplated by the merger
agreement.
Certain of Enstars directors and executive officers have
interests in the merger that are different from, or in addition
to, yours. These interests include, among others: a new
employment agreement between Castlewood and John J. Oros;
accelerated vesting of 80,000 options granted to certain Enstar
directors and officers; a severance payment of $350,000 to
Nimrod T. Frazer; tax indemnification by Castlewood of
J. Christopher Flowers; registration rights granted to
Enstars directors; rights of two directors of Enstar to
each sell up to 25,000 ordinary shares of New Enstar back to New
Enstar; service of the current Enstar directors on New
Enstars board of directors; and indemnification by New
Enstar of past and present directors and officers of Enstar. See
section Interests of Certain Persons in the Merger
beginning on page 51 for additional details.
Failure
to consummate the merger could negatively impact the share price
and the future business and financial results of
Enstar.
If the merger is not consummated, the ongoing business of Enstar
may be adversely affected and Enstar will be subject to several
risks, including the following:
|
|
|
|
|
Enstar may be required to pay certain costs relating to the
merger, such as legal, accounting and printing fees; and
|
|
|
|
management of Enstar may be focused on the merger instead of
pursuing other opportunities that could be beneficial to it.
|
If the merger is not consummated, Enstar cannot ensure its
shareholders that these risks will not materialize and will not
materially affect the business, financial results and share
price of Enstar.
20
Risks
Relating to New Enstars Business
If we
are unable to implement our business strategies, our business
and financial condition may be adversely affected.
New Enstars future results of operations will depend in
significant part on the extent to which we can implement our
business strategies successfully. Our business strategies after
the merger include continuing to operate Castlewoods
portfolio of run-off insurance and reinsurance companies and
related management engagements, as well as pursuing additional
acquisitions and management engagements in the run-off segment
of the insurance and reinsurance market. We may not be able to
implement our strategies fully or realize the anticipated
results of our strategies as a result of significant business,
economic and competitive uncertainties and contingencies, many
of which are beyond our control. If we are unable to
successfully implement our business strategies, we may not be
able to achieve future growth in our earnings and our financial
condition may suffer.
Our
inability to successfully manage our portfolio of insurance and
reinsurance companies in run-off may adversely impact our
ability to grow our business and may result in
losses.
Castlewood was founded to acquire and manage companies and
portfolios of insurance and reinsurance in run-off. The run-off
business differs from the business of traditional insurance and
reinsurance underwriting in that insurance and reinsurance
companies and portfolios in run-off no longer underwrite new
policies and their books of business are subject to various
risks, including the sufficiency of stated reserves to cover
future losses. Because a company or portfolio in run-off no
longer collects underwriting premiums, the source of capital to
cover losses is limited to the stated reserves, as well as any
reinsurance coverage. In addition, existing capital for the
run-off business or portfolio must be sufficient to cover
run-off expenses.
In order for us to achieve positive operating results, we must
first price acquisitions on favorable terms relative to the
risks posed by the acquired portfolio and then successfully
manage the acquired portfolios. Our inability to price
acquisitions on favorable terms, efficiently manage claims,
collect from reinsurers or control run-off expenses could result
in us having to cover losses sustained under assumed policies
with retained earnings, which would materially and adversely
impact our ability to grow our business and may result in losses.
Our
inability to successfully manage the companies and portfolios
for which we have been engaged as a third-party manager may
adversely impact our financial results and our ability to win
future management engagements.
In addition to acquiring companies and portfolios of insurance
and reinsurance in run-off, we have entered into several
management agreements with third parties to manage their
portfolios or companies in run-off. The terms of these
management engagements typically include incentive payments to
us based on our ability to successfully manage the run-off of
these companies or portfolios. We may not be able to accomplish
our objectives for these engagements as a result of unforeseen
circumstances such as the length of time for claims to develop,
the extent to which losses may exceed reserves, changes in the
law that may require coverage of additional claims and losses,
our ability to commute reinsurance policies on favorable terms
and our ability to manage run-off expenses. If we are not
successful in meeting our objectives for these management
engagements, we may not receive incentive payments under our
management agreements and we may not win future engagements to
provide these management services, either or both of which could
adversely impact our financial results and slow the growth of
our business.
If our
insurance and reinsurance subsidiaries loss reserves are
inadequate to cover their actual losses, our insurance and
reinsurance subsidiaries net income and capital and
surplus would be reduced.
Our insurance and reinsurance subsidiaries are required to
maintain reserves to cover their estimated ultimate liability
for losses and loss adjustment expenses for both reported and
unreported claims incurred. These reserves are only estimates of
what our subsidiaries think the settlement and administration of
claims will cost based on facts and circumstances known to the
subsidiaries. Because of the uncertainties that
21
surround estimating loss reserves and loss adjustment expenses,
our insurance and reinsurance subsidiaries cannot be certain
that ultimate losses will not exceed these estimates of losses
and loss adjustment expenses. If the subsidiaries reserves
are insufficient to cover their actual losses and loss
adjustment expenses, the subsidiaries would have to augment
their reserves and incur a charge to their earnings. These
charges could be material and would reduce our net income and
capital and surplus.
The difficulty in estimating the subsidiaries reserves is
increased because the 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, the difficulty in identifying the source of the
asbestos or environmental contamination, long reporting delays
and the difficulty in properly allocating liability for the
asbestos or environmental damage. Developed case law and
adequate claim history do not always 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
our subsidiaries potential losses for these claims. Our
subsidiaries have not made any changes in reserve estimates that
might arise as a result of any proposed U.S. federal
legislation related to asbestos. There can be no assurance that
the reserves established by our subsidiaries will be adequate to
cover future losses or will not be adversely affected by the
development of other latent exposures.
Our
insurance and reinsurance subsidiaries reinsurers may not
satisfy their obligations to our insurance and reinsurance
subsidiaries.
Our insurance and reinsurance subsidiaries are subject to credit
risk with respect to their reinsurers because the transfer of
risk to a reinsurer does not relieve our subsidiaries of their
liability to the insured. In addition, reinsurers may be
unwilling to pay our subsidiaries even though they are able to
do so. The failure of one or more of our subsidiaries
reinsurers to honor their obligations in a timely fashion may
affect our cash flows, reduce our net income or cause us to
incur a significant loss. Disputes with our reinsurers may also
result in unforeseen expenses relating to litigation or
arbitration proceedings.
The
value of our insurance and reinsurance subsidiaries
investment portfolios and the investment income that our
insurance and reinsurance subsidiaries receive from these
portfolios may decline as a result of market fluctuations and
economic conditions.
The fair market value of the fixed-income securities and equity
securities classified as available-for-sale in our
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 our
subsidiaries fixed-income securities generally increases
or decreases in an inverse relationship with fluctuations in
interest rates. The fair market value of our subsidiaries
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
our subsidiaries realize from investments in fixed income
securities will generally increase or decrease with interest
rates. The changes in the market value of our subsidiaries
securities that are classified as available-for-sale are
reflected in their financial statements. Permanent impairments
in the value of our subsidiaries fixed income securities
are also reflected in their financial statements. As a result, a
decline in the value of the securities in our subsidiaries
portfolio may reduce their net income or cause them to incur a
loss.
22
Fluctuations
in the reinsurance industry may cause our operating results to
fluctuate.
The reinsurance industry historically has been subject to
significant fluctuations and uncertainties. Factors that affect
the industry in general may also cause our operating results to
fluctuate. The industrys 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 affect the ultimate payout of loss
amounts and the costs of administering books of reinsurance
business;
|
|
|
|
volatile and unpredictable developments, which may adversely
affect the recoverability of reinsurance from our 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.
|
The
effects of emerging claim and coverage issues on our business
are uncertain.
As industry practices and legal, judicial, social and other
environmental conditions change, unexpected and unintended
issues related to claims and coverage may emerge. These issues
may adversely affect our business by either extending coverage
beyond the intent of insurance policies and reinsurance
contracts envisioned at the time they were written, or by
increasing the number or size of claims. In some instances,
these changes may not become apparent until some time after we
have acquired companies or portfolios of insurance or
reinsurance contracts that are affected by the changes. As a
result, the full extent of liability under these insurance or
reinsurance contracts may not be known for many years after a
contract has been issued.
Insurance
laws and regulations restrict our ability to operate, and any
failure to comply with these laws and regulations may have a
material adverse effect on our business.
We are subject to extensive regulation under insurance laws of a
number of jurisdictions. These laws limit the amount of
dividends that can be paid to us by our insurance and
reinsurance subsidiaries, impose restrictions on the amount and
type of investments that they can hold, prescribe solvency
standards that they must meet and maintain and require them to
maintain reserves. Failure to comply with these laws may subject
our subsidiaries to fines and penalties and restrict them from
conducting business. The application of these laws may affect
our liquidity and ability to pay dividends on our ordinary
shares and may restrict our ability to expand our business
operations through acquisitions.
If we
fail to comply with applicable insurance laws and regulations,
we may be subject to disciplinary action, damages, penalties or
restrictions that may have a material adverse effect on our
business.
We cannot assure you that our subsidiaries have or can maintain
all required licenses and approvals or that their businesses
fully comply with the laws and regulations to which they are
subject, or the relevant insurance regulatory authoritys
interpretation of those laws and regulations. In addition, some
regulatory authorities have relatively broad discretion to
grant, renew or revoke licenses and approvals. If our
subsidiaries do not have the requisite licenses and approvals or
do not comply with applicable regulatory requirements, the
insurance regulatory authorities may preclude or suspend our
subsidiaries from carrying on some or all of their activities,
or impose monetary penalties on them. These types of actions may
have a material adverse effect on our business and may preclude
us from making future acquisitions or obtaining future
engagements to manage companies and portfolios in run-off.
23
Castlewood
has made, and New Enstar expects to continue to make, strategic
acquisitions of insurance and reinsurance companies in run-off,
and these activities may not be financially beneficial to us or
our shareholders.
Castlewood has pursued and, as part of our strategy, we will
continue to pursue growth through acquisitions
and/or
strategic investments in insurance and reinsurance companies in
run-off. Castlewood and its subsidiaries have made several
acquisitions and investments and we expect to continue to make
such acquisitions and investments. See Information About
Castlewood Business Acquisition
of Insurers or Portfolios in Run-Off beginning on
page 74. We cannot be certain that any of these
acquisitions or investments will be financially advantageous for
us or our shareholders.
The negotiation of potential acquisitions or strategic
investments as well as the integration of an acquired business
or portfolio could result in a substantial diversion of
management resources. Acquisitions could involve numerous
additional risks such as potential losses from unanticipated
litigation or levels of claims and an inability to generate
sufficient revenue to offset acquisition costs.
Our ability to manage our growth through acquisitions or
strategic investments will depend, in part, on our success in
addressing these risks. Any failure by us to effectively
implement our acquisition or strategic investment strategies
could have a material adverse effect on our business, financial
condition or results of operations.
Future
acquisitions may expose us to operational risks.
We may in the future make additional strategic acquisitions,
either of other companies or selected portfolios of insurance or
reinsurance in run-off. Any future acquisitions may expose us to
operational challenges and risks, including:
|
|
|
|
|
funding cash flow shortages that may occur if anticipated
revenues are not realized or are delayed, whether by general
economic or market conditions or unforeseen internal
difficulties;
|
|
|
|
funding cash flow shortages that may occur if expenses are
greater than anticipated;
|
|
|
|
the value of assets being lower than expected or diminishing
because of credit defaults or changes in interest rates, or
liabilities assumed being greater than expected;
|
|
|
|
integrating financial and operational reporting systems,
including assurance of compliance with Section 404 of the
Sarbanes-Oxley Act of 2002;
|
|
|
|
establishing satisfactory budgetary and other financial controls;
|
|
|
|
funding increased capital needs and overhead expenses;
|
|
|
|
obtaining management personnel required for expanded operations;
|
|
|
|
the assets and liabilities we may acquire may be subject to
foreign currency exchange rate fluctuation; and
|
|
|
|
financial exposures in the event that the sellers of the
entities we acquire are unable or unwilling to meet their
indemnification, reinsurance and other obligations to us.
|
Our failure to manage successfully these operational challenges
and risks could have a material adverse effect on our business,
financial condition or results of operations.
Certain
exit and finality strategies may not continue to be
available.
With respect to our U.K., European and Bermudian insurance and
reinsurance subsidiaries, Castlewood is able to pursue
strategies to achieve complete finality and conclude the run-off
of a company by promoting a solvent scheme of arrangement
whereby a local court-sanctioned scheme, approved by a statutory
majority of voting creditors, provides for a one-time full and
final settlement of an insurance or reinsurance companys
obligations to its policyholders. Recently, certain solvent
schemes of arrangement have either not received the required
creditor or court approval. This development suggests that this
exit and finality option may not be as
24
readily available in the future. Should solvent schemes of
arrangement no longer be available to us, there is a risk that
the length and the cost of run-off may increase substantially,
resulting potentially in a material adverse effect on our
financial condition and results of operations.
Conflicts
of interest might prevent us from pursuing desirable investment
and business opportunities.
Our directors and executive officers may have ownership
interests or other involvement with entities that could compete
against us, either in the pursuit of acquisition targets or in
general business operations. These interests may result in a
conflict of interest for those officers and directors. As a
result, we may not be able to pursue all advantageous
transactions that we would otherwise pursue in the absence of
such a conflict or we may not be able to obtain terms as
favorable as may otherwise be available.
We are
dependent on our executive officers, directors and other key
personnel and the loss of any of these individuals could
adversely affect our business.
Our success substantially depends on our ability to attract and
retain qualified employees and upon the ability of our senior
management and other key employees to implement our business
strategy. We believe that there are only a limited number of
available qualified personnel in the business in which we
compete. We rely substantially upon the services of Dominic F.
Silvester, our Chief Executive Officer, Paul J. OShea and
Nicholas A. Packer, our Executive Vice Presidents, Richard J.
Harris, our Chief Financial Officer, John J. Oros, who will
become our Executive Chairman, and our other executive officers
and directors to identify and consummate the acquisition of
insurance and reinsurance companies and portfolios in run-off on
favorable terms and to implement our run-off strategy. Each of
Messrs. Silvester, OShea and Packer has, and
Mr. Oros will have, an employment agreement with us. The
loss of any of their services or the services of other members
of our management team or the inability to attract and retain
other talented personnel could impede the further implementation
of our business strategy, which could have a material adverse
effect on our business. Further, if we were to lose any of our
key employees in Bermuda, we would likely hire non-Bermudians to
replace them. Under Bermuda law, non-Bermudians (other than
spouses of Bermudians or holders of permanent residents
certificates) may not engage in any gainful occupation in
Bermuda without an appropriate governmental work permit. Work
permits may be granted or extended by the Bermuda government
upon showing that, after proper public advertisement in most
cases, no Bermudian (or spouse of a Bermudian or holder of a
permanent residents certificate) is available who meets
the minimum standard requirements for the advertised position.
The Bermuda governments policy limits the duration of work
permits to six years, with certain exemptions for key employees
and job categories where there is a worldwide shortage of
qualified employees.
We may
require additional capital in the future that may not be
available or may only be available on unfavorable
terms.
Our future capital requirements depend on many factors,
including our ability to manage the run-off of our assumed
policies and to establish reserves at levels sufficient to cover
losses. We may need to raise additional funds through financings
in the future. Any equity or debt financing, if available at
all, may be on terms that are not favorable to us. In the case
of equity financings, dilution to our shareholders could result,
and, in any case, such securities may have rights, preferences
and privileges that are senior to those of our already
outstanding securities. If we cannot obtain adequate capital,
our business, results of operations and financial condition
could be adversely affected.
We are
a holding company, and we are dependent on the ability of our
subsidiaries to distribute funds to us.
We are a holding company and conduct substantially all of our
operations through subsidiaries. Our only significant assets are
the capital stock of our subsidiaries. As a holding company, we
are dependent on distributions of funds from our subsidiaries to
pay dividends, fund acquisitions or fulfill financial
obligations in the normal course of our business. Our
subsidiaries may not generate sufficient cash from operations to
enable us to make dividend payments, acquire additional
companies or insurance or reinsurance portfolios or fulfill
other financial obligations. The ability of our insurance and
reinsurance subsidiaries to make
25
distributions to us is limited by applicable insurance laws and
regulations, and the ability of all of our subsidiaries to make
distributions to us may be restricted by, among other things,
other applicable laws and regulations.
Fluctuations
in currency exchange rates may cause us to experience
losses.
We maintain a portion of our investments, insurance liabilities
and insurance assets denominated in currencies other than
U.S. dollars. Consequently, we and our subsidiaries may
experience foreign exchange losses.
We publish our 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 our reported consolidated
financial condition, results of operations and cash flows from
year to year.
Risks
Relating to Ownership of New Enstar Ordinary Shares
There
is no existing market for our ordinary shares.
There is no current public trading market for New Enstar
ordinary shares. We cannot predict the prices at which our
ordinary shares may trade following the merger. Such trading
prices will be determined by the marketplace and may be
influenced by many factors, including the depth and liquidity in
the market for such shares, investor perceptions of us and the
industry in which we participate, our dividend policy and
general economic and market conditions. Until an orderly market
develops, the trading prices for our shares may fluctuate
significantly.
The
market value of our ordinary shares may decline if large numbers
of shares are sold following the merger.
If, following the merger, large amounts of our ordinary shares
are sold, the price of our ordinary shares may decline. Because
Enstars common stock historically has been thinly traded,
we expect that, at least initially, New Enstars ordinary
shares will also be thinly traded. Consequently, if relatively
small amounts of our ordinary shares are sold, the price of our
ordinary shares may decline. Current shareholders of Castlewood
and Enstar may not wish to continue to invest in New Enstar or
for other reasons may wish to dispose of some or all of their
interests in New Enstar. Actual or potential sales by officers,
directors or large shareholders of New Enstar may be viewed
negatively by other investors.
Castlewood, Trident, Messrs. Flowers and Silvester and
certain other shareholders of Castlewood will enter into a
registration rights agreement in connection with the
transactions contemplated by the merger agreement and the
recapitalization agreement. The registration rights agreement
will become effective immediately upon the consummation of the
merger. The registration rights agreement will provide that,
after the expiration of one year from the date of the
registration rights agreement, Trident, Mr. Flowers and
Mr. Silvester may request that New Enstar effect the
registration under the Securities Act of certain of such
holders New Enstar shares. Notwithstanding the
preceding sentence, the registration rights agreement further
provides that, after the expiration of 90 days from the
date of the registration rights agreement and prior to the first
anniversary of such date, Trident has the right to require New
Enstar to effect the registration of up to 750,000 of
Tridents New Enstar shares.
Our
stock price may experience volatility, thereby causing a
potential loss of value to our investors.
The market price for our ordinary shares may fluctuate
substantially due to, among other things, the following factors:
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announcements with respect to an acquisition or investment;
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changes in the value of our assets;
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our quarterly operating results;
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changes in general conditions in the economy;
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the financial markets; and
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adverse press or news announcements.
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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.
A few
significant shareholders may influence or control the direction
of our business. If the ownership of our ordinary shares
continues to be highly concentrated, it may limit your ability
and the ability of other shareholders to influence significant
corporate decisions.
The interests of Trident and Messrs. Flowers, Silvester,
Packer and OShea may not be fully aligned with your
interests, and this may lead to a strategy that is not in your
best interest. Following the consummation of the merger, Trident
will beneficially own approximately 18% of the outstanding New
Enstar ordinary shares, and Messrs. Flowers, Silvester,
Packer and OShea will beneficially own approximately 10%,
19%, 6% and 6%, respectively, of the outstanding New Enstar
ordinary shares. Although they do not act as a group, Trident
and each of Messrs. Flowers, Silvester, Packer and
OShea will exercise significant influence over matters
requiring shareholder approval. Although they do not act as a
group, the concentrated holdings of Trident and
Messrs. Flowers, Silvester, Packer, and OShea may
delay or deter possible changes in control of New Enstar, which
may reduce the market price of New Enstar ordinary shares. For
further information on aspects of our bye-laws that may
discourage changes of control of New Enstar, see
Some aspects of our corporate structure may
discourage third-party takeovers and other transactions or
prevent the removal of our board of directors and
management on page 27.
As a
result of the merger, we will be subject to financial reporting
and other requirements for which our accounting and other
management systems and resources may not be adequately
prepared.
Enstars reporting and control systems are appropriate for
that of a public company. However, as a private company,
Castlewood has not been directly subject to reporting and other
requirements of the Exchange Act. As a result of the merger, New
Enstar will be directly subject to reporting and other
obligations under the Exchange Act, including the requirements
of Section 404 of the Sarbanes-Oxley Act of 2002, which
will require annual management assessments of the effectiveness
of our internal controls over financial reporting and a report
by our independent auditors addressing these assessments. These
reporting and other obligations will place significant demands
on our management, administrative and operational resources,
including accounting resources. If we are unable to integrate
and upgrade our financial and management controls, reporting
systems, information technology and procedures in a timely and
effective fashion, our ability to comply with financial
reporting requirements and other rules that apply to reporting
companies may be impaired. Any failure to achieve and maintain
effective internal controls may have a material adverse effect
on our business, operating results and stock price.
Some
aspects of our corporate structure may discourage third-party
takeovers and other transactions or prevent the removal of our
board of directors and management.
Some provisions of our bye-laws have the effect of making more
difficult or discouraging unsolicited takeover bids from third
parties or preventing the removal of our current board of
directors and management. In particular, our bye-laws make it
difficult for any U.S. shareholder or Direct Foreign
Shareholder Group to own or control ordinary shares that
constitute 9.5% or more of the voting power of all of our
ordinary shares. The votes conferred by such shares will be
reduced by whatever amount is necessary so that after any such
reduction the votes conferred by such shares will constitute
9.5% of the total voting power of all ordinary shares entitled
to vote generally. The primary purpose of this restriction is to
reduce the likelihood that we will be deemed a controlled
foreign corporation within the meaning of the Code, for
U.S. federal tax purposes. However, this limit may also
have the effect of deterring purchases of large blocks of our
ordinary shares or proposals to acquire us, even if some or a
majority of our shareholders might deem these purchases or
27
acquisition proposals to be in their best interests. In
addition, our bye-laws provide for a classified board, whose
members may be removed by our shareholders only for cause by a
majority vote, and contain restrictions on the ability of
shareholders to nominate persons to serve as directors, submit
resolutions to a shareholder vote and request special general
meetings.
These bye-law provisions make it more difficult to acquire
control of us by means of a tender offer, open market purchase,
proxy contest or otherwise. These provisions are designed to
encourage persons seeking to acquire control of us to negotiate
with our directors, which we believe would generally best serve
the interests of our shareholders. However, these provisions may
have the effect of discouraging a prospective acquirer from
making a tender offer or otherwise attempting to obtain control
of us. In addition, these bye-law provisions may prevent the
removal of our current board of directors and management. To the
extent these provisions discourage takeover attempts, they may
deprive shareholders of opportunities to realize takeover
premiums for their shares or may depress the market price of the
shares.
Because
we are incorporated in Bermuda, it may be difficult for
shareholders to serve process or enforce judgments against us or
our directors and officers.
We are a Bermuda company. In addition, certain of our officers
and directors reside in countries outside the United States. All
or a substantial portion of our assets and the assets of these
officers and directors are or may be located outside the United
States. Investors may have difficulty effecting service of
process within the United States on our directors and officers
who reside outside the United States or recovering against us or
these directors and officers on judgments of U.S. courts
based on civil liabilities provisions of the U.S. federal
securities laws even if we appoint an agent in the United States
to receive service of process.
Further, no claim may be brought in Bermuda against us or our
directors and officers in the first instance for violation of
U.S. federal securities laws because these laws have no
extraterritorial jurisdiction under Bermuda law and do not have
force of law in Bermuda. A Bermuda court may, however, impose
civil liability, including the possibility of monetary damages,
on us or our directors and officers if the facts alleged in a
complaint constitute or give rise to a cause of action under
Bermuda law.
We have been advised by Conyers Dill & Pearman, our
Bermuda counsel, that there is doubt as to whether the courts of
Bermuda would enforce judgments of U.S. courts obtained in
actions against us or our directors and officers, as well as the
experts named in this proxy statement/prospectus, predicated
upon the civil liability provisions of the U.S. federal
securities laws or original actions brought in Bermuda against
us or these persons predicated solely upon U.S. federal
securities laws. Further, we have been advised by Conyers
Dill & Pearman that there is no treaty in effect
between the United States and Bermuda providing for the
enforcement of judgments of U.S. courts, and there are
grounds upon which Bermuda courts may not enforce judgments of
U.S. courts.
Some remedies available under the laws of
U.S. jurisdictions, including some remedies available under
the U.S. federal securities laws, may not be allowed in
Bermuda courts as contrary to that jurisdictions public
policy. Because judgments of U.S. courts are not
automatically enforceable in Bermuda, it may be difficult for
you to recover against us based upon such judgments.
Holders
of our ordinary shares may face difficulties in protecting their
interests because we are incorporated under Bermuda
law.
The Bermuda Companies Act, which applies to us, differs in
certain material respects from laws generally applicable to
U.S. corporations and their shareholders. As a result of
these differences, U.S. persons who own our shares may have
more difficulty protecting their interests than
U.S. persons who own shares of a U.S. corporation. To
further understand this risk, see Description of New
Enstars Share Capital Differences in
Corporate Law beginning on page 180 for more
information on the differences between Bermuda and Georgia
corporate laws.
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We do
not intend to pay cash dividends on our ordinary
shares.
We do not intend to pay a cash dividend on our ordinary shares.
Rather, we intend to use any retained earnings to fund the
development and growth of our business. From time to time, our
board of directors will review our alternatives with respect to
our earnings and seek to maximize value for our shareholders. In
the future, we may decide to commence a dividend program for the
benefit of our shareholders. Any future determination to pay
dividends will be at the discretion of our board of directors
and will be limited by our position as a holding company that
lacks direct operations, significant regulatory restrictions,
the results of operations of our subsidiaries, our financial
condition, cash requirements and prospects and other factors
that our board of directors deems relevant. As a result, capital
appreciation, if any, on our ordinary shares may be your sole
source of gain for the foreseeable future. In addition, there
are regulatory and other constraints that could prevent us from
paying dividends in any event.
Our
board of directors may decline to register a transfer of our
ordinary shares under certain circumstances.
Our board of directors may decline to register a transfer of
ordinary shares under certain circumstances, including if it has
reason to believe that any non-de minimis adverse tax,
regulatory or legal consequences to us, any of our subsidiaries
or any of our shareholders may occur as a result of such
transfer. Further, our
bye-laws
provide us with the option to repurchase, or to assign to a
third party the right to purchase, the minimum number of shares
necessary to eliminate any such non-de minimis adverse tax,
regulatory or legal consequence. In addition, our board of
directors may decline to approve or register a transfer of
shares unless all applicable consents, authorizations,
permissions or approvals of any governmental body or agency in
Bermuda, the United States or any other applicable jurisdiction
required to be obtained prior to such transfer shall have been
obtained. The proposed transferor of any shares will be deemed
to own those shares for dividend, voting and reporting purposes
until a transfer of such shares has been registered on our
shareholders register.
Conyers Dill & Pearman has advised us that while the
precise form of the restrictions on transfer contained in our
bye-laws is untested, as a matter of general principle,
restrictions on transfers are enforceable under Bermuda law and
are not uncommon.
These restrictions on transfer may also have the effect of
delaying, deferring or preventing a change in control.
Risks
Relating to Taxation
We
cannot predict our future tax liabilities.
We are a multi-national group with a Bermuda parent and with
operating subsidiaries doing business in a number of countries.
If the U.S. Internal Revenue Service, or IRS, were to
contend successfully that we or any of our
non-U.S. subsidiaries
are engaged in a trade or business in the United States, then,
to the extent not exempted from tax by the
U.S.-Bermuda
or other relevant income tax treaty, we or our
non-U.S. subsidiaries
would be subject to U.S. corporate income tax on that
portion of our or their net income treated as effectively
connected with a U.S. trade or business, as well as the
U.S. corporate branch profits tax. Although we would
vigorously resist such a contention, if we or our
non-U.S. subsidiaries
were ultimately held to be subject to taxation in the United
States, our earnings would correspondingly decline.
In addition, the provisions of the
U.S.-Bermuda
income tax treaty that may limit any such tax to income
attributable to a permanent establishment that we or our Bermuda
subsidiaries maintain in the United States are only available if
more than 50% of our or our subsidiarys shares are
beneficially owned, directly or indirectly, by individuals who
are Bermuda residents or U.S. citizens or residents.
Similar restrictions may apply under other tax treaties. We may
not be able to continually satisfy this beneficial ownership or
other relevant treaty test or may not be able to establish it to
the satisfaction of the IRS.
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For more information on the tax considerations of holding and
disposing of New Enstar ordinary shares, see Material Tax
Considerations of Holding and Disposing of New Enstar Ordinary
Shares beginning on page 186.
U.S. persons
who own our ordinary shares might become subject to adverse
U.S. tax consequences as a result of related party
insurance income, or RPII, if any, of our
non-U.S. insurance
company subsidiaries.
If the RPII rules of the Code were to apply to us, a
U.S. person who owns our ordinary shares directly or
indirectly through foreign entities on the last day of the
taxable year would be required to include in income for
U.S. federal income tax purposes the shareholders pro
rata share of our
non-U.S. subsidiaries
RPII for the entire taxable year, determined as if that RPII
were distributed proportionately to the U.S. shareholders
at that date regardless whether any actual distribution is made.
In addition, any RPII that is includible in the income of a
U.S. tax-exempt organization would generally be treated as
unrelated business taxable income. Although we and our
subsidiaries intend to generally operate in a manner so as to
qualify for certain exceptions to the RPII rules, there can be
no assurance that these exceptions will be available.
Accordingly, there can be no assurance that U.S. Persons
who own our ordinary shares will not be required to recognize
gross income inclusions attributable to RPII. See Material
Tax Considerations of Holding and Disposing of New Enstar
Ordinary Shares Taxation of
Shareholders United States Taxation
beginning on page 190.
In addition, the RPII rules provide that if a shareholder who is
a U.S. Person disposes of shares in a foreign insurance
company that has RPII and in which U.S. Persons
collectively own 25% or more of the shares, any gain from the
disposition will generally be treated as dividend income to the
extent of the shareholders share of the corporations
undistributed earnings and profits that were accumulated during
the period that the shareholder owned the shares (whether or not
those earnings and profits are attributable to RPII). Such a
shareholder would also be required to comply with certain
reporting requirements, regardless of the amount of shares owned
by the shareholder. These rules should not apply to dispositions
of our ordinary shares because New Enstar will not itself be
directly engaged in the insurance business. The RPII rules,
however, have not been interpreted by the courts or the IRS, and
regulations interpreting the RPII rules exist only in proposed
form. Accordingly, there is no assurance that our views as to
the inapplicability of these rules to a disposition of our
ordinary shares will be accepted by the IRS or a court. See
Material Tax Considerations of Holding and Disposing of
New Enstar Ordinary Shares Taxation of
Shareholders United States
Taxation Dispositions of Ordinary Shares
beginning on page 193.
U.S. persons
who own our ordinary shares would be subject to adverse tax
consequences if we or one or more of our
non-U.S. subsidiaries
were considered a passive foreign investment
company, or PFIC, for U.S. federal income tax
purposes.
We believe that we and our
non-U.S. subsidiaries
will not be PFICs for U.S. federal income purposes for the
current year. Moreover, we do not expect to conduct our
activities in a manner that will cause us or any of our
non-U.S. subsidiaries
to become a PFIC in the future. However, there can be no
assurance that the IRS will not challenge this position or that
a court will not sustain such challenge. Accordingly, it is
possible that we or one or more of our
non-U.S. subsidiaries
might be deemed a PFIC by the IRS or a court for the current
year or any future year. If we or one or more of our
non-U.S. subsidiaries
were a PFIC, it could have material adverse tax consequences for
an investor that is subject to U.S. federal income
taxation, including subjecting the investor to a substantial
acceleration
and/or
increase in tax liability. There are currently no regulations
regarding the application of the PFIC provisions of the Code to
an insurance company, so the application of those provisions to
insurance companies remains unclear in certain respects. See
Material Tax Considerations of Holding and Disposing of
New Enstar Ordinary Shares Taxation of
Shareholders United States
Taxation Passive Foreign Investment
Companies beginning on page 194.
We may
become subject to taxes in Bermuda after March 28,
2016.
The Bermuda Minister of Finance, under the Exempted Undertakings
Tax Protection Act 1966, as amended, of Bermuda, has given us
and each of our Bermuda subsidiaries an assurance that if any
legislation is enacted in
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Bermuda that would impose tax computed on profits or income, or
computed on any capital asset, gain or appreciation, or any tax
in the nature of estate duty or inheritance tax, then the
imposition of any such tax will not be applicable to us or our
Bermuda subsidiaries or any of our or their respective
operations, shares, debentures or other obligations until
March 28, 2016. See Material Tax Considerations of
Holding and Disposing of New Enstar Ordinary
Shares Taxation of New Enstar and
Subsidiaries Bermuda beginning on
page 186. Given the limited duration of the Minister of
Finances assurance, we cannot be certain that we will not
be subject to any Bermuda tax after March 28, 2016. In the
event that we become subject to any Bermuda tax after such date,
it could have a material adverse effect on our financial
condition and results of operations.
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FORWARD-LOOKING
STATEMENTS
This proxy statement/prospectus and the documents incorporated
by reference into this proxy statement/prospectus contain
statements that constitute forward-looking
statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act with
respect to the financial condition, results of operations,
business strategies, operating efficiencies, competitive
positions, growth opportunities, plans and objectives of the
management of each of Enstar, Castlewood and New Enstar, as well
as the merger, the markets for Enstar common stock and New
Enstar ordinary shares and the insurance and reinsurance sectors
in general. Statements that include words such as
estimate, project, plan,
intend, expect, anticipate,
believe, would, should,
could, seek, and similar statements of a
future or forward-looking nature identify forward-looking
statements for purposes of the federal securities laws or
otherwise. All forward-looking statements are necessarily
estimates or expectations, and not statements of historical
fact, reflecting the best judgment of the respective managements
of Enstar and Castlewood and, following the merger, New Enstar,
and involve a number of risks and uncertainties that could cause
actual results to differ materially from those suggested by the
forward-looking statements. These forward-looking statements
should, therefore, be considered in light of various important
factors, including those set forth in and incorporated by
reference in this proxy statement/prospectus.
Factors that could cause actual results to differ materially
from those suggested by the forward-looking statements include:
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risks associated with implementing our business strategies and
initiatives;
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the adequacy of our loss reserves and the need to adjust such
reserves as claims develop over time;
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risks relating to the availability and collectibility of our
reinsurance;
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tax, regulatory or legal restrictions or limitations applicable
to Castlewood, Enstar or New Enstar or the insurance and
reinsurance business generally;
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increased competitive pressures, including the consolidation and
increased globalization of reinsurance providers;
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emerging claim and coverage issues;
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lengthy and unpredictable litigation affecting assessment of
losses
and/or
coverage issues;
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loss of key personnel;
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changes in Castlewoods, Enstars or New Enstars
plans, strategies, objectives, expectations or intentions, which
may happen at any time at managements discretion;
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operational risks, including system or human failures;
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risks that we may require additional capital in the future which
may not be available or may be available only on unfavorable
terms;
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the risk that ongoing or future industry regulatory developments
will disrupt our business, or mandate changes in industry
practices in ways that increase our costs, decrease our revenues
or require us to alter aspects of the way we do business;
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changes in Bermuda law or regulation or the political stability
of Bermuda;
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changes in regulations or tax laws applicable to us or our
subsidiaries, or the risk that we or one of our
non-U.S. subsidiaries
become subject to significant, or significantly increased,
income taxes in the United States or elsewhere;
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losses due to foreign currency exchange rate fluctuations;
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changes in accounting policies or practices; and
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changes in economic conditions, including interest rates,
inflation, currency exchange rates, equity markets and credit
conditions which could affect our investment portfolio.
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The factors listed above should not be construed as
exhaustive. Certain of these factors are described in more
detail in Risk Factors above. We undertake no
obligation to release publicly the results of any future
revisions we may make to forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
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INFORMATION
ABOUT THE ANNUAL MEETING AND VOTING
General
This proxy statement/prospectus is being furnished to the
shareholders of Enstar in connection with the solicitation of
proxies by the board of directors of Enstar for use at the
Annual Meeting to be held
on ,
2006 at Flowers Hall, Huntingdon College, at 1500 East Fairview
Avenue, Montgomery, Alabama 36106, at 9:00 a.m., local
time, and at any adjournment thereof.
Record
Date
The Enstar board of directors has
fixed ,
2006 as the Record Date for the determination of shareholders
entitled to notice of, and to vote at, the Annual Meeting. Only
holders of common stock, par value $.01 per share, of
Enstar, as of the Record Date are entitled to vote at the Annual
Meeting. On the Record Date, Enstar had issued and
outstanding shares of common
stock. Each share of common stock is entitled to one vote on
each matter being considered at the Annual Meeting. No
cumulative voting rights are authorized, and appraisal rights
for dissenting shareholders are not applicable to the matters
being proposed. It is anticipated that this proxy
statement/prospectus will be first mailed to shareholders of
Enstar on or
about ,
2006.
Voting
and Proxies
When the enclosed form of proxy is properly executed and
returned, the Enstar common stock it represents will be voted as
directed at the Annual Meeting or, if no direction is indicated
on an executed proxy, such shares will be voted in favor of the
proposals set forth in the notice attached hereto. Any Enstar
shareholder giving a proxy has the power to revoke it at any
time before it is voted. All proxies delivered pursuant to the
solicitation are revocable at any time at the option of the
persons executing them by giving written notice to the Secretary
of Enstar, by delivering a later-dated proxy or by voting in
person at the Annual Meeting. Any beneficial owner of shares of
Enstar common stock as of the Record Date who intends to vote
such shares in person at the Annual Meeting must obtain a legal
proxy from the record owner and present such proxy at the Annual
Meeting in order to vote such shares. Votes cast by proxy or in
person at the Annual Meeting will be tabulated by the inspector
of elections appointed for the meeting who will also determine
whether a quorum is present for the transaction of business.
The presence in person or by proxy of holders of a majority of
the shares of Enstar common stock outstanding on the Record Date
will constitute a quorum for the transaction of business at the
Annual Meeting.
Approval of the merger agreement and the transactions
contemplated by the merger agreement requires the affirmative
vote of the holders of a majority of the outstanding voting
power of Enstars common stock on the Record Date.
As of May 23, 2006, Enstars directors and executive
officers owned 1,904,753 shares of Enstar common stock,
representing approximately 33.19% of the voting power of Enstar
common stock on that date. Three of those directors, who owned
Enstar common stock representing 30.1% of the voting power on
that date, have entered into a support agreement with Castlewood
pursuant to which such directors have agreed to vote their
shares of Enstar common stock in favor of the merger agreement
and the transactions contemplated by the merger agreement. All
other Enstar directors and officers have also indicated that
they intend to vote their shares of Enstar common stock in favor
of the merger agreement and the transactions contemplated by the
merger agreement.
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The affirmative vote of a plurality of the shares of Enstar
common stock present in person or by proxy and entitled to vote
is required to elect directors. The affirmative vote of the
majority of the shares of Enstar common stock represented at the
Annual Meeting and entitled to vote on the subject matter is
required with respect to the ratification of the appointment of
Deloitte & Touche LLP as Enstars independent
registered public accounting firm and any other matter that may
properly come before the Annual Meeting.
At the Annual Meeting, votes cast for or against any matter may
be cast in person or by proxy. Shares of Enstar common stock
that are voted FOR, AGAINST or
WITHHOLD at the Annual Meeting will be treated as
being present at such meeting for purposes of establishing a
quorum and will also be treated as votes eligible to be cast by
the Enstar common stock present in person at the annual meeting
and entitled to vote. Abstentions will be counted for purposes
of determining both the presence or absence of a quorum for the
transaction of business and the total number of votes cast with
respect to a particular matter. Broker non-votes will be counted
for purposes of determining the presence or absence of a quorum
for the transaction of business but will not be counted for
purposes of determining the number of votes cast with respect to
the particular proposal on which the broker has expressly not
voted. As a result, broker non-votes have the effect of reducing
the number of affirmative votes required to achieve a particular
voting requirement for matters by reducing the total number of
shares from which the voting requirement is calculated. Broker
non-votes are proxies from brokers or nominees indicating that
those persons have not received instructions from the beneficial
owners of the shares as to certain proposals on which the
beneficial owners are entitled to vote but with respect to which
the brokers or nominees have no discretionary voting power to
vote without instructions.
As of the date of this proxy statement/prospectus, management of
Enstar has no knowledge of any business other than that
described herein which will be presented for consideration at
the Annual Meeting. In the event any other business is properly
presented at the Annual Meeting, the persons named in the
enclosed proxy will have authority to vote such proxy in
accordance with their judgment on such business.
Expenses
of Solicitation
The cost of solicitation of proxies by the Enstar board of
directors in connection with the Annual Meeting will be borne by
Enstar. As part of its services as Enstars transfer agent,
American Stock Transfer & Trust Company will assist in
the solicitation of proxies. In addition, Enstar may engage the
services of Georgeson Shareholder Communications Inc. to assist
in the solicitation of proxies. Enstar estimates the costs of
these solicitation services should be approximately $9,000.
Enstar will reimburse brokers, fiduciaries and custodians for
reasonable expenses incurred by them in forwarding proxy
materials to beneficial owners of common stock held in their
names.
Approval
of the Merger Agreement and the Transactions Contemplated by the
Merger Agreement
On May 23, 2006, Enstar entered into the merger agreement
with Castlewood and Merger Sub, pursuant to which Merger Sub
will be merged with and into Enstar, and Enstar, which will be
renamed Enstar USA, Inc., will become a direct wholly-owned
subsidiary of Castlewood. Holders of shares of Enstar common
stock will be entitled to receive one ordinary share of
Castlewood in the merger for each share of Enstar common stock
they own. Immediately following the merger, current shareholders
of Enstar will hold approximately 48.7% of the issued ordinary
shares of Castlewood, which will be renamed Enstar Group Limited.
At the Annual Meeting, holders of Enstar common stock will be
asked to vote to approve the merger agreement and the
transactions contemplated by the merger agreement.
THE MERGER WILL NOT BE CONSUMMATED UNLESS ENSTARS
SHAREHOLDERS APPROVE THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED BY THE MERGER AGREEMENT.
35
Recommendation
of the Board of Directors of Enstar
THE ENSTAR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT ENSTAR
SHAREHOLDERS VOTE FOR THE APPROVAL OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER
AGREEMENT.
Details surrounding the proposed merger, including the
background of the merger, the reasons for the merger, the
accounting treatment of the merger, material U.S. federal
income tax consequences of the merger, regulatory matters
relating to the merger and other matters concerning the New
Enstar ordinary shares in connection with the merger, can be
found in the following section The Proposed Merger.
Dissenters
Rights
Under Georgia law, Enstar shareholders are not entitled to
dissenters rights in connection with the merger.
Election
of Enstar Directors
In accordance with the bylaws of Enstar, Enstars board of
directors currently consists of seven members. Enstars
articles of incorporation divide Enstars board of
directors into three classes. Directors for each class are
elected to serve a term of three years at the annual meeting of
shareholders held in the year in which the term for such class
expires. Nominees for vacant or newly created director positions
stand for election at the next annual meeting following the
vacancy or creation of such director positions, to serve for the
remainder of the term of the class in which their respective
positions are apportioned. The terms of two current directors,
T. Whit Armstrong and T. Wayne Davis, expire at the Annual
Meeting. At the Annual Meeting, T. Whit Armstrong and T. Wayne
Davis will stand for re-election to serve as directors for
three-year terms expiring at the 2009 annual meeting of
shareholders, or until their successors are duly elected and
qualified. In accordance with the bylaws of Enstar, a director
who is not also an employee of Enstar may serve as a director
only until the next annual meeting following such
directors 70th birthday.
Enstars board of directors has no reason to believe that
any of the nominees for the office of director will be
unavailable for election as directors. However, if at the time
of the Annual Meeting any nominee should be unable or decline to
serve, the persons named in the proxy will vote as recommended
by Enstars board of directors either (1) to elect a
substitute nominee recommended by Enstars board of
directors, (2) to allow the vacancy created thereby to
remain open until filled by Enstars board of directors or
(3) to reduce the number of directors for the ensuing year.
In no event, however, can a proxy be voted to elect more than
two directors. The election of directors requires the
affirmative vote of a plurality of the shares held by
shareholders present and voting at the Annual Meeting in person
or by proxy.
If the merger is consummated, New Enstar, as the sole
shareholder of Enstar following the merger, will be able to
determine the composition of Enstars board of directors in
accordance with the merger agreement after the merger.
Recommendation
of Enstars Board of Directors
ENSTARS BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR T. WHIT ARMSTRONG AND T. WAYNE DAVIS TO HOLD
OFFICE UNTIL THE 2009 ANNUAL MEETING OF SHAREHOLDERS, OR UNTIL
THEIR SUCCESSORS ARE DULY ELECTED AND QUALIFIED.
Nominees
for Election Terms Expiring 2009
T. Whit Armstrong was elected to the position of
director at Enstar in June of 1990. Mr. Armstrong has been
President, Chief Executive Officer and Chairman of the Board of
The Citizens Bank, Enterprise, Alabama, and its holding company,
Enterprise Capital Corporation, Inc. for more than five years.
Mr. Armstrong is also a director of Alabama Power Company
of Birmingham, Alabama. Mr. Armstrong is 58 years old.
36
T. Wayne Davis was elected to the position of
director at Enstar in June of 1990. Mr. Davis was Chairman
of the Board of General Parcel Service, Inc., a parcel delivery
service, from January of 1989 to September of 1997 and was
Chairman of the Board of Momentum Logistics, Inc. from September
of 1997 to March of 2003. He also is a director of Winn-Dixie
Stores, Inc. and MPS Group, Inc. Mr. Davis is 59 years
old.
Continuing
Directors Terms Expiring 2008
Nimrod T. Frazer was elected to the position of director
of Enstar in August of 1990. Mr. Frazer was named Chairman
of the Board, Acting President and Chief Executive Officer of
Enstar on October 26, 1990 and served as President of
Enstar from May 26, 1992 to June 6, 2001.
Mr. Frazer is 76 years old.
John J. Oros has served as a director of Enstar since
March of 2000. Mr. Oros was named to the position of
Executive Vice President of Enstar in March of 2000 and on
June 6, 2001, Mr. Oros was named President and Chief
Operating Officer of Enstar. Before joining Enstar,
Mr. Oros was an investment banker at Goldman,
Sachs & Co. in the Financial Institutions Group.
Mr. Oros joined Goldman, Sachs & Co. in 1980 and
was made a General Partner in 1986. Mr. Oros resigned from
Goldman, Sachs & Co. in March 2000 to join Enstar. In
February 2006, Mr. Oros became a Managing Director of J.C.
Flowers & Co. LLC, which will manage J.C.
Flowers II LP, a newly formed private equity fund
affiliated with J. Christopher Flowers. Mr. Oros splits his
time between J.C. Flowers & Co. LLC and Enstar.
Mr. Oros is 59 years old.
Continuing
Directors Terms Expiring 2007
J. Christopher Flowers was elected to the position
of director of Enstar in October of 1996. Mr. Flowers
became a General Partner of Goldman, Sachs & Co. in
1988 and a Managing Director in 1996. He resigned from Goldman,
Sachs & Co. in November 1998 in order to pursue his own
business interests. Mr. Flowers was named Vice Chairman of
the Board of Enstar in December 1998; Mr. Flowers resigned
from such position in July 2003 but remains a member of
Enstars board of directors. He is also a director of
Shinsei Bank, Ltd., formerly Long-Term Credit Bank of Japan,
Ltd. Mr. Flowers has been the President of J.C.
Flowers & Co., LLC, a financial services
investment fund since 2002. Mr. Flowers is 48 years
old.
Gregory L. Curl was elected to the position of director
of Enstar in July of 2003. Mr. Curl has been Director of
Corporate Planning and Strategy for Bank of America since
December 1998. Previously, Mr. Curl was Vice Chairman of
Corporate Development and President of Specialized Lending for
Bank of America from 1997 to 1998. Mr. Curl is
57 years old.
Paul J. Collins was elected to the position of director
of Enstar in May of 2004. Mr. Collins retired as a Vice
Chairman and member of the Management Committee of Citigroup
Inc. in September 2000. From 1985 to 2000, Mr. Collins
served as a director of Citicorp and its principal subsidiary,
Citibank; from 1988 to 1998 he also served as Vice Chairman of
such entities. Mr. Collins currently serves as a director
of Nokia Corporation and BG Group, as a member of the
supervisory board of Actis Capital LLP and as a trustee of the
University of Wisconsin Foundation and the Glyndebourne Arts
Trust. He is also a member of the Advisory Board of Welsh,
Carson, Anderson & Stowe, a private equity firm.
Mr. Collins is 69 years old.
Enstars
Code of Conduct and Code of Ethics
Enstar has a Code of Conduct which is applicable to all
directors, officers and employees of Enstar. Enstar has an
additional Code of Ethics for Senior Executive and Financial
Officers, or the Code of Ethics, which contains provisions
specifically applicable to its chief executive officer, chief
financial officer, chief accounting officer and persons
performing similar functions. The Code of Ethics is attached as
an exhibit to Enstars Annual Report on
Form 10-K
for the year ended December 31, 2003. Upon request to the
following address, Enstar will furnish without charge a copy of
the Code of Conduct and the Code of Ethics:
THE ENSTAR GROUP, INC.
401 Madison Avenue
Montgomery, Alabama 36104
Attention: Amy M. Dunaway
Treasurer and Controller
37
Enstars
Board of Directors
Enstars board of directors has determined that each of T.
Whit Armstrong, T. Wayne Davis, Gregory L. Curl, and Paul J.
Collins is an independent director as such term is
defined in Nasdaq Marketplace Rule 4200(a)(15).
During 2005, Enstar had an Audit Committee that was comprised of
T. Whit Armstrong, Chairman, T. Wayne Davis, Gregory L.
Curl and Paul J. Collins. Enstars board of directors has
determined that each Audit Committee member meets the
independence standards for audit committee members, as set forth
in the Sarbanes-Oxley Act of 2002 and the Nasdaq listing
standards, and the Nasdaqs financial knowledge
requirements. Enstars board of directors has determined
that Mr. Curl is an audit committee financial
expert, as such term is defined in Commission regulations,
and that Mr. Curl and Mr. Armstrong meet the
Nasdaqs professional experience requirements.
Enstars Audit Committee is responsible for, among other
things, appointing (subject to shareholder ratification) the
accounting firm that will serve as the independent registered
public accounting firm of Enstar and reviewing and pre-approving
all audit and non-audit services provided to Enstar by its
independent auditors. Enstars Audit Committee is also
responsible for overseeing Enstars financial reporting and
accounting practices and monitoring the adequacy of internal
accounting, compliance and control systems. Enstars board
of directors has adopted a written charter for the Audit
Committee which complies with the applicable requirements of the
Sarbanes-Oxley Act of 2002 and related rules of the Commission
and the Nasdaq.
During 2005, Enstar had a Compensation Committee that was
composed of T. Wayne Davis, Chairman, T. Whit Armstrong and
Gregory L. Curl. In addition, J. Christopher Flowers served on
Enstars Compensation Committee until Mr. Curl was
appointed to the Compensation Committee in June 2005. Other than
Mr. Flowers, each director who served on Enstars
Compensation Committee during fiscal 2005 qualifies as a
non-employee director as such term is defined in
Rule 16b-3
promulgated under the Exchange Act, and an independent
director as such term is defined in Nasdaq Marketplace
Rule 4200(a)(15). Enstars Compensation Committee is
responsible for, among other things, reviewing, determining and
establishing, upon the recommendation of the Chief Executive
Officer (with the exception of the compensation of the Chief
Executive Officer) salaries, bonuses and other compensation for
Enstars executive officers and for administering
Enstars stock option plans.
Enstar does not have a nominating committee or a nominating
committee charter. It is the position of Enstars board of
directors that, given the small size of the board, it is
appropriate for the independent directors, rather than a
separate committee comprised of most or all of such independent
directors, to recommend director candidates. In November 2003,
Enstars board of directors adopted a resolution regarding
the nomination of directors. Pursuant to such resolution,
director nominees must be recommended to Enstars board of
directors by a majority of the independent directors
as such term is defined in Nasdaq Marketplace
Rule 4200(a)(15). Enstars board of directors has
determined that each of T. Wayne Davis, T. Whit Armstrong, Paul
J. Collins and Gregory L. Curl is an independent director. When
identifying and reviewing director nominees, the independent
directors consider the nominees personal and professional
integrity, ability and judgment and other factors deemed
appropriate by the independent directors. For incumbent
directors, the independent directors review each directors
overall service to Enstar during such directors term,
including the number of meetings attended, level of
participation and quality of performance. The independent
directors considered and nominated the candidates proposed for
election as directors at the Annual Meeting, with Enstars
board of directors unanimously agreeing on all actions taken in
this regard.
During 2005, Enstars board of directors held a total of
five meetings, Enstars Audit Committee held a total of
four meetings and Enstars Compensation Committee held one
meeting. In addition, the independent directors met in an
executive session of Enstars board of directors a total of
four times. All directors attended all of the meetings of
Enstars board of directors and all committees on which
they served during 2005, except for Gregory L. Curl, who did not
attend two meetings of the board of directors of Enstar, and
Paul J. Collins, who did not attend one meeting of the Audit
Committee. Directors are encouraged but are not required to
attend Enstars annual meetings. Except for Gregory L.
Curl, all directors attended the 2005 annual meeting of
shareholders.
38
Communications
with Enstars Board of Directors
Shareholders may communicate with Enstars board of
directors by sending an email to treasurer@enstargroup.com
or by sending a letter to Enstar board of directors,
c/o the Treasurer, 401 Madison Avenue, Montgomery, Alabama
36104. Enstars Treasurer will receive the correspondence
and forward it to Enstars Chairman of the Audit Committee
or to any individual director or directors to whom the
communication is directed. Enstars Treasurer has the
authority to discard or disregard any inappropriate
communications or to take other appropriate actions with respect
to such inappropriate communications.
Compensation
of Enstar Directors
Directors who are not employees of Enstar receive a quarterly
retainer fee of $6,250 and per meeting fees as follows:
(1) $2,500 for each board meeting attended other than a
telephone board meeting; (2) $1,000 for each telephone
board meeting attended; (3) $1,000 for each committee
meeting attended; and (4) $1,500 for each committee meeting
attended by a committee chairperson. In addition, each committee
chairperson receives a quarterly retainer fee of $500. Such
outside directors fees are payable in cash. Until
May 23, 2006, such fees to Enstars outside directors
were payable at the election of the director either in cash or
in stock units under Enstars Deferred Compensation and
Stock Plan for Non-Employee Directors, as amended. If a director
elected to receive stock units instead of cash, the stock units
were payable only upon the directors termination. The
number of shares to be distributed in connection with such
termination would be equal to one share of common stock for each
stock unit, with cash paid for any fractional units. The
distribution of stock units was also subject to acceleration
upon certain events constituting a change in control of Enstar.
All current non-employee directors, other than Gregory L. Curl,
had elected to receive 100% of their compensation in stock units
in lieu of cash payments. Mr. Curl had elected to receive a
portion of his compensation in cash. As of December 31,
2005, a total of $853,000 in retainer and meeting fees had been
deferred under this deferred compensation plan. In addition,
directors are entitled to reimbursement for
out-of-pocket
expenses incurred in attending all meetings.
In April 2005, Paul J. Collins was granted options to purchase
5,000 shares of common stock at an exercise price of
$57.81 per share (which was the market price of the common
stock at that time). During 2005, no other options to purchase
shares of common stock were granted to directors for their
service as directors.
Ratification
of Appointment of the Independent Registered Public Accounting
Firm of Enstar
Enstars Audit Committee has appointed the firm of
Deloitte & Touche LLP to serve as the independent
registered public accounting firm of Enstar for the year ending
December 31, 2006, subject to ratification of this
appointment by the shareholders of Enstar. Deloitte &
Touche LLP has served as the independent registered public
accounting firm of Enstar from 1990 through 2005 and is
considered by management of Enstar to be well qualified. Enstar
has been advised by Deloitte & Touche LLP that neither
it nor any member thereof has any financial interest, direct or
indirect, in Enstar or any of its subsidiaries in any capacity.
One or more representatives of Deloitte & Touche LLP
will be present at the Annual Meeting, will have an opportunity
to make a statement if he or she desires to do so and will be
available to respond to appropriate questions.
If the merger is consummated, New Enstar, as the sole
shareholder of Enstar following the merger, will be able to
select the independent auditors of Enstar after the merger.
Recommendation
of Enstars Board of Directors
ENSTARS BOARD RECOMMENDS A VOTE FOR THE
PROPOSAL TO RATIFY THE APPOINTMENT OF DELOITTE &
TOUCHE LLP AS THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
OF ENSTAR FOR 2006.
39
Principal
Accounting Firm Fees and Services for Enstar
The following table sets forth the aggregate fees billed to
Enstar for the fiscal years ended December 31, 2005 and
December 31, 2004 by Enstars principal accounting
firm, Deloitte & Touche LLP, the member firms of
Deloitte Touche Tohmatsu, and their respective affiliates, or
collectively, Deloitte.
|
|
|
|
|
|
|
|
|
Type of Fees
|
|
2005
|
|
|
2004
|
|
|
Audit Fees
|
|
$
|
227,000
|
|
|
$
|
245,355
|
|
Audit-Related Fees
|
|
|
0
|
|
|
|
1,500
|
(1)
|
Tax Fees
|
|
|
40,500
|
(2)
|
|
|
68,123
|
(2)
|
All Other Fees
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
267,500
|
|
|
$
|
314,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents fees related to financial accounting and Commission
advisory services arising in connection with matters outside the
scope of the audit. |
|
(2) |
|
Represents fees related to the preparation of Enstars
federal and state income tax returns, consultation on federal
tax planning and other income tax issues. |
Pre-Approval
of Audit and Permissible Non-Audit Services
The amended and restated charter of the Audit Committee, adopted
on May 29, 2003, charges Enstars Audit Committee with
review of all aspects of Enstars relationship with
Deloitte, including the provision of and payment for all
services. All audit and non-audit services provided by Deloitte
are pre-approved by Enstars Audit Committee, which
concluded that the provision of non-audit services was
compatible with maintaining the accountants independence
in the conduct of its auditing functions.
40
THE
PROPOSED MERGER
General
On May 23, 2006, Enstar entered into the merger agreement
with Castlewood and Merger Sub, pursuant to which Merger Sub
will be merged with and into Enstar, and Enstar, which will be
renamed Enstar USA, Inc., will become a direct wholly-owned
subsidiary of Castlewood. Holders of shares of Enstar common
stock will be entitled to receive one ordinary share of
Castlewood, or New Enstar, in the merger for each share of
Enstar common stock they own. Immediately following the merger,
current shareholders of Enstar will hold approximately 48.7% of
the issued ordinary shares of New Enstar.
Enstars board of directors is using this proxy
statement/prospectus to solicit proxies from the holders of
Enstar common stock for use at the Annual Meeting.
Castlewoods board of directors has approved the merger
agreement and the transactions contemplated by the merger
agreement and Castlewood shareholders holding the number of
shares required to approve the recapitalization agreement and
the transactions contemplated by the recapitalization agreement
have agreed to vote in favor of such agreement and transactions.
Enstar
Proposal
At the Annual Meeting, holders of Enstar common stock will be
asked to vote to approve the merger agreement and the
transactions contemplated by the merger agreement.
THE MERGER WILL NOT BE CONSUMMATED UNLESS ENSTARS
SHAREHOLDERS APPROVE THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED BY THE MERGER AGREEMENT.
Background
of the Merger
In 1993, Mr. Silvester, who was joined by Mr. Packer
and Mr. OShea in 1993 and 1994, respectively, began a
business venture in Bermuda to provide run-off services to the
insurance and reinsurance industry. In 1995 this business was
assumed by Castlewood Limited.
In 1996, Castlewood Limited formed a wholly-owned subsidiary,
Castlewood (EU) Ltd., based in Guildford and London in the
United Kingdom, to extend the services provided by Castlewood
Limited.
In 2000, Castlewood Limited entered into a joint venture with
Enstar and an affiliate of Trident II, L.P. to acquire, and
for Castlewood Limited to manage, B.H. Acquisition. In
connection with the formation of the joint venture, Castlewood,
Enstar and an affiliate of Trident II, L.P. acquired 45%,
33% and 22% economic interests, respectively, in B.H.
Acquisition.
In November 2001, Enstar, together with Trident and senior
management of Castlewood Limited, completed the formation of a
new venture, Castlewood, 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. Enstar owns 50% of the
voting stock of Castlewood and Castlewoods senior
management and Trident each own 25% of Castlewood voting stock.
Enstar owns a 32.03% economic interest in Castlewood.
Since the formation of Castlewood, senior management of Enstar
and Castlewood have discussed a potential business combination
between Castlewood and Enstar from time to time in connection
with the ordinary course discussions about the business of
Castlewood.
On August 29, 2005, Mr. Flowers, on behalf of Enstar,
provided to Mr. Silvester a letter outlining a proposal for
the merger of Enstar into Castlewood. Mr. Flowers proposed
that should Castlewood and Enstar be able to reach an agreement
with respect to a merger, then a joint presentation should be
made to Trident.
During a regular meeting of Enstars board of directors
held on September 20, 2005, Mr. Oros reported to
Enstars board of directors that Enstar and Castlewood were
considering a possible merger and briefly discussed the overall
approach to the transaction.
41
On September 13, 2005, Mr. Silvester met with
Mr. Flowers and Mr. Oros to discuss
Mr. Flowers letter of August 29, 2005 and to
consider various options and alternatives to the proposal made
by Mr. Flowers.
On November 6, 2005, Mr. Silvester, responding to
Mr. Flowers letter of August 29, 2005 and the
discussions held on September 13, 2005, wrote to
Mr. Flowers, with copies to Messrs. Oros and Frazer,
to provide certain suggestions and amendments to
Mr. Flowers original proposal.
Mr. Silvesters letter also outlined certain other key
considerations such as the proposed name of the combined entity,
key executives, board composition and future compensation.
During November and December 2005, discussions continued between
Mr. Flowers and Mr. Oros, on behalf of Enstar, and
Mr. Silvester and Mr. OShea, on behalf of
Castlewood. Mr. Oros updated Enstar board members on the
discussions at a meeting on December 7, 2005. In early
December, Mr. Flowers called, and on December 12, 2005
met with Mr. Charles A. Davis and
Mr. James D. Carey, Chief Executive Officer and
Principal, respectively, of Stone Point Capital LLC, on behalf
of Trident, to determine Tridents interest in such a
transaction as proposed. During this time, Mr. Silvester
and Mr. OShea also spoke with Mr. Carey and
Mr. Davis about Tridents possible interest in such a
transaction.
During January 2006, Messrs. Flowers, Oros and Frazer and
Messrs. Silvester, OShea and Packer reached a general
consensus regarding the terms of a possible merger transaction.
On January 25, 2006, Messrs. Flowers, Oros and Frazer
met with Messrs. Silvester, OShea, Packer and
Richard J. Harris, Chief Financial Officer of
Castlewood, and Mr. Carey and David J. Wermuth, the
General Counsel of Stone Point Capital LLC, on behalf of
Trident. During this meeting, Mr. Silvester presented the
key terms of a possible merger transaction to the Stone Point
Capital LLC representatives.
During February and March 2006, discussions between
Mr. Silvester, Mr. OShea and Mr. Carey
continued and a non-binding agreement to the key terms of the
merger of Enstar into Castlewood was reached.
At a meeting on February 16, 2006, Mr. Oros provided
an update to the Enstar board members regarding the possible
merger.
On April 5, 2006, Enstars board of directors held a
special meeting, during which the directors reviewed at length
the proposed economic terms of a transaction with Castlewood and
the status of the negotiations. At that meeting, representatives
of Enstars outside legal counsel, Parker, Hudson,
Rainer & Dobbs, and special legal counsel,
Debevoise & Plimpton LLP, or Debevoise, reviewed in
detail the boards fiduciary duties, both generally and in
the specific context of the proposed transaction.
On April 24, 2006, representatives of Castlewood and
Enstar, along with their respective special legal counsel,
Drinker Biddle & Reath LLP, or Drinker, and Debevoise,
met in person and by telephone to discuss the material terms of
the recapitalization and the merger. These discussions included
a review of the recapitalization transaction, including the
allocation of Castlewoods ordinary shares in exchange for
its existing outstanding shares, and the consideration to be
issued to the shareholders of Enstar.
On April 26, 2006, Enstars board of directors held a
special meeting, during which the directors reviewed in detail
the financial and other aspects of the proposed transaction. The
Enstar board of directors also discussed different alternatives
for listing the shares of New Enstar after the merger and
reviewed the proposed principal transaction documents and the
status of negotiations respecting such documents.
On May 5, 2006, Castlewood and Enstar entered into a
confidentiality agreement, after which both parties began
providing requested due diligence materials, and due diligence
investigations by executives and legal advisors for both
companies began and continued through May 22, 2006.
The due diligence investigations by both parties included the
reciprocal exchange of information and documents regarding the
two companies businesses, including: historical financial
information and financial forecasts; tax records; descriptions
of properties; human resources and employee benefits
information, including benefit plans and employment agreements;
pending and settled litigation matters; material contracts,
including contracts relating to acquisitions and dispositions of
businesses; and general corporate matters, including corporate
governance documents, material governmental filings, auditor
response letters, real estate
42
documents and descriptions of securities. Such investigations
also included interviews of some of the executive officers of
Castlewood and Enstar.
From the beginning of April 2006 to the beginning of May 2006,
Enstars legal advisor, Debevoise, provided drafts of the
principal transaction documents to Drinker, the legal advisors
to Castlewood. The draft merger agreement contained customary
representations, warranties and covenants with no post-closing
indemnification by either party. Specifically, on April 8,
2006, Debevoise delivered initial drafts of the form of merger
agreement and support agreement, which Castlewood and Drinker
reviewed. On April 13, 2006, Debevoise delivered an initial
draft of the recapitalization agreement, which Castlewood and
Drinker reviewed. On April 27 and 28 of 2006, Debevoise
delivered drafts of the merger agreement, the recapitalization
agreement and the support agreement to Skadden, Arps, Slate,
Meagher & Flom LLP, or Skadden, special outside counsel to
Trident II, L.P. in connection with the recapitalization, and a
conference call was held among Drinker, Debevoise and Skadden to
discuss issues related to the recapitalization and merger.
During the week of May 1, 2006, Castlewood, Enstar and
their legal representatives held several telephone conferences
to discuss preliminary comments and issues raised in the merger
agreement, support agreement and recapitalization agreement.
From the beginning of May 2006 through May 21, 2006, the
parties, together with their respective legal advisors,
negotiated the principal terms of the transaction documents,
including valuation and the proposed exchange ratio, and
continued to conduct due diligence. During the week of
May 8, 2006, Castlewood sought the advice of its local
counsel in foreign jurisdictions concerning the nature of any
regulatory consents or filings that may be required in
connection with the proposed merger. During the week of
May 15, 2006, the parties and their respective counsel held
several conference calls to discuss outstanding due diligence
items and their respective comments to the transaction
documents. During this week, the parties also exchanged their
respective disclosure schedules for review.
On May 20, 2006, Castlewoods board of directors met
to consider the merger agreement and the proposed transactions
related to the merger agreement and voted unanimously to approve
the merger agreement and the other transaction documents.
On May 21, 2006, Enstars board of directors met to
consider the merger agreement and the proposed transactions
related to the merger agreement and voted unanimously to approve
the merger agreement and the transactions contemplated by the
merger agreement.
On May 22, 2006, the parties finalized the merger
agreement, the recapitalization agreement, the registration
rights agreement, the support agreement and the other
transaction documents. The parties also agreed on the initial
composition of the board of directors and executive officers of
New Enstar, as well as other employee compensation and benefit
matters, including amendments to the employment agreements of
Messrs. OShea, Packer and Silvester and the terms of
the new employment agreement for Mr. Oros. The negotiation
of the merger agreement and other documents was handled
primarily by Mr. Oros and Cheryl D. Davis, Chief Financial
Officer of Enstar, and Mr. Flowers, on behalf of Enstar,
and Messrs. Silvester, OShea and Harris, on behalf of
Castlewood, together with each partys legal advisors.
Enstars
Reasons for the Merger
At a special meeting held on May 21, 2006, the Enstar board
of directors unanimously determined that it was advisable and
fair to and in the best interests of Enstar and its shareholders
for Enstar to enter into and consummate the proposed
transactions and approve the merger agreement and the
transactions contemplated by the merger agreement. Some of
Enstars directors and executive officers have interests in
the proposed transactions that are different from, or in
addition to, yours. The Enstar board of directors considered
these interests when approving the proposed transactions and the
merger agreement. These interests are discussed in
Interests of Certain Persons in the Merger beginning
on page 51.
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In reaching its decision, the Enstar board of directors
considered a number of factors, including the following:
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the merger is expected to enhance the existing and proven close
working relationship between Enstar and Castlewood management
and to further align the incentives of Castlewood management
with the interests of Enstars shareholders;
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the transactions would provide a positive economic result for
Enstars shareholders, as a result of a one-time
$3.00 per share dividend, the
one-for-one
exchange ratio contemplated by the merger agreement and the
opportunity for Enstars shareholders to participate in
approximately 48.7% (on an undiluted basis) of the earnings and
cash flows of New Enstar;
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the ownership and management structure of Castlewood, Enstar and
B.H. Acquisition, a company they partially own with an affiliate
of Trident II, L.P., would be simplified by forming
one public company with one board of directors and a
consolidated management team;
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consolidating the financial and management resources and thereby
expanding New Enstars capabilities to pursue additional
acquisitions in the insurance and reinsurance run-off business;
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New Enstars access to capital could be enhanced as a
result of both its larger asset base and simplified ownership
structure;
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the merger could expand the opportunities for New Enstar to
deploy its capital in attractive investments;
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the merger is expected to result in increased focus of the time
and energies of the directors and management of New Enstar on
identifying and consummating attractive acquisitions and
managing the existing businesses;
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Enstars board of directors and management believed that
the other terms of the merger agreement, including the
parties representations, warranties, covenants and
conditions to their respective obligations, were reasonable;
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Enstar was familiar with Castlewood through its existing
ownership interest; and
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the merger was expected to qualify as a tax-free reorganization
for U.S. federal income purposes and, accordingly, should
not be taxable either to Castlewood, Enstar or Enstars
shareholders.
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The Enstar board of directors also identified and considered the
potentially negative factors concerning the potential
transactions, including the following:
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the risk that the merger might not be completed or that the
closing might be delayed;
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the costs to be incurred in connection with the merger,
including transaction expenses; and
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the other risks described in Risk Factors beginning
on page 19.
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After deliberation, the Enstar board of directors concluded
that, on balance, the potential benefits of the transactions to
the Enstar shareholders outweighed these risks and potential
disadvantages.
The foregoing discussion of the information and factors
considered by the Enstar board of directors is not intended to
be exhaustive, but includes the material factors considered by
the Enstar board of directors. In reaching its decision to
approve the merger agreement and the transactions contemplated
by the merger agreement, the Enstar board did not view any
single factor as determinative and did not find it necessary or
practicable to assign any relative or specific weights to the
various factors considered.
Recommendation
of the Board of Directors of Enstar
THE ENSTAR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT ENSTAR
SHAREHOLDERS VOTE FOR THE APPROVAL OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER
AGREEMENT.
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In considering the recommendation of Enstars board of
directors with respect to the merger, you should be aware that
some officers and directors of Enstar have interests in the
merger that are different from, or in addition to, the interests
of Enstar shareholders generally. Enstars board of
directors considered these interests in approving the merger
agreement and the transactions contemplated by the merger
agreement. For more information on these interests, see
Interests of Certain Persons in the Merger beginning
on page 51.
In addition, you should be aware that as of May 23, 2006,
Enstars directors and executive officers owned 1,904,753
shares of Enstar common stock, representing approximately 33.19%
of the voting power of Enstar common stock on that date. Three
of those directors, who owned Enstar common stock representing
30.1% of the voting power on that date, have entered into a
support agreement with Castlewood pursuant to which such
directors have agreed to vote their shares of Enstar common
stock in favor of the merger agreement and the transactions
contemplated by the merger agreement. All other Enstar directors
and officers have also indicated that they intend to vote their
shares of Enstar common stock in favor of the merger agreement
and the transactions contemplated by the merger agreement.
Castlewoods
Reasons for the Merger
At a special meeting held on May 20, 2006, the Castlewood
board of directors determined that it was advisable and fair to
and in the best interest of Castlewood and its shareholders for
Castlewood to enter into the merger agreement and consummate the
transactions contemplated by the merger agreement. In reaching
its decision, the Castlewood board of directors considered a
number of factors, including the following:
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New Enstar is expected to have a significantly increased equity
market capitalization, which Castlewoods board of
directors believes would provide greater financial flexibility
and improved access to both debt and equity capital;
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New Enstars ordinary shares will be listed on Nasdaq and,
subject to contractually agreed upon restrictions on transfer
and other restrictions under Bermuda law, would be substantially
more liquid for Castlewoods existing shareholders than
their current Castlewood shares;
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New Enstar would benefit from the expertise and extensive
experience of the combined management team;
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the increased size of New Enstar could allow it to participate
in the acquisition and management of larger companies or
portfolios in run-off than would be available to Castlewood on a
stand-alone basis;
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as a result of the simplified shareholder structure, New Enstar
would be easier to analyze and value, which would provide for
increased market visibility for New Enstar and, ultimately, may
enhance the market valuation of New Enstars ordinary
shares relative to the shares privately held by
Castlewoods existing shareholders;
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holders of substantially all of Castlewoods existing
shares were directly involved in the negotiations in respect of
the proposed merger and were supportive of the transaction and
the related recapitalization of Castlewood;
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the potential financial benefits stemming from the enhanced
growth prospects of New Enstar; and
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the merger is expected to qualify as a tax-free reorganization
for U.S. federal income tax purposes and, accordingly,
should not be taxable either to Castlewood, Enstar or
Enstars shareholders.
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The Castlewood board of directors also identified and considered
the potentially negative factors concerning the potential
transactions, including the following:
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the risk that the merger might not be consummated or that the
closing might be delayed;
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the costs to be incurred in connection with the merger,
including transaction expenses;
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the cost of becoming directly subject to the reporting and other
requirements of the Exchange Act, including Section 404 of
the Sarbanes-Oxley Act of 2002; and
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the other risks described in Risk Factors beginning
on page 19.
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After deliberation, the Castlewood board of directors concluded
that, on balance, the potential benefits of the transactions to
Castlewood and its shareholders outweighed these risks and
potential disadvantages.
Some of Castlewoods directors and executive officers have
interests in the proposed transactions that are different from,
or in addition to, Castlewoods shareholders. The
Castlewood board of directors considered these interests when
approving the proposed transactions and the merger agreement.
These interests are discussed in Interests of Certain
Persons in the Merger beginning on page 51.
The foregoing discussion of the information and factors
considered by the Castlewood board of directors is not intended
to be exhaustive, but does include the material positive and
negative factors considered by the Castlewood board of
directors. In view of the wide variety of factors considered by
the Castlewood board of directors in connection with its
evaluation of the merger and the complexity of these matters,
the board did not attempt to quantify, rank or otherwise assign
relative weights to the specific factors it considered in
reaching its decision. Rather, the Castlewood board of directors
made its determination based on the totality of information
presented to it and the deliberations engaged in by it. In
considering the factors discussed above, individual directors
may have given different weights to different factors.
Accounting
Treatment
The merger will be accounted for as a purchase by Castlewood
under accounting principles generally accepted in the United
States. Under the purchase method of accounting, the assets and
liabilities of Enstar will be recorded, as of consummation of
the merger, at their respective fair values and combined with
those of Castlewood.
Material
U.S. Federal Income Tax Consequences of the
Merger
The following discussion is a summary of the material
U.S. federal income tax consequences to holders of Enstar
common stock who exchange such stock for New Enstar ordinary
shares in the merger and who hold Enstar common stock and will
hold New Enstar ordinary shares as capital assets (as defined in
section 1221 of the Code). This discussion is based on the
Code, U.S. Treasury regulations, administrative rulings and
pronouncements, and judicial decisions, all as in effect as of
the date hereof and all of which are subject to change, possibly
with retroactive effect. Any such change could alter the tax
consequences discussed below. This discussion does not cover any
issues arising under any state, local or
non-U.S. tax
laws.
This discussion is based in part on facts described in this
proxy statement/prospectus; the provisions of the merger
agreement, the recapitalization agreement and other related
agreements; and representations made by Castlewood and Enstar.
If any of these facts or representations is inaccurate, the
U.S. federal income tax consequences of the merger could
differ from those described below.
This discussion is for general information only and does not
address all U.S. federal income tax issues that may be
relevant to all holders in light of their particular
circumstances or the consequences to holders who are subject to
special federal income tax treatment, such as:
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tax-exempt organizations;
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individuals who hold Enstar common stock received pursuant to
the exercise of any incentive stock options or who hold Enstar
common stock subject to certain restrictions received in
connection with the performance of services; or
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non-U.S. holders
who have held more than 5% of the Enstar common stock (taking
into account the applicable attribution rules of the Code and
U.S. Treasury regulations) at any time within the five-year
period ending at the consummation of the merger.
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In addition, this discussion does not address any tax
consequences associated with:
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the exercise of options to purchase Enstar common stock before
the effective time of the merger;
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the exchange of options to purchase Enstar common stock for
options to purchase New Enstar ordinary shares in the
merger; or
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the exchange of Enstar restricted stock units for a right to
receive New Enstar ordinary shares.
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We urge you to consult your own tax advisor concerning the
specific U.S. federal, state and local, as well as
non-U.S., tax
consequences to you of the exchange of Enstar common stock for
New Enstar ordinary shares in the merger in light of your own
particular circumstances.
Tax
Opinions
It is a condition to the closing of the merger that Enstar and
Castlewood receive an opinion from Enstars tax counsel,
Debevoise, on or prior to the date on which Castlewoods
registration statement of which this proxy statement/prospectus
is a part becomes effective, or the effective date opinion, to
the effect that the merger should be treated for
U.S. federal income tax purposes as a reorganization within
the meaning of section 368(a) of the Code. It is also a
condition to the consummation of the merger that Enstar and
Castlewood receive a second opinion from Debevoise, dated as of
the closing date of the merger, or the closing date opinion,
confirming the effective date opinion. The effective date
opinion is, and the closing date opinion will be, based in part
on representation letters provided by Enstar and Castlewood to
Debevoise at the effective time and the closing date,
respectively, and on customary factual assumptions.
If any of the necessary representations or assumptions is
inaccurate or incomplete, Debevoises effective date
opinion or its closing date opinion, or both, may be invalid. If
any of these representations or assumptions cannot be made,
Debevoise may not be able to provide its closing date opinion.
If Debevoise cannot provide its closing date opinion, the merger
cannot close unless Enstar and Castlewood waive the requirement
that they receive such opinion. If Enstar and Castlewood waive
the requirement that they receive such closing date opinion, or
if Debevoises closing date opinion would differ materially
from Debevoises effective date opinion, and there is a
material change in the expected U.S. federal income tax
consequences associated with the exchange of Enstar common stock
for New Enstar ordinary shares in the merger as described
in this proxy statement/prospectus, then this proxy
statement/prospectus will be revised and recirculated and the
approval of Enstars shareholders will be resolicited.
The full text of Debevoises effective date opinion will be
filed as an exhibit to Castlewoods registration statement
of which this proxy statement/prospectus is a part. For
information on how to obtain a copy of exhibits filed with
Castlewoods registration statement, see Where You
Can Find More Information on page 198.
Debevoises closing date opinion will also confirm the
opinion rendered in Debevoises effective date opinion.
No assurance can be given that the IRS will agree with the tax
consequences described in the Debevoise opinions or that, if the
IRS were to take a contrary position, that position would not
ultimately be sustained by the courts. Neither Enstar nor
Castlewood intends to obtain a ruling from the IRS regarding the
tax consequences of the merger.
Tax
Consequences to Exchanging Shareholders
Assuming that the merger is treated for U.S. federal income
tax purposes as a reorganization within the meaning of
Section 368(a) of the Code:
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Enstar shareholders will not recognize any gain or loss on the
exchange of Enstar common stock for New Enstar ordinary shares
in the merger;
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the tax basis to an Enstar shareholder of New Enstar ordinary
shares received in exchange for Enstar common stock pursuant to
the merger will equal such Enstar shareholders tax basis
in the Enstar common stock surrendered in exchange
therefor; and
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the holding period of an Enstar shareholder for New Enstar
ordinary shares received pursuant to the merger will include the
holding period of the Enstar common stock surrendered in
exchange therefor.
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Under applicable U.S. Treasury regulations
(§1.368-3(b)), each Enstar exchanging shareholder will be
required to attach to its federal income tax return for the
current taxable year a statement setting forth certain specified
information about the exchange, including a statement of such
shareholders tax basis in its Enstar common stock and a
description of the New Enstar ordinary shares it receives in the
merger.
A U.S. holder who will own 5% or more of either the total
voting power or the total value of the outstanding New Enstar
ordinary shares after the merger (determined after taking into
account the applicable attribution rules of the Code and
U.S. Treasury regulations) will qualify for non-recognition
of gain in connection with the merger (and the basis and holding
period consequences described above will apply to such holder)
only if such holder enters into a gain recognition
agreement with the IRS in accordance with the
U.S. Treasury regulations under section 367(a) of the
Code. Certain subsequent dispositions of Enstar shares or assets
by New Enstar may result in gain recognition to such a holder.
Each such U.S. holder should consult its own tax advisors
regarding these matters.
Certain
Tax Consequences to Enstar and Castlewood
Assuming that the merger is treated for U.S. federal income
tax purposes as a reorganization within the meaning of
section 368(a) of the Code, no income, gain or loss will be
recognized by Castlewood or Enstar as a result of the transfer
to the Enstar shareholders of New Enstar ordinary shares
pursuant to the merger.
For a discussion of the material tax considerations of
holding and disposing of New Enstar ordinary shares, see the
discussion under Material Tax Considerations of Holding
and Disposing of New Enstar Ordinary Shares beginning on
page 186.
Regulatory
Matters Relating to the Merger
Antitrust
and Competition Filings
The merger is not subject to notification to the U.S. Department
of Justice and U.S. Federal Trade Commission under the
Hart-Scott-Rodino
Antitrust Improvements Act. Castlewood and Enstar conduct
operations in a number of foreign jurisdictions, and the merger
may be subject to notification and approval by governmental
authorities under the antitrust or competition laws of those
jurisdictions. We recognize that some of these approvals may not
be obtained before the completion of the merger and may impact
New Enstars ability to conduct business in those
jurisdictions until such approvals are obtained. We cannot
assure you that the governmental reviewing authorities will
clear the merger at all or without restrictions or conditions
that would have a material adverse effect on New Enstar if the
merger is consummated. These restrictions and conditions could
include a complete or partial license, divestiture or spin-off
of some of New Enstars assets or businesses.
In addition, even after completion of all notification and
approval requirements, the U.S. Department of Justice, the U.S.
Federal Trade Commission or another governmental authority could
challenge or seek to block the merger under the antitrust laws,
as it deems necessary or desirable in the public interest. Other
agencies with authority over antitrust or other comparable
anti-competition laws with jurisdiction over the merger could
also initiate action to challenge or block the merger. In
addition, in some jurisdictions, a competitor, customer or other
third party could initiate a private action under the antitrust
laws challenging or seeking to enjoin the merger, before or
after it is consummated. Castlewood and Enstar cannot be sure
that a challenge to the merger will not be made or that, if a
challenge is made, Castlewood and Enstar will prevail.
Other
Regulatory Considerations
The consummation of the merger is conditioned upon
Castlewoods receipt of approval of the recapitalization
and the merger from the Financial Services Authority of the
United Kingdom and the Banking Finance and Insurance Commission
in Belgium. Castlewood and its shareholders are also required to
provide proper notice of the transaction to the Federal Office
of Private Insurance in Switzerland. Castlewood has not yet
submitted the requisite applications or notice, but expects to
do so in a timely manner.
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Although Castlewood does not expect these regulatory authorities
to raise any significant concerns in connection with their
review of the merger, there is no assurance that Castlewood will
obtain all required regulatory approvals, or that those
approvals will not include terms, conditions or restrictions
that may have an adverse effect on Castlewood or Enstar.
Other than the filings described above, neither Enstar nor
Castlewood is aware of any regulatory approvals required to be
obtained, or waiting periods to expire, to consummate the
merger. If the parties discover that other approvals or action
is needed, however, they may not be able to obtain it, as is the
case with respect to the other necessary approvals. Even if
Enstar and Castlewood could obtain all necessary approvals, and
the necessary approval of their shareholders, conditions may be
placed on any such approval that could cause either Castlewood
or Enstar to abandon the merger.
Castlewood has already received approval from the Bermuda
Monetary Authority to issue its ordinary shares in connection
with the recapitalization and the merger.
Rights
Agreement
Enstar entered into a rights agreement dated as of
January 20, 1997, as amended, with American Stock
Transfer & Trust Company as rights agent. Under this
agreement, Enstar effected a dividend distribution of
shareholder rights that carry certain conversion rights in the
event of a significant change in beneficial ownership of Enstar.
One right is attached to each share of Enstars outstanding
common stock and is not detachable until such time as a person
or group of affiliated or associated persons either acquires
beneficial ownership of 15% or more of Enstars outstanding
common stock or announces an intention to commence a tender or
exchange offer the consummation of which would result in
beneficial ownership of 15% or more of the outstanding Enstar
common stock. The exercise price of each right was fixed at $40.
If an acquirer purchases an equity position in Enstar equal to
or greater than a 15% interest or engages in certain other types
of transactions with Enstar, each right not beneficially owned
by the acquirer is converted into the right to buy that number
of shares of Enstar common stock which has a market value
shortly after such triggering event of two times the exercise
price of the right.
At the time of the execution and delivery of the merger
agreement, Enstar and the rights agent amended the terms of the
rights agreement so that the execution and delivery of the
merger agreement, recapitalization agreement, support agreement
and any other agreement or transaction entered into in
connection with the merger would not constitute a triggering
event. The amended terms of the rights agreement also provide
for the cancellation of all rights under the rights agreement
upon the effectiveness of the merger and in accordance with the
merger transaction documents. This means that holders of
Enstars common stock will not obtain the detachable rights
in connection with the merger.
Federal
Securities Laws Consequences; Stock Transfer Restriction
Agreements
All New Enstar ordinary shares received by Enstar shareholders
in the merger will be freely transferable, except that New
Enstar ordinary shares received by persons who are deemed to be
affiliates of Enstar under the Securities Act at the
time of the Annual Meeting may be resold by them only in
transactions permitted by Rule 145 under the Securities Act
or as otherwise permitted under the Securities Act. Persons who
may be deemed to be an affiliate of Enstar for such purposes
generally include individuals or entities that control, are
controlled by or are under common control with, Enstar, as the
case may be, and include directors, certain executive officers
and principal shareholders of Enstar. These affiliates may
resell the New Enstar ordinary shares they receive in the merger
only:
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under an effective registration statement under the Securities
Act covering the resale of those shares;
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in transactions permitted by Rule 145(d) under the
Securities Act; or
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as otherwise permitted under the Securities Act.
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Castlewoods registration statement, of which this proxy
statement/prospectus is a part, does not cover the resale of New
Enstar ordinary shares to be received in connection with the
merger by persons who may be
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deemed to be affiliates of Enstar before the merger, and no
person is authorized to make any use of this document in
connection with any such sale. The merger agreement also
requires that Enstar use reasonable best efforts to cause each
affiliate to execute a written agreement to the effect that such
persons will not offer, sell or otherwise dispose of any of the
New Enstar ordinary shares issued to them in the merger in
violation of the Securities Act or the related rules and
regulations promulgated thereunder. However, Trident and
Messrs. Flowers and Silvester and certain other
shareholders of Castlewood (including the current directors of
Enstar), some of whom may be deemed to be affiliates of Enstar,
have entered into a registration rights agreement with
Castlewood and certain of its current shareholders. The
registration rights agreement gives such persons the right to
require, in certain instances, New Enstar to register their New
Enstar ordinary shares or to participate in registered offerings
of shares by New Enstar and other shareholders of New Enstar.
See Material Terms of Related
Agreements Registration Rights Agreement
on page 67.
Stock
Exchange Listing; Delisting and Deregistration of Enstar Common
Stock
It is a condition to the merger that the New Enstar ordinary
shares issuable in the merger be approved for listing on Nasdaq,
subject to official notice of issuance. If the merger is
consummated, Enstar common stock will cease to be listed on
Nasdaq and its shares will be deregistered under the Exchange
Act.
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INTERESTS
OF CERTAIN PERSONS IN THE MERGER
Certain of Enstars and Castlewoods directors and
executive officers have interests in the merger as individuals
in addition to, and that may be different from, your interests
as shareholders of Enstar or New Enstar. The Enstar and
Castlewood boards of directors were aware of these interests and
considered them in their respective decisions to approve the
merger agreement and the transactions contemplated by the merger
agreement.
New
Employment Agreements with John J. Oros, Paul J. OShea,
Nicholas A. Packer and Dominic F. Silvester
On May 23, 2006, Castlewood entered into a new employment
agreement with Mr. OShea and amended its employment
agreements with Messrs. Packer and Silvester.
Mr. OSheas employment agreement, which will
become effective when the merger is consummated, supersedes the
employment agreement between Castlewood and
Mr. OShea, dated November 29, 2001.
Messrs. Packers and Silvesters amended and
restated employment agreements, which will also become effective
when the merger is consummated, supersedes their respective
employment agreements, each dated as of April 1, 2006.
Castlewood also expects to enter into a new employment agreement
with John J. Oros, to become effective when the merger is
consummated.
Under their respective agreements, following the merger,
Messrs. OShea and Packer will serve as New
Enstars Executive Vice Presidents and Mr. Silvester
will serve as its Chief Executive Officer. Under the agreement
expected to be entered into with Mr. Oros, he will serve as
Executive Chairman of New Enstar following the merger. As
compensation for their services, each executive officer will
(1) receive a base salary (Mr. Silvesters salary
will be $565,000 and Messrs. OSheas and
Packers salary will each be $440,000, and
Mr. Oross salary is expected to be $282,500),
(2) be eligible for incentive compensation under
Castlewoods incentive compensation programs and
(3) be entitled to certain employee benefits, including a
housing allowance, a life insurance policy in the amount of five
times his base salary, medical, dental and long-term disability
insurance, payment of an amount equal to 10% of his base salary
each year contributed to his retirement savings plan and, for
Messrs. Packer and Silvester, the executive will be
reimbursed for one round trip for his family to/from Bermuda
each calendar year.
For additional details on the terms of these employment
agreements, see section Management of New Enstar Following
the Merger and Other Information Employment
Agreements beginning on page 148.
Enstar
Director and Executive Benefit Plans
Under Enstars 1997 Amended Incentive Plan, as amended in
2001 and 2003 and Enstars 2001 Outside Directors
Stock Option Plan, 500,000 options to purchase Enstar shares
have been granted to various directors and officers of Enstar.
Of the 500,000 options outstanding, 80,000 options have yet to
vest. These 80,000 unvested options will vest immediately
upon a change of control triggered by the merger.
Payments
to, and Other Interests of, Certain Executive Officers and
Directors
Pursuant to the recapitalization agreement, Castlewood will pay,
immediately prior to the merger, $5,076,000 to certain of its
executive officers and employees. Of the $5,076,000,
Messrs. OShea, Packer and Silvester will receive
$989,956, $989,956 and $2,969,868, respectively. The remaining
$126,220 will be paid to Messrs. David Grisley, David
Hackett and David Rocke, employees of Castlewood.
Certain parties to the recapitalization agreement will also
enter into a registration rights agreement entitling them to
require Castlewood to register for resale the New Enstar
ordinary shares they receive in the recapitalization. For
additional details on the terms of registration rights
agreement, see Material Terms of Related
Agreements Registration Rights Agreement
beginning on page 67. The directors of Enstar are also
expected to become parties to the registration rights agreement,
which will entitle them to require Castlewood to register for
resale the New Enstar ordinary shares they receive in the merger
subject to the terms of such agreement.
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Two directors of Enstar, Messrs. Armstrong and Davis, have
entered into a letter agreement, dated May 23, 2006, with
Castlewood pursuant to which Castlewood, subject to the
consummation of the merger, agreed to repurchase from
Messrs. Armstrong and Davis, upon their request, during a
30-day
period commencing January 15, 2007, at then prevailing
market prices, such number of New Enstar ordinary shares as
provides an amount sufficient for Messrs. Armstrong and
Davis to pay taxes on compensation income resulting from the
exercise of options by them on May 23, 2006 for
50,000 shares of Enstar common stock in the aggregate.
Castlewoods obligation to repurchase ordinary shares is
limited to 25,000 ordinary shares from each of
Messrs. Armstrong and Davis.
Pursuant to the Severance Benefits Agreement, dated May 21,
1998, between Enstar and Mr. Frazer, Mr. Frazer will
be entitled to $350,000 upon the expected termination of his
employment with Enstar immediately following the effective time
of the merger.
New
Enstar Board of Directors
Under the terms of the recapitalization agreement, the board of
directors of New Enstar after the consummation of the merger
will consist of ten individuals. Four of these
individuals Messrs. T. Whit Armstrong,
Paul J. Collins, Gregory L. Curl and T. Wayne
Davis are current directors of Enstar, three of
these individuals Messrs. J. Christopher
Flowers, Nimrod T. Frazer and John J. Oros are
current directors of both Enstar and Castlewood, and the other
three individuals Messrs. OShea,
Silvester and Packer are current directors
and/or
executive officers of Castlewood.
Indemnification
of Directors and Officers; Directors Indemnity
Agreements
From and after the effective time of the merger, Castlewood has
agreed that New Enstar will indemnify and hold harmless all past
and present directors, officers, employees and agents of Enstar
and its subsidiaries before the consummation of the merger for
losses in connection with any action arising out of or
pertaining to acts or omissions, or alleged acts or omissions,
by them in their capacities as such at or before the effective
time of the merger.
New Enstar will indemnify or advance expenses to such persons to
the same extent such persons are indemnified or have the right
to advancement of expenses under Enstars articles of
incorporation, bylaws and indemnification agreements, if any, on
the date of the merger agreement, and to the fullest extent
permitted by law. Castlewood also has agreed that it will
include and cause to be maintained in effect in its memorandum
of association and bye-laws and Enstar USAs articles of
incorporation and bylaws for a period of six years after the
consummation of the merger, provisions substantially similar to
(in the case of Castlewood, to the fullest extent permitted by
Bermuda law) the current provisions regarding elimination of
liability of directors, indemnification of officers, directors
and employees and advancement of expenses contained in the
articles of incorporation and bylaws of Enstar.
In addition, Castlewood has agreed that it will cause to be
maintained, for a period of six years after the consummation of
the merger, the current policies of directors and
officers liability insurance and fiduciary liability
insurance maintained by Enstar with respect to claims arising
from facts or events that occurred at or before the effective
time of the merger. New Enstar may substitute policies of at
least the same coverage and amounts containing terms and
conditions which are, in the aggregate, no less advantageous to
the insured. Such substitute policies must be issued by
insurance companies having the same or better ratings and levels
of creditworthiness as the insurance companies that have issued
the current policies.
Tax
Indemnification Agreement
Mr. Flowers, a director and Enstars largest
shareholder, has entered into a tax indemnification agreement,
dated May 23, 2006, with Castlewood and Enstar pursuant to
which Castlewood will reimburse and indemnify Mr. Flowers
for, and hold him harmless on an after-tax basis against, any
increase in Mr. Flowers U.S. federal, state or
local income tax liability (including any interest or penalties
relating thereto), and reasonable attorneys fees, incurred
by Mr. Flowers as a result of certain dispositions of
shares of Enstar or dispositions of all or substantially all of
the Enstar assets by New Enstar, Enstar or any successor or
assign of either, within the period beginning immediately after
the effective time of the merger and ending five years after the
last day of the taxable year that includes the effective time.
52
THE
MERGER AGREEMENT
The following is a summary of the material terms of the merger
agreement. This summary does not purport to describe all the
terms of the merger agreement and is qualified in its entirety
by reference to the complete text of the merger agreement which
is attached as Annex A to this proxy statement/prospectus
and incorporated herein by reference. All shareholders of Enstar
are urged to read carefully the merger agreement in its entirety.
The merger agreement has been attached to provide investors with
information regarding its terms. It is not intended to provide
any other factual information about Enstar or Castlewood. In
particular, the assertions embodied in the representations and
warranties contained in the merger agreement were intended
principally to allocate risk between Enstar and Castlewood or
establish closing conditions, rather than to establish matters
of fact. Such assertions may be subject to important
qualifications and limitations agreed to by the parties in
connection with negotiating the terms of the merger agreement.
Moreover, the representations and warranties are subject to a
contractual standard of materiality that may be different from
what may be viewed as material to shareholders of Enstar.
Accordingly, you should not rely on the representations and
warranties in the merger agreement as characterizations of the
actual state of facts regarding Enstar or Castlewood.
General
Under the merger agreement, Merger Sub, a wholly-owned
subsidiary of Castlewood, will merge with and into Enstar, with
Enstar surviving as a wholly-owned subsidiary of Castlewood.
Enstar will change its name to Enstar USA, Inc.
Closing
Matters
Unless the parties agree otherwise, the consummation of the
merger will take place as promptly as practicable (but no later
than the third business day) after all closing conditions have
been satisfied or waived, unless the merger agreement has been
terminated or another time or date is agreed to in writing by
the parties. See Conditions to the
Consummation of the Merger below for a more complete
description of the conditions that must be satisfied or waived
before consummation of the merger.
As soon as practicable after the satisfaction or waiver of the
conditions to the merger, on the closing date, Merger Sub and
Enstar will file a certificate of merger with the Georgia
Secretary of State in accordance with the relevant provisions of
the Georgia Business Corporation Code, and make all other
required filings or recordings. The merger will become effective
when the certificate of merger is filed or at such later time as
Castlewood and Enstar agree and specify in the certificate of
merger.
Merger
Consideration; Treatment of Stock Options and Restricted Stock
Units; Board and Management
The merger agreement further provides that, at the consummation
of the merger:
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Each share of Enstar common stock issued and outstanding
immediately before the consummation of the merger, together with
the associated rights issued under the Enstar shareholder rights
plan, will be converted into the right to receive one New Enstar
ordinary share.
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Each outstanding option to purchase shares of Enstar common
stock will be assumed by New Enstar and converted into an option
to purchase New Enstar ordinary shares.
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The per share exercise price of each new option will be set at a
ratio to the trading price of the ordinary shares of New Enstar
immediately following the closing of the merger that equals the
ratio of the exercise price of the corresponding Enstar stock
option to the trading price of shares of Enstar common stock
immediately prior to the closing of the merger. The number of
New Enstar ordinary shares underlying the new option will be set
so that the aggregate spread value of the new option
approximately equals the spread value of the former Enstar stock
option.
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Each assumed New Enstar option will be vested to the same extent
the Enstar stock option was vested immediately prior to the
closing, except if the option agreement provides for
acceleration of vesting as
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a result of the merger. New Enstar options will otherwise be
subject to the same terms and conditions as the Enstar stock
options.
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Each restricted stock unit issued under Enstars Deferred
Compensation and Stock Plan for Non-Employee Directors that is
outstanding immediately prior to the closing will automatically
convert from a right in respect of a share of Enstar common
stock into a right in respect of a New Enstar ordinary share.
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Each share of common stock of Merger Sub issued and outstanding
immediately prior to the consummation of the merger will be
converted into one share of common stock of Enstar USA.
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The articles of incorporation of Enstar will be amended and
restated at the consummation of the merger and will be the
articles of incorporation of Enstar USA until thereafter amended.
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The bylaws of Merger Sub in effect immediately prior to the
consummation of the merger will be the bylaws of Enstar USA
until thereafter amended.
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Until successors are duly elected or appointed and qualified,
Cheryl D. Davis and John J. Oros will be the directors of Enstar
USA.
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Until successors are duly elected or appointed and qualified,
the officers of Enstar immediately prior to the consummation of
the merger will be the officers of Enstar USA.
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Exchange
of Stock in the Merger
Before the consummation of the merger, Castlewood will appoint
an exchange agent (which will be reasonably acceptable to
Enstar) to handle the exchange of Enstar common stock for New
Enstar ordinary shares. Promptly after the completion of the
merger, the exchange agent will send a letter of transmittal,
which is to be used to exchange Enstar common stock for New
Enstar ordinary shares, to each former Enstar shareholder of
record.
The letter of transmittal will be accompanied by instructions
explaining the procedures for surrendering Enstar share
certificates. PLEASE DO NOT RETURN STOCK CERTIFICATES WITH THE
ENCLOSED PROXY CARD.
Enstar shareholders who surrender their common stock in
accordance with the instructions, together with a properly
completed letter of transmittal, will receive one New Enstar
ordinary share for each share of Enstar common stock held by
such shareholder as of the effective time. After the merger,
each share of Enstar common stock will only represent the right
to receive one New Enstar ordinary share into which that share
of Enstar common stock will have been converted, except as
otherwise described below.
Dividends or distributions declared with respect to New Enstar
ordinary shares with a record date that is after the
consummation of the merger will not be paid to any holder of any
Enstar share certificates until the holder surrenders the Enstar
share certificates in exchange for New Enstar ordinary shares.
Upon surrender and subject to applicable law, New Enstar will
pay to the holder, without interest, any dividends or
distributions that have been declared on New Enstar ordinary
shares with a record date after the consummation of the merger
and before the date of such surrender and a payment date before
the date of such surrender.
After the consummation of the merger, Enstar will not register
any transfers of the shares of Enstar common stock. Castlewood
shareholders will not exchange their share certificates in the
merger.
Listing
of New Enstar Ordinary Shares
Castlewood has agreed to use its reasonable best efforts to
cause the New Enstar ordinary shares to be issued in the merger
and the New Enstar ordinary shares to be reserved for issuance
upon exercise of the stock options exchanged for Enstar stock
options to be approved for listing on Nasdaq, subject to
official notice of issuance, before the consummation of the
merger. Approval for listing on Nasdaq of the New Enstar
ordinary shares issuable to the Enstar shareholders in the
merger, subject only to official notice of issuance, is a
condition to the obligations of Castlewood and Enstar to
consummate the merger.
54
Covenants
Castlewood and Enstar have each undertaken certain covenants in
the merger agreement, which, among other things, concern the
conduct of their respective businesses between the date the
merger agreement was signed and the consummation of the merger.
The following summarizes the more significant of these covenants:
No
Solicitation
Enstar has agreed that Enstar, and each of its subsidiaries,
officers and directors, will use reasonable best efforts to
ensure that their respective employees, agents and
representatives (including any investment banker, attorney or
accountant retained by it or any of its subsidiaries) do not
directly or indirectly:
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initiate inquiries regarding, or solicit the making of, any
takeover proposal, as defined below; or
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engage in any negotiations concerning a takeover proposal.
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However, Enstar and its board of directors are permitted to
disclose to its shareholders its position with respect to any
takeover proposal as may be required under the federal
securities laws. In addition, Enstar is permitted to engage in
any discussions or negotiations with, or provide information to,
any person in response to an unsolicited takeover proposal, if:
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before providing any information to any person in connection
with a takeover proposal, such person is required to enter into
a customary confidentiality agreement with Enstar containing
terms no less restrictive than the terms contained in the
confidentiality agreement between Castlewood and Enstar; and
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Enstar provides Castlewood with copies of all information
provided to such person to the extent such information has not
been previously provided to Castlewood.
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A takeover proposal means any proposal or offer in
respect of:
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a merger, consolidation, business combination, share exchange,
reorganization, recapitalization, sale of substantially all of
the assets, liquidation, dissolution or similar transaction
involving Enstar, any of the foregoing referred to as a business
combination transaction, with a third party;
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Enstars acquisition of any third party in a business
combination transaction in which the shareholders of the third
party immediately prior to consummation of such business
combination transaction will own more than 35% of Enstars
outstanding capital stock immediately following such business
combination transaction, including the issuance by Enstar of
more than 35% of any class of its voting equity securities as
consideration for assets or securities of a third party; or
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any acquisition, whether by tender or exchange offer or
otherwise, by any third party of 35% or more of any class of
capital stock of Enstar or of 35% or more of the consolidated
assets of Enstar, in a single transaction or a series of related
transactions.
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Enstar has agreed to notify Castlewood in writing of the receipt
of any takeover proposal or request for information or inquiry
that would reasonably be expected to lead to the receipt of a
takeover proposal, the terms and conditions of any takeover
proposal, and the identity of the person making a takeover
proposal, request or inquiry. Enstar has also agreed to inform
Castlewood on the status and material terms of any discussions
regarding, or relating to, any takeover proposal and of any
change in the price or material terms of and conditions
regarding the takeover proposal.
55
Board
of Directors Covenant to Recommend
Enstar has agreed that its board of directors will recommend
adoption and approval of the merger agreement to the Enstar
shareholders. However, Enstars board of directors is
permitted to withdraw, or qualify in any material respect its
recommendation in any manner adverse to Castlewood, before the
Annual Meeting, if:
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its board of directors determines in good faith, after
consultation with its outside legal counsel, that the failure to
do so would be reasonably likely to be inconsistent with the
fiduciary duties owed by the board to Enstars shareholders
under applicable law; or
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if the change in recommendation is in response to a superior
proposal, as defined below, only (i) after Enstar provides
to Castlewood a written notice advising Castlewood that the
Enstar board of directors has received a superior proposal,
specifying the terms and conditions of such superior proposal
and including a copy thereof and identifying the person making
such superior proposal, (ii) after negotiating in good
faith with Castlewood to make such adjustments in the terms and
conditions of the merger agreement as would enable Enstar to
proceed with its recommendation without a change in such
recommendation if and to the extent Castlewood elects to seek to
make such adjustments and (iii) if Castlewood does not,
within the earlier of five days of Castlewoods receipt of
notice of a superior proposal or three business days prior to
the special shareholders meeting of Enstar, make an offer that
the board of directors of Enstar determines in good faith to be
as favorable to the Enstar shareholders as such superior
proposal.
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A superior proposal means a bona fide written
proposal or offer made by a third party in respect of a business
combination transaction involving, or any purchase or
acquisition of all or substantially all of the voting power of
Enstars capital stock, or all or substantially all of the
consolidated assets of Enstar, which business combination
transaction or other purchase or acquisition contains terms and
conditions that the board of directors determines in good faith,
after consultation with its outside counsel, would result in a
transaction that if consummated would be more favorable, from a
financial point of view, to the shareholders of Enstar than the
merger.
Operations
of Castlewood and Enstar Pending Closing
Castlewood and Enstar have each undertaken covenants that place
restrictions on them and their respective subsidiaries until
either the consummation of the merger or the termination of the
merger agreement. In general, Castlewood, Enstar and their
respective subsidiaries are required to conduct their respective
businesses in the usual, regular and ordinary course in all
material respects substantially in the same manner as conducted
before the date of the merger agreement and to use their
reasonable best efforts to preserve intact their present lines
of business and relationships with third parties.
Each of them has agreed to restrictions that, except as
expressly contemplated by the merger agreement, or with the
written consent of the other party, prohibit them and their
respective subsidiaries from:
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declaring or paying dividends or distributions (except for a
$3.00 per share dividend payable in cash to the
shareholders of Enstar immediately prior to the consummation of
the merger);
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making changes in their share capital, including, among other
things, stock splits, combinations or reclassifications;
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repurchasing or redeeming their capital stock;
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issuing or selling any shares of their capital stock or other
equity interests, except Castlewood may issue up to 198 of its
Class D non-voting ordinary shares to up to 35 employees of
Castlewood and may enter into agreements reasonably acceptable
to Enstar related to the issuance of such shares; or
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amending their respective governing documents.
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Enstar also agreed to additional restrictions that, except as
expressly contemplated by the merger agreement, or with the
written consent of Castlewood (not to be unreasonably withheld),
prohibits them and their respective subsidiaries from:
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acquiring any person or division (other than an entity that is a
wholly-owned subsidiary of Enstar) or disposing of
assets; and
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incurring or guaranteeing debt, making loans or capital
contributions or investments in any other person (other than to
wholly-owned subsidiaries of Enstar) and entering into any
material commitment or transaction requiring a capital
expenditure by Enstar or its subsidiaries.
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Reasonable
Best Efforts Covenant
Castlewood and Enstar have agreed to cooperate with each other
and to use their reasonable best efforts to take all actions and
do all things necessary, proper or advisable under the merger
agreement and applicable laws to consummate the merger and the
other transactions contemplated by the merger agreement.
Reasonable best efforts include (but are not limited to) filing
for governmental consents and taking actions necessary to
resolve any objections or challenge any governmental entity may
have to the contemplated transactions so as to permit their
consummation.
Other
Covenants and Agreements
Expenses
Castlewood and Enstar have each agreed to pay their own costs
and expenses incurred in connection with the merger and the
merger agreement, except that if the merger is consummated,
Castlewood or its relevant subsidiary will pay all property or
transfer taxes imposed on Enstar and its subsidiaries.
Other
Covenants
The merger agreement contains certain other covenants, including
covenants relating to cooperation between Castlewood and Enstar
in the preparation of this proxy statement/prospectus, making
governmental filings, public announcements and certain tax
matters. The merger agreement also contains customary covenants
by Castlewood relating to indemnification of directors,
officers, employees and agents of Enstar and its subsidiaries
from and after the effective time of the merger and maintaining,
for a period of six years after the consummation of the merger,
the current policies of directors and officers
liability insurance and fiduciary liability insurance.
Representations
and Warranties
The merger agreement contains substantially mutual
representations and warranties, certain of which are qualified
by material adverse effect limitation, made by each of
Castlewood and Enstar to the other. The representations and
warranties include those relating to:
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corporate existence, qualification to conduct business and
corporate standing and power;
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ownership of subsidiaries;
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capital structure;
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corporate authority to enter into, and carry out the obligations
under, the merger agreement and enforceability of the merger
agreement;
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absence of any conflict with or violation under their
organizational documents or any law or agreement to which they
are subject or bound as a result of the merger agreement and the
transactions contemplated by the merger agreement;
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governmental and regulatory approvals required to consummate the
merger and the other transactions contemplated by the merger
agreement;
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in the case of Enstar, filings made with the Commission;
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financial statements;
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accuracy of information supplied for use in this proxy
statement/prospectus;
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board of directors approval;
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required shareholder votes;
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litigation;
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compliance with laws;
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absence of certain changes or events since December 31,
2005;
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employee benefit plans and related matters;
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inapplicability of anti-takeover statutes;
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environmental matters;
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intellectual property matters;
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payment of fees to finders or brokers in connection with the
merger agreement;
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tax matters;
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material contracts;
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assets;
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real property;
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insurance;
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affiliate transactions; and
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disclosures made by them.
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The merger agreement also contains certain representations and
warranties of Castlewood with respect to Merger Sub, including
those relating to organization, authorization, absence of a
breach of the organizational documents and no prior business
activities.
Conditions
to the Consummation of the Merger
Mutual
Conditions
Castlewoods and Enstars respective obligations to
consummate the merger are subject to the satisfaction or the
waiver of the following conditions:
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the receipt of all governmental and regulatory consents,
clearances, approvals and actions necessary for the merger and
the other transactions contemplated by the merger agreement
unless failure to obtain those consents, clearances, approvals
and actions would not reasonably be expected to have a material
adverse effect on New Enstar (except for a limited number of
consents, clearances, approvals and actions of, filings with and
notices to the governmental entities listed in Castlewoods
disclosure letter that must be obtained regardless of their
materiality);
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the absence of any law, order or injunction prohibiting the
consummation of the merger in the United States, Bermuda or the
European Union;
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the Commission having declared effective the Castlewood
registration statement of which this proxy statement/prospectus
is a part;
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the approval for listing by Nasdaq of the New Enstar ordinary
shares to be issued in the merger, subject to official notice of
issuance;
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the receipt of all securities and blue sky permits and approvals
necessary to consummate the merger;
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the adoption and approval of the merger agreement by the Enstar
shareholders;
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the affirmative votes of the holders of a majority of the
outstanding share capital of Castlewood necessary to consummate
the transactions contemplated by the recapitalization agreement;
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the completion of the recapitalization of Castlewood pursuant to
the recapitalization agreement (see Material Terms of
Related Agreements Recapitalization
Agreement beginning on page 62);
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no event having occurred which would trigger a distribution
under Enstars shareholders rights plan;
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the receipt by Enstar and Castlewood of Debevoises opinion
to the effect that the merger should qualify as a reorganization
within the meaning of section 368(a) of the Code (see
discussion under The Proposed
Merger Material U.S. Federal Income Tax
Consequences of the Merger Tax Opinions
beginning on page 47);
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the representations and warranties of the other party contained
in the merger agreement which are qualified as to material
adverse effect being true and correct, as of the date of the
merger agreement and as of the closing date of the merger,
except to the extent that such representation or warranty speaks
as of another date, and the representations and warranties of
the other party which are not qualified as to material adverse
effect being true and correct (disregarding materiality
qualifiers) except where the failure to be true and correct,
individually or in the aggregate, would not have a material
adverse effect on the party making the representation, as of the
date of the merger agreement and as of the closing date of the
merger as if they were made on that date, except to the extent
that such representation or warranty speaks as of another
date; and
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the parties having performed or complied in all material
respects with all agreements or covenants required to be
performed by them under the merger agreement (other than the
parties covenants regarding the issuance of securities,
and Enstars covenant regarding dividends and changes in
share capital, which will have been complied with in all
respects), in each case, on or before the closing date.
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As used in the merger agreement, the term material adverse
effect means with respect to either Castlewood or Enstar,
as applicable, any event, change, circumstance or effect that,
individually or in the aggregate, is or would be reasonably
likely to be materially adverse to:
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the business, financial condition, assets or results of
operations of such entity and its subsidiaries, taken as a
whole, other than any event, change, circumstance or effect
relating:
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to the economy or financial markets in general;
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to changes in general in the industries in which such entity
operates (provided, however, that the effect of such changes
shall be included to the extent of, and in the amount of, the
disproportionate impact (if any) they have on such entity
relative to the other participants in such industry);
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to changes in applicable law or regulations or in generally
accepted accounting principles (provided, however, that the
effect of such changes shall be included to the extent of, and
in the amount of, the disproportionate impact (if any) they have
on such entity relative to other persons with similar lines of
business); or
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to the announcement of the merger agreement or the transactions
contemplated by the merger agreement; or
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the ability of such entity and its subsidiaries to complete the
transactions contemplated by the merger agreement and the
recapitalization agreement.
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Additional
Conditions
In addition, Enstars obligation to consummate the merger
is subject to the satisfaction or waiver of the receipt by
Mr. Flowers of an indemnity agreement with respect to the
gain recognition agreement anticipated
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to be filed by Mr. Flowers in accordance with Treasury
regulation § 1.367(a)-8. Mr. Flowers and
Castlewood entered into such indemnity agreement on May 23,
2006. See Interests of Certain Persons in the
Merger Tax Indemnification Agreement
beginning on page 52 for a description of the tax indemnity
agreement.
Termination
of Merger Agreement
Right
to Terminate
The merger agreement may be terminated at any time before the
consummation of the merger in any of the following ways:
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by mutual written consent of Enstar and Castlewood;
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by either Enstar or Castlewood:
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if the merger has not been consummated by January 31, 2007;
except that a party may not terminate the merger agreement if
the cause of the merger not being consummated is that
partys failure to fulfill its material obligations under
the merger agreement;
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if a governmental authority or a court in the United States or
European Union permanently enjoins or prohibits the consummation
of the merger, except that a party that seeks to terminate the
merger agreement upon such an event must have used its
reasonable best efforts to obtain government approvals for the
consummation of the merger; or
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if Enstars shareholders fail to approve the merger
agreement.
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if Enstar has breached in any material respect any of its
representations or warranties or has failed to perform in any
material respect any of its covenants or other agreements under
the merger agreement and such breach:
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is incapable of being cured by or remains uncured prior to
January 31, 2007; or
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would result in the failure of certain closing conditions in the
merger agreement being satisfied; or
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Enstar or Enstars board of directors materially breaches
the covenant regarding no solicitation of an alternative
takeover proposal and such breach is not cured within five
business days after receiving such notice of breach;
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Enstars board of directors changes its recommendation to
the Enstar shareholders to approve the merger agreement; or
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Enstar fails to hold the Annual Meeting to vote on the merger by
November 23, 2006; or
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if Castlewood or Merger Sub has breached in any material respect
any of its representations or warranties or has failed to
perform in any material respect any of its covenants or other
agreements under the merger agreement and such breach:
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is incapable of being cured by or remains uncured prior to
January 31, 2007; or
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would result in the failure of certain closing conditions in the
merger agreement being satisfied; or
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if there has been a change in the recommendation by the Enstar
board of directors in respect of the merger agreement and:
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Enstar notifies Castlewood in writing that it intends to approve
and enter into an agreement concerning a different business
combination transaction that constitutes a superior proposal,
attaching the most current version of such agreement or a
description of its material terms; and
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Castlewood, within five business days of receiving such notice
from Enstar, does not make an offer that the board of directors
of Enstar determines is at least as favorable to the Enstar
shareholders as the superior proposal Enstar received from
the third party.
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Termination of the merger agreement also terminates certain
obligations under the support agreement.
Obligations
in Event of Termination
In the event of termination as provided for above, the merger
agreement will become void and of no further force and effect
(except with respect to certain designated sections of the
merger agreement) and there will be no liability on behalf of
Enstar, Castlewood or Merger Sub, except for liabilities arising
from a willful breach of the merger agreement.
Amendments,
Extensions and Waivers
The merger agreement may be amended by the parties at any time
before or after the Annual Meeting and the Castlewood
shareholders meeting, except that any amendment after the
shareholders meetings, which requires approval by
shareholders, may not be made without such approval.
At any time before the consummation of the merger, the parties
may, to the extent legally allowed, extend the time for the
performance of any of the obligations or other acts of the other
parties, waive any inaccuracies in the representations and
warranties contained in the merger agreement, and waive
compliance with any of the agreements or conditions contained in
the merger agreement.
61
MATERIAL
TERMS OF RELATED AGREEMENTS
Recapitalization
Agreement
Castlewood and certain of its shareholders entered into a
recapitalization agreement, dated as of May 23, 2006,
pursuant to which the series of transactions described below
will be effected immediately prior to the consummation of the
merger. The following is a summary of the material terms of the
recapitalization agreement. This summary does not purport to
describe all the terms of the recapitalization agreement and is
qualified in its entirety by reference to the complete text of
the agreement, which is attached as Annex C to this proxy
statement/prospectus and incorporated herein by reference.
Events
Immediately prior to the consummation of the merger, the
following events will occur:
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The repurchase by Castlewood of 1,797.555 of its Class B
shares held by Trident for $20,000,000 in cash.
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A payment of $5,076,000 by Enstar to Castlewood.
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A payment of $5,076,000 by Castlewood to certain of its
executive officers and employees.
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The amendment and restatement of Castlewoods bye-laws and
the change of Castlewoods name to Enstar Group
Limited.
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The exchange of all outstanding Class A shares of
Castlewood held by Enstar for 2,972,892 non-voting convertible
ordinary shares of Castlewood.
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The exchange of all remaining outstanding Class B shares of
Castlewood held by Trident for 2,082,236 ordinary shares of
Castlewood.
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The exchange of all outstanding Class C shares of
Castlewood, including
Class C-1 shares,
Class C-2 shares,
Class C-3 shares
and
Class C-4 shares,
held by certain Castlewood shareholders for 3,636,612 ordinary
shares of Castlewood.
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The exchange of all outstanding Class D shares of
Castlewood, including
Class D-1 shares,
Class D-2 shares,
Class D-3 shares,
Class D-4 shares
and
Class D-5 shares,
of Castlewood held by certain employee shareholders for 420,577
ordinary shares of Castlewood. To the extent any Class D
shares that are exchanged are unvested, an entity designated by
Castlewood and Enstar will hold
and/or have
the right to purchase the ordinary shares issued upon the
exchange thereof for $0.001 per share from the holder
thereof if the holders employment with Castlewood is
terminated prior to the time the Class D shares would have
become vested. This right must be exercised within 60 days
of any such termination.
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The purchase by Castlewood of all of the shares of B.H.
Acquisition beneficially owned by an affiliate of
Trident II, L.P. for $6,200,167 in cash. B.H. Acquisition
is partially owned by Castlewood, Enstar and an affiliate of
Trident II, L.P.
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As of the consummation of the merger, the following events will
occur:
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The automatic termination of the share purchase and capital
commitment agreement, dated as of October 1, 2001, among
Castlewood, Enstar and certain shareholders of Castlewood and
the agreement among members, dated November 29, 2001, among
Castlewood, Enstar and certain shareholders of Castlewood.
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The appointment of the members of the board of directors of New
Enstar immediately following the merger. Such directors will
include Messrs. T. Whit Armstrong, Paul J. Collins, Gregory
L. Curl, T. Wayne Davis, J. Christopher Flowers, Nimrod T.
Frazer, John J. Oros, Paul J. OShea, Nicholas A. Packer
and Dominic F. Silvester.
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62
Mutual
Representations and Warranties
The recapitalization agreement contains substantially mutual
representations and warranties made by each of Castlewood and
its shareholders that are a party thereto related to:
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authority to enter into, and carry out the obligations under,
the recapitalization agreement and the enforceability of the
recapitalization agreement;
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absence of any breach of their organizational documents or any
law or agreement to which they are subject or bound as a result
of the transactions contemplated by the recapitalization
agreement; and
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approvals required to carry out the obligations under the
recapitalization agreement.
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Additional
Representations and Warranties
In addition, Castlewood made representations and warranties
related to:
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due authorization and issuance of all issued and outstanding
shares of Castlewood, including all ordinary shares issued in
connection with the recapitalization;
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the sufficiency of the number of ordinary shares available for
issuance upon conversion of all of the non-voting convertible
ordinary shares; and
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the sufficiency of voting power held by shareholders party to
the agreement to effect the transactions contemplated by the
recapitalization agreement.
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In addition, the Castlewood shareholders party to the
recapitalization agreement made representations and warranties
related to:
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ownership of shares;
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acquisition of shares for investment purpose; and
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the shareholder being an accredited investor.
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In addition, Trident II, L.P. represented and warranted to
certain ownership matters with respect to the shares of B.H.
Acquisition beneficially owned by its affiliate.
Covenants
Castlewood and its shareholders party to the recapitalization
agreement agreed to the following covenants under the
recapitalization agreement:
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to use their reasonable best efforts to take all actions and do
all things necessary, proper and advisable under the
recapitalization agreement, the merger agreement and applicable
laws to complete the transactions contemplated in the
recapitalization agreement and the merger agreement;
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to execute and deliver any additional documents and take any
further action as may be reasonably necessary or desirable to
effect the matters contemplated in the recapitalization
agreement or merger agreement;
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to consent to the completion of the transactions contemplated by
the recapitalization agreement and to waive any requirements,
restrictions or obligations under the share purchase and capital
commitment agreement or the agreement among members (each as
described above) arising out of the transactions contemplated by
the recapitalization agreement;
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to waive any dissenters, appraisal or similar rights such
party may have in respect of the transactions contemplated by
the recapitalization agreement or the merger agreement; and
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to waive and release all directors and officers of Castlewood
from all actions, claims and liabilities for any actions or
omissions in respect of the recapitalization agreement, the
merger agreement and the
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other transactions contemplated by the recapitalization
agreement or the merger agreement (other than any actions,
claims or liabilities based on fraud, bad faith or intentional
misconduct).
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Other
Covenants and Agreements
Castlewood has also agreed to the following covenants:
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to use its reasonable best efforts to cause all ordinary shares
issued in the recapitalization to be approved for listing on
Nasdaq;
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to take all reasonable steps to cause any disposition of its
Class B shares or acquisitions of its ordinary shares in
the transactions contemplated by the recapitalization agreement
to be exempt from Section 16(b) of the Exchange Act;
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to take all action to call and hold a special meeting of
Castlewood shareholders to vote on the approval of the
recapitalization agreement and the transactions contemplated in
the recapitalization agreement;
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to use reasonable efforts to cause each holder of Class D
shares of Castlewood to become a party to the recapitalization
agreement or take such actions necessary to cause all of the
outstanding Class A shares, Class B shares,
Class C shares and Class D shares of Castlewood to be
exchanged for the consideration described above;
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to either establish (1) an entity with the sole purpose of
holding
and/or
having the right to purchase the ordinary shares issued in
exchange for unvested Class D shares from holders whose
employment has been terminated prior to the time such unvested
Class D shares would become vested or (2) at the option of
Enstar, alternative arrangements to accomplish a similar
administrative process for exercising such rights; and
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to use its reasonable best efforts to obtain letter agreements
from all holders of Class D shares of Castlewood who are
not parties to the recapitalization agreement that restrict the
holders from transferring the ordinary shares they receive in
the recapitalization for a period of one year.
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Irrevocable
Proxy
Under the recapitalization agreement, each Castlewood
shareholder that is a party thereto has agreed to designate and
appoint Messrs. Frazer and Oros, in their respective
capacities as officers of Enstar, and any individual who shall
thereafter succeed to any such office of Enstar, and each of
them individually, as such shareholders proxy and
attorney-in-fact
to vote on the recapitalization agreement and the transactions
contemplated by the recapitalization agreement on the
shareholders behalf.
Conditions
Castlewoods and the shareholders respective
obligations to complete the transactions contemplated by the
recapitalization agreement are subject to the satisfaction of
the following conditions:
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the absence of any law, order or injunction prohibiting
completion of the transactions contemplated by the
recapitalization agreement;
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the receipt of all permits, consents, approvals and
authorizations required for the performance;
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the satisfaction or waiver of the closing conditions under
Article VI (conditions precedent) of the merger agreement;
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delivery of Debevoises opinion to the effect that the
recapitalization will qualify as a reorganization under
section 368(a) of the Code;
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the requisite consent of Castlewoods shareholders to the
recapitalization agreement and the transactions contemplated in
the recapitalization agreement;
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the representations and warranties of Castlewood (in the case of
the shareholders) or of each shareholder (in the case of
Castlewood) contained in the recapitalization agreement being
true and correct in all material respects, as of the date of the
recapitalization agreement and as of the closing date; and
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Castlewood (in the case of the shareholders) or each shareholder
(in the case of Castlewood) having performed or complied in all
material respects with all agreements or covenants required to
be performed by it under the recapitalization agreement at or
prior to the completion of the transactions contemplated by the
recapitalization agreement.
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Employee
Bonuses
Upon the closing of the merger, Castlewoods current annual
incentive compensation plan will be cancelled (and any accruals
under such plan will be reversed) and replaced with a new annual
incentive compensation plan, the terms of which will be subject
to approval by the compensation committee of New Enstars
board of directors. It is anticipated that, with respect to
services to be performed in each of calendar years 2006 through
2010, the plan will permit eligible employees to share in a
bonus pool, which is anticipated to represent, in the aggregate,
15% of New Enstars consolidated net after-tax profits and
from which distributions are anticipated to be made in cash,
ordinary shares or other securities of New Enstar, or the right
to acquire ordinary shares or other securities of New Enstar, in
such amounts per employee and in such form as shall be
determined by New Enstars compensation committee. The
board of directors of New Enstar will determine whether and, if
so, on what terms and conditions, the plan will continue in
effect with respect to calendar years after 2010.
Transfer
Restrictions
Under the recapitalization agreement, each shareholder of
Castlewood has agreed not to transfer or agree to transfer its
ordinary shares or non-voting convertible ordinary shares of New
Enstar received pursuant to the recapitalization for a period of
one year. Pursuant to a separate letter agreement, this one year
transfer restriction also applies to directors of Enstar with
respect to shares of New Enstar that they receive pursuant to
the merger. Directors of Enstar also agreed not to exercise any
options for one year following the merger. The following are
exceptions to the general prohibition on transfers:
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transfers to Castlewood;
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following the consummation of the merger, other than in the case
of an employee shareholder, transfers to another party to the
recapitalization agreement, other than an employee shareholder,
or to any party to the letter agreement containing similar
transfer restrictions on members of the board of directors of
Enstar;
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transfers to a trust under which distributions may be made only
to such shareholder or his or her immediate family members;
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transfers to a charitable remainder trust, the income from which
will be paid to such shareholder during his or her life;
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transfers to a corporation, partnership, limited liability
company or other entity, all of the equity interests in which
are held, directly or indirectly, by such shareholder and his or
her immediate family members; and
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transfers in connection with a tender offer, merger,
amalgamation, recapitalization, reorganization or similar
transaction involving New Enstar;
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provided that, with regard to some of the transfers listed
above, such shareholder has sole, ultimate control of the entity
referred to and such entity agrees to be bound by the
recapitalization agreement or the letter agreement referred to
above.
65
Registration
Rights
Concurrently with the closing, Castlewood and certain
shareholders of Castlewood and Enstar will enter into a
registration rights agreement pursuant to which those
shareholders will be granted registration rights following the
closing of the merger with respect to the ordinary shares
received pursuant to the recapitalization and the merger. For
more information on the registration rights agreement, see
Material Terms of Related
Agreements Registration Rights Agreement
beginning on page 67.
Expenses
All fees and expenses incurred in connection with the
recapitalization agreement, the merger agreement and the
transactions contemplated in the recapitalization agreement and
merger agreement will be paid by the party incurring such fees
and expenses. However, Castlewood will reimburse all reasonable
out-of-pocket
fees and expenses incurred in connection with the
recapitalization agreement, the merger agreement and the
transactions contemplated in the recapitalization agreement and
merger agreement by the holders of its Class B shares, its
Class C shares and its Class D shares, except that the
reimbursement for the holders of its Class B shares is
subject to a maximum of $150,000.
Termination
The recapitalization agreement will terminate on the earlier of
the termination of the merger agreement and the termination of
the support agreement (other than the termination of the support
agreement upon the completion of the merger). If the
recapitalization agreement is terminated, its provisions will
cease to have effect, except that no such termination will
relieve any party from any liability arising from a willful
breach of the recapitalization agreement.
Support
Agreement
Castlewood and Messrs. Flowers, Oros and Frazer entered
into the support agreement, with respect to the Enstar common
stock owned by them and acquired during the term of the support
agreement. The following is a summary of the material terms of
the support agreement and is qualified in its entirety by
reference to the complete text of the agreement, which is
attached as Annex B to this proxy statement/prospectus and
incorporated herein by reference.
Voting
of Shares
Each of Messrs. Flowers, Oros and Frazer agreed that, at
any meeting of the shareholders of Enstar called to vote upon
the merger, the merger agreement and the other transactions
contemplated by the merger agreement, he will vote all of the
shares of Enstar common stock owned by him in favor of the
approval of the merger agreement and the transactions
contemplated by the merger agreement. Each of the three
shareholders further agreed that at any meeting of the
shareholders of Enstar, he will vote all of the shares of Enstar
common stock owned by him against:
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any takeover proposal other than as contemplated by the merger
agreement;
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any other transaction or proposal involving Enstar or any of its
subsidiaries that would prevent, nullify, materially interfere
with or delay the merger agreement, the merger and the other
transactions contemplated by the merger agreement.
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As of May 23, 2006, Messrs. Flowers, Oros and Frazer, three
of the largest shareholders of Enstar, hold an aggregate of
1,726,556 shares of Enstars outstanding common stock,
representing approximately 30.1% of the voting power of
Enstars capital stock.
Irrevocable
Proxy
Each of Messrs. Flowers, Oros and Frazer has agreed to
designate and appoint Mr. Richard J. Harris and
Mr. Paul J. OShea, in their respective capacities as
officers of Castlewood, and any individual who shall
66
thereafter succeed to any such office of Castlewood, and each of
them individually, as the shareholders proxy and
attorney-in-fact
to vote on the matters described above.
Transfer
Restrictions
Each of Messrs. Flowers, Oros and Frazer has agreed not to
transfer any of the shares of Enstar common stock owned by him,
or grant any proxies or enter into any voting agreements with
respect to such shares other than the support agreement with
Castlewood. Exceptions to the general prohibition on transfer
include transfers to a trust under which distributions may be
made only to such shareholder or his immediate family members,
to a charitable remainder trust, the income from which will be
paid to such shareholder during his life, or to an entity, all
of the equity interests in which are held by such shareholder
and his immediate family members, and provided, in each of the
exceptions, such shareholder has sole record ownership and
control of the entity referred to and such entity agrees to be
bound by the support agreement.
Termination
The support agreement will terminate on the earlier of the
consummation of the merger, at the option of at least two of the
shareholders party to the support agreement if Enstars
board of directors has effected a change in its recommendation
to the Enstar shareholders to approve the merger agreement and
the transactions contemplated by the merger agreement, the
termination of the merger agreement and January 31, 2007.
If the support agreement is terminated, its provisions will
cease to have effect, except that no such termination will
relieve any party from liability for any breach prior to such
termination.
Shareholder
Capacity
The parties acknowledged that each of Messrs. Flowers, Oros
and Frazer executed the support agreement solely in his capacity
as a record holder or beneficial owner of shares of Enstar
common stock and not in his capacity as an officer or director
of Enstar.
Registration
Rights Agreement
Castlewood, Trident, Messrs. Flowers and Silvester and
certain other shareholders of Castlewood, and the directors of
Enstar, and, together with any other person who becomes party to
the registration rights agreement, as agreement holders, will
enter into a registration rights agreement in connection with
the transactions contemplated by the merger agreement and the
recapitalization agreement. The registration rights agreement
will become effective immediately upon the consummation of the
merger. The following is a summary of the material terms of the
registration rights agreement. This summary does not purport to
describe all of the terms of the registration rights agreement
and is qualified in its entirety by reference to the complete
text of the agreement, which is filed as an exhibit to the
registration statement of which this proxy statement/prospectus
is a part and incorporated herein by reference.
The registration rights agreement will provide that, after the
expiration of one year from the date of the registration rights
agreement, any of Trident, Mr. Flowers and
Mr. Silvester, each referred to as a requesting holder, may
require that New Enstar effect the registration under the
Securities Act of all or any part of such holders
registrable securities, as defined below. Trident is entitled to
make three requests and Messrs. Flowers and Silvester are
each entitled to make two requests. Notwithstanding the
preceding sentence, the registration rights agreement further
provides that, after the expiration of 90 days from the
date of the registration rights agreement and prior to the first
anniversary of such date, Trident has the right to require New
Enstar to effect the registration of up to 750,000 shares
of registrable securities, referred to as the Trident demand.
Upon receipt of a registration request (other than the Trident
demand), New Enstar is required as promptly as reasonably
practicable (but in any event within 7 days of such
request) to give written notice of such request to all other
holders of registrable securities. New Enstar must then use its
reasonable best efforts to register all registrable securities
that have been requested to be registered by the requesting
holder in the registration request or by any other agreement
holder by written notice to New Enstar in accordance with the
provisions of the registration rights agreement.
67
New Enstar will not be required to effect a registration request
unless the aggregate number of ordinary shares proposed to be
registered constitutes at least the lesser of: (1) 25% of
the total number of registrable securities held by the
requesting holder (or 15% in the case of the Trident demand) or
(2) 10% of the total number of registrable securities held
by all holders of registrable securities on the date of the
registration rights agreement, or if the total number of
registrable securities then outstanding is less than such
amount, all of the registrable securities then outstanding. In
addition, New Enstar will not be obligated to effect a
registration more than once in any nine month period except that
any request for registration that immediately follows the
registration pursuant to the Trident demand may be as soon as
six months following registration pursuant to the Trident
demand. With respect to the Trident demand, New Enstar cannot
include any securities other than registrable securities owned
by Trident without Tridents prior written consent.
Registrable securities means:
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any ordinary shares of New Enstar issued pursuant to the merger;
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any ordinary shares of New Enstar issued pursuant to the
recapitalization agreement;
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any ordinary shares of New Enstar issued upon exercise, exchange
or conversion of any options, restricted stock units or other
rights to acquire ordinary shares of New Enstar that are issued
in connection with the merger or the recapitalization
agreement; or
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any equity securities issued or issuable with respect to the
ordinary shares referred to above by way of conversion, exercise
or exchange thereof or share dividend or share split or in
connection with a combination of shares, recapitalization,
reclassification, merger, amalgamation, arrangement,
consolidation or other reorganization.
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A request for registration will not constitute the use of a
registration request by a requesting holder pursuant to the
registration rights agreement if:
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the requesting holder and the other holders of registrable
securities holding 50% or more of the outstanding registrable
securities determine in good faith to withdraw (prior to the
effective date of the registration statement relating to such
request) the proposed registration;
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the registration statement relating to such request is not
declared effective within 90 days of the date such
registration statement is first filed with the Commission;
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prior to the sale of at least 90% of the registrable securities
included in the registration relating to such request, such
registration is adversely affected by any stop order, injunction
or other order or requirement of the Commission or other
governmental agency, quasi-governmental agency or
self-regulatory body or court for any reason and New Enstar
fails to cure such stop order, injunction or other order or
requirement within 30 days;
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more than 20% of the registrable securities requested by the
requesting holder to be included in the registration of an
underwritten offering are not included in such offering on the
advice of the managing underwriter of such offering;
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the conditions to closing specified in any underwriting
agreement or purchase agreement entered into in connection with
the registration relating to such request are not satisfied
(other than as a result of a material breach by the requesting
holder); or
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in the case of an underwritten offering, the failure of New
Enstar to cooperate fully.
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New Enstar may postpone for a reasonable period of time, not to
exceed 90 days, the filing or the effectiveness of a
registration statement if New Enstar furnishes to the holders of
registrable securities covered by such registration statement a
certificate signed by the chief executive officer of New Enstar
stating that the board of directors of New Enstar has determined
that such registration is reasonably likely to have a material
adverse effect on any proposal or plan by New Enstar to engage
in any acquisition of assets or any merger, amalgamation,
consolidation, tender offer or similar transaction, or otherwise
would have a material adverse effect on the business, assets,
operations, prospects or financial condition of New Enstar.
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New Enstar cannot grant registration rights to any holder or
prospective holder of any securities of New Enstar which are
senior to or otherwise conflict in any material respect with the
registration rights that will be provided pursuant to the
registration rights agreement, without the prior written consent
of either each of the requesting holders or shareholders to the
agreement holding 50% or more of outstanding registrable
securities and, for such time as Trident owns at least 20% of
the registrable securities it owned as of the date of the
registration rights agreement, Trident. New Enstar may grant
additional demand or piggyback registration rights that are
pari passu with the rights that will be set forth in the
registration rights agreement, and any dilution of the
registration rights resulting from any such pari passu
rights will not be deemed to conflict with the rights that will
be set forth in the registration rights agreement.
Whenever New Enstar proposes to register ordinary shares (other
than a registration pursuant to a registration request under the
registration rights agreement, a registration on
Form S-4
or a registration relating solely to employee benefit plans),
whether for its own account or for the account of one or more
securityholders of New Enstar, and the registration form to be
filed may be used for the registration or qualification for
distribution of registrable securities, New Enstar is required
to give prompt written notice to all holders of registrable
securities of its intention to effect such a registration and
must include in such registration, all registrable securities
with respect to which New Enstar receives from the holders of
registrable securities written requests for inclusion, or a
piggyback registration. New Enstar may terminate or withdraw any
registration initiated by it prior to the effectiveness of such
registration, whether or not any holder of registrable
securities has elected to include registrable securities in such
registration, and except for the obligation to pay certain
registration expenses, New Enstar will have no liability to any
holder of registrable securities in connection with such
termination or withdrawal.
For a period of 180 days from the effective date of the
effectiveness of a registration statement filed in connection
with a request for registration, New Enstar cannot file or cause
to be effected any registration of any of its equity securities
or securities convertible or exchangeable into or exercisable
for its equity securities under the Securities Act (except on
Form S-4
or S-8 or
any successor or similar forms).
If a requesting holder requests registration of any of its
shares, New Enstar is required to prepare and file a
registration statement with the Commission as expeditiously as
possible, and no later than 45 days after receipt of such
request. New Enstar is required to keep such registration
statement effective for a period of either a minimum of six
months (or if such registration statement relates to an
underwritten offering, such longer period as in the opinion of
counsel for the underwriters a prospectus is required by law to
be delivered in connection with sales of registrable securities
by an underwriter or dealer) or such shorter period as will
terminate when all the securities covered by such registration
statement have been disposed of.
New Enstar will pay certain expenses in connection with any
request for registration or piggyback registration in accordance
with the registration rights agreement.
In the event of a requested underwritten offering, the holders
of a majority of the registrable securities being registered
will have the right to select the investment banker(s) and
manager(s) to administer the offering, subject to New
Enstars approval which cannot be unreasonably withheld,
conditioned or delayed.
In addition to the provisions set forth above, the registration
rights agreement contains other terms and conditions including
those customary in agreements of this kind.
Termination
The registration rights agreement will terminate on the earliest
of its termination by the consent of the holders of registrable
securities holding 50% or more of the outstanding registrable
securities and each of the requesting holders (but only if such
requesting holder holds any registrable securities at such time)
or in each case, their respective successors in interest, the
date on which no shares subject to the agreement are
outstanding, and the dissolution, liquidation or winding up of
New Enstar.
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No
Transfers Letter Agreement
In connection with the merger, each of the members of the board
of directors of Enstar entered into a letter agreement with
Enstar, pursuant to which the directors agreed not to
(1) transfer any of such directors shares of Enstar
common stock or New Enstar ordinary shares or any option to
purchase shares of Enstar common stock or any option to purchase
ordinary shares of New Enstar upon the assumption of any such
Enstar stock options by New Enstar or (2) exercise any
Enstar stock option or New Enstar option held by such person,
for a period of one year following the effective time of the
merger. The letter agreement contains certain exceptions to the
general prohibition of transfers that are described above under
the heading Recapitalization
Agreement Transfer Restrictions beginning
on page 65.
Repurchase
of Shares Letter Agreement
Two directors of Enstar, Messrs. Armstrong and Davis, have
entered into a letter agreement, dated May 23, 2006, with
Castlewood pursuant to which New Enstar, subject to the
consummation of the merger, agrees to repurchase from
Messrs. Armstrong and Davis, upon their request, during a
30-day
period commencing January 15, 2007, at the then prevailing
market prices, such number of shares as provides an amount
sufficient for Messrs. Armstrong and Davis to pay taxes on
compensation income resulting from the exercise of options by
them on May 23, 2006 for 50,000 shares of Enstar
common stock in the aggregate. New Enstars obligation to
repurchase ordinary shares is limited to 25,000 ordinary shares
from each of Mr. Armstrong and Mr. Davis.
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INFORMATION
ABOUT CASTLEWOOD
Business
Company
Overview
In 1993, Mr. Silvester, who was joined by Mr. Packer
and Mr. OShea in 1993 and 1994, respectively, began a
business venture in Bermuda to provide run-off services to the
insurance and reinsurance industry. In 1995 this business was
assumed by Castlewood Limited.
In 1996, Castlewood Limited formed a wholly-owned subsidiary,
Castlewood (EU) Ltd. based in Guildford and London in the United
Kingdom, to extend the services provided by Castlewood Limited.
In 2000, Castlewood Limited entered into a joint venture with
Enstar and an affiliate of Trident II, L.P. to acquire, and
for Castlewood Limited to manage, B.H. Acquisition. In
connection with the formation of the joint venture, Castlewood,
Enstar and an affiliate of Trident II, L.P. acquired
45%, 33% and 22% economic interests, respectively, in B.H.
Acquisition.
Castlewood was formed in August 2001 under the laws of Bermuda
to acquire and manage insurance and reinsurance companies in
run-off, and to provide management, consulting and other
services to the insurance and reinsurance industry. In
connection with Castlewoods formation, Enstar and Trident
made an initial investment in Castlewood and the senior
executives of Castlewood contributed their equity interests in
Castlewood Limited.
Since its formation, Castlewood, through its subsidiaries, has
completed several acquisitions of insurance and reinsurance
companies and is now administering those businesses in run-off.
Castlewood derives its income from the ownership and management
of these companies primarily by settling insurance and
reinsurance claims below the recorded loss reserves and from
returns on the portfolio of investments retained to pay future
claims. In addition, Castlewood has formed other businesses that
provide management and consultancy services, claims inspection
services and reinsurance collection services to Castlewood
affiliates and third-party clients for both fixed and
success-based fees.
In the primary (or direct) insurance business, the insurer
assumes risk of loss from persons or organizations that are
directly subject to the given risks. Such risks may relate to
property, casualty, life, accident, health, financial or other
perils that may arise from an insurable event. In the
reinsurance business, the reinsurer agrees to indemnify an
insurance or reinsurance company, referred to as the ceding
company, against all or a portion of the insurance risks. When
an insurer or reinsurer stops writing new insurance business or
a particular line of business, the insurer, reinsurer, or the
line of discontinued business is in run-off.
In recent years, the insurance industry has experienced
significant consolidation. As a result of this consolidation and
other factors, the remaining participants in the industry often
have portfolios of business that are either inconsistent with
their core competency or provide excessive exposure to a
particular risk or segment of the market (i.e.,
property/casualty, asbestos, environmental, director and officer
liability, etc.). These non-core and/or discontinued portfolios
are often associated with potentially large exposures and
lengthy time periods before resolution of the last remaining
insured claims resulting in significant uncertainty to the
insurer or reinsurer covering those risks. These factors can
distract management, drive up the cost of capital and surplus
for the insurer or reinsurer, and negatively impact the
insurers or reinsurers credit rating, which makes
the disposal of the unwanted company or portfolio an attractive
option. Alternatively, the insurer may wish to maintain the
business on its balance sheet, yet not divert significant
management attention to the run-off of the portfolio. The
insurer or reinsurer, in either case, is likely to engage a
third party, such as Castlewood, that specializes in run-off
management to purchase the company or portfolio, or to manage
the company or portfolio in run-off.
In the sale of a run-off company, a purchaser, such as
Castlewood, typically pays a discount to the book value of the
company based on the risks assumed and the relative value to the
seller of no longer having to manage the company in run-off.
Such a transaction can be beneficial to the seller because it
receives an
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upfront payment for the company, eliminates the need for its
management to devote any attention to the disposed company and
removes the risk that the established reserves for the business
may prove to be inadequate. The seller is also able to redeploy
its management and financial resources to its core businesses.
Alternatively, if the insurer or reinsurer hires a third party,
such as Castlewood, to manage its run-off business, the insurer
or reinsurer will, unlike in a sale of the business, receive
little or no cash up front. Instead, the management arrangement
may provide that the insurer or reinsurer will share in any
profits derived from the run-off with certain incentive payments
allocated to the run-off manager. By hiring a run-off manager,
the insurer or reinsurer can outsource the management of the
run-off business to experienced and capable individuals, while
allowing its own management team to focus on the insurers
or reinsurers core businesses. Although Castlewoods
desired approach to managing run-off business is to align its
interests with the interests of the owners, under certain
management arrangements to which Castlewood is a party, it only
receives a fixed management fee and does not receive incentives.
Following the purchase of a run-off company or the engagement to
manage a run-off company or portfolio of business, it is
incumbent on the new owner or manager to conduct the run-off in
a disciplined and professional manner in order to efficiently
discharge the liabilities associated with the business while
preserving and maximizing its assets. Castlewoods approach
to managing a run-off company or portfolio of business includes
negotiating with third-party insureds and reinsureds to commute
their insurance or reinsurance agreement for an agreed upon
up-front payment by Castlewood, or the third-party client, and
to more efficiently manage payment of reinsurance claims.
Castlewood attempts to commute policies with direct insureds or
reinsureds (sometimes called policy buy-backs), thereby
eliminating uncertainty over the amount of future claims.
Castlewood also attempts, where appropriate, to negotiate
favorable commutations with reinsurers by securing the receipt
of a lump-sum settlement from the reinsurer in complete
satisfaction of the reinsurers liability in respect of any
future claims. Castlewood, or the third-party client, is then
fully responsible for any claims in the future. Castlewood
typically invests proceeds from reinsurance commutations with
the expectation that such investments will produce income,
which, together with the principal, will be sufficient to
satisfy future obligations with respect to the acquired company
or portfolio.
Competitive
Strengths
Castlewood believes that its competitive strengths have enabled,
and will continue to enable, it to capitalize on the
opportunities that exist in the run-off market. These strengths
include:
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Experienced Management Team with Proven Track
Record. Dominic F. Silvester, Castlewoods
Chief Executive Officer, Paul J. OShea, an Executive Vice
President of Castlewood, Nicholas A. Packer, an Executive Vice
President of Castlewood and Richard J. Harris, Castlewoods
Chief Financial Officer, each has over 18 years of
experience in the insurance and reinsurance industry. The
extensive depth and knowledge of Castlewoods management
team provide it with the ability to identify, select and price
companies and portfolios in run-off and to successfully manage
companies and portfolios in run-off.
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Highly Qualified, Experienced and Ideally Located Employee
Base. Castlewood has been successful in
recruiting a highly qualified team of experienced claims,
reinsurance, financial, actuarial and legal staff located in
three of the major insurance and reinsurance centers in the
world: London, New York and Bermuda. The quality and breadth of
experience of Castlewoods staff enable it to offer a wide
range of professional services to the industry.
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Long-Standing Market
Relationships. Castlewoods management team
has well-established personal relationships across the insurance
and reinsurance industry. Castlewood uses these market
relationships to identify and source business opportunities and
establish itself as a leader in the run-off business.
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Disciplined Approach to Acquisitions and Claims
Management. Castlewood believes in generating
profitability through a disciplined, conservative approach to
both acquisitions and claims management. Castlewood closely
analyzes new business opportunities to determine a
companys inherent value and Castlewoods ability to
profitably manage that company or a portfolio in run-off.
Castlewood believes
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that its review and claims management process, combined with
management of global exposures across product lines, allow it to
price acquisitions on favorable terms and to profitably run-off
the businesses that it acquires and manages.
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Financial Strength. As of December 31,
2005, Castlewood had $260.9 million of shareholders
equity without any outstanding debt. This financial strength
allows Castlewood to aggressively price acquisitions that fit
within its core competency and hire and retain additional
management talent when necessary. Castlewood believes that its
financial strength has allowed it to be recognized as a leader
in the acquisition and management of run-off companies and
portfolios. Castlewoods conservative approach to managing
its balance sheet reflects its commitment to maintaining its
financial strength.
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Strategy
Castlewoods corporate objective is to generate returns on
capital that appropriately reward it for risks it assumes.
Castlewood intends to achieve this objective by executing the
following strategies:
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Establish Leadership Position in the Run-Off Market by
Leveraging Managements Experience and
Relationships. Castlewood intends to continue to
utilize the extensive experience and significant relationships
of its senior management team to establish itself as a leader in
the run-off segment of the insurance and reinsurance market. The
strength and reputation of Castlewoods management team is
expected to generate opportunities for Castlewood to acquire or
manage companies and portfolios in run-off, to price effectively
the acquisition or management of such businesses, and, most
importantly, to manage the run-off of such businesses
efficiently and profitably.
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Professionally Manage Claims. Castlewood is
professional and disciplined in managing claims against run-off
companies and portfolios it owns or manages. Castlewoods
management understands the need to dispose of certain risks
expeditiously and cost-effectively by constantly analyzing
changes in the market and efficiently settling claims with the
assistance of its experienced claims adjusters and in-house and
external legal counsel. When Castlewood acquires or begins
managing a company or portfolio it initially determines which
claims are valid through the use of experienced in-house
adjusters and claims experts. Castlewood pays valid claims on a
timely basis, and looks to well-documented policy exclusions and
coverage issues where applicable and litigates when necessary to
avoid invalid claims under existing policies and reinsurance
agreements.
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Commutation of Assumed Liabilities and Ceded Reinsurance
Assets. Using detailed analysis and actuarial
projections, Castlewood negotiates with the policyholders of the
insurance and reinsurance companies or portfolios it owns or
manages with a view to commuting insurance and reinsurance
liabilities for an agreed upon up-front payment at a discount to
the ultimate liability. Such commutations can take the form of
policy buy-backs and structured settlements over fixed periods
of time. Castlewood also negotiates with reinsurers to commute
their reinsurance agreements providing coverage to
Castlewoods subsidiaries on terms that Castlewood believes
to be favorable based on then-current market knowledge.
Castlewood invests the proceeds from reinsurance commutations
with the expectation that such investments will produce income,
which, together with the principal, will be sufficient to
satisfy future obligations with respect to the acquired company
or portfolio.
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Continue Commitment to Highly Disciplined Acquisition,
Management, and Reinsurance Practices. Castlewood
utilizes a disciplined approach to minimize risk and increase
the probability of positive operating results from acquisitions
and companies and portfolios it manages. Castlewood carefully
reviews acquisition candidates and management engagements for
consistency with accomplishing its long-term objective of
producing positive operating results. Castlewood focuses its
investigation on the risk exposure, claims practices, reserve
requirements, outstanding claims and its ability to price an
acquisition or engagement on terms that will provide positive
operating results. In particular, Castlewood carefully reviews
all outstanding claims and case reserves, and follows a highly
disciplined approach to managing allocated loss adjustment
expenses, such as the cost of defense counsel, expert witnesses,
and related fees and expenses.
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Manage Capital Prudently. Castlewood manages
its capital prudently relative to its risk exposure and
liquidity requirements to maximize profitability and long-term
growth in shareholder value. Castlewoods capital
management strategy is to deploy capital efficiently to
acquisitions, reinsurance opportunities and to establish (and
re-establish, when necessary) adequate loss reserves to protect
against future adverse developments.
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Acquisition
of Insurers or Portfolios in Run-Off
Castlewood specializes in the negotiated acquisition and
management of insurance and reinsurance companies and portfolios
in run-off. Castlewood approaches, or is approached by, primary
insurers or reinsurance providers with portfolios of business to
be sold or managed in run-off. Castlewood evaluates each
opportunity presented by carefully reviewing the
portfolios risk exposures, claim practices, reserve
requirements and outstanding claims, and seeking an appropriate
discount or seller indemnification to reflect the uncertainty
contained in the portfolios reserves. Based on this
initial analysis, Castlewood can determine if a company or
portfolio of business would add value to its current portfolio
of run-off business. If Castlewood determines to pursue the
purchase of a company in run-off, it then proceeds to price the
acquisition in a manner it believes will result in positive
operating results based on certain assumptions including,
without limitation, its ability to favorably resolve claims,
negotiate with direct insureds and reinsurers, and otherwise
manage the nature of the risks posed by the business.
With respect to its U.K., European and Bermudian insurance and
reinsurance subsidiaries, Castlewood is able to pursue
strategies to achieve complete finality and conclude the run-off
of a company by promoting a solvent scheme of arrangement
whereby a local court-sanctioned scheme, approved by a statutory
majority of voting creditors, provides for a one-time full and
final settlement of an insurance or reinsurance companys
obligations to its policyholders.
Acquisitions
to Date
In November 2001, a wholly-owned subsidiary of Castlewood
completed the acquisition of two reinsurance companies in
run-off, River Thames Insurance Company Limited, or River
Thames, based in London, England, and Overseas Reinsurance
Corporation Limited, or Overseas Reinsurance, based in Bermuda.
The total purchase price of River Thames and Overseas
Reinsurance was approximately $15.2 million.
In August 2002, Castlewood purchased Hudson Reinsurance Company
Limited, or 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 Castlewood is now administering the run-off of its claims.
In March 2003, Castlewood and Shinsei Bank, Limited, or Shinsei,
completed the acquisition of The Toa-Re Insurance Company (UK)
Limited, a London-based subsidiary of The Toa Reinsurance
Company, Limited, for approximately $46.4 million. Upon
completion of the transaction, Toa-Res name was changed to
Hillcot Re Limited. Hillcot Re Limited underwrote reinsurance
business throughout the world between 1980 and 1994, when it
stopped writing new business and went into run-off. The
acquisition was effected through Hillcot Holdings Ltd., or
Hillcot, a Bermuda company, in which Castlewood has a 50.1%
economic interest and a 50% voting interest. Hillcot is included
in Castlewoods consolidated financial statements, with the
remaining 49.9% economic interest reflected as minority
interest. J. Christopher Flowers, a member of Castlewoods
board of directors and, following the merger, one of New
Enstars largest shareholders, is a director and the
largest shareholder of Shinsei. Castlewoods results of
operations include the results of Hillcot Re Limited from the
date of acquisition in March 2003.
During 2004, Castlewood, through one of its subsidiaries,
completed the acquisition of Mercantile Indemnity Company Ltd.,
or Mercantile, Harper Insurance Limited, or Harper (formerly
Turegum Insurance Company) and Longmynd Insurance Company Ltd.,
or Longmynd (formerly Security Insurance Company (UK) Ltd.) for
a total purchase price of approximately $4.5 million.
Castlewood recorded an extraordinary gain of approximately
$21.8 million in 2004 relating to the current excess of the
fair value of the net assets acquired over the cost of these
acquisitions.
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In May 2005, Castlewood, through one of its subsidiaries,
purchased Fieldmill Insurance Company Limited (formerly known as
Harleysville Insurance Company (UK) Limited) for approximately
$1.4 million.
In March 2006, Castlewood and Shinsei, through Hillcot,
completed the acquisition of Aioi Insurance Company of Europe
Limited, or 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 its
general insurance and reinsurance business into run-off. The
aggregate purchase price paid for Aioi Europe was
£62 million (approximately $108.9 million), with
£50 million in cash paid upon the closing of the
transaction and £12 million in the form of a
promissory note, payable twelve months from the date of the
closing. Upon completion of the transaction, Aioi Europe changed
its name to Brampton Insurance Company Limited. Castlewood
recorded an extraordinary gain of approximately
$4.3 million, net of minority interest, in 2006 relating to
the current excess of the fair value of the net assets acquired
over the cost of this acquisition. In April 2006, Hillcot
Holdings Limited borrowed approximately $44 million from an
international bank to partially assist with the financing of the
Aioi Europe acquisition. Following a repurchase by Aioi Europe
of its shares valued at £40 million in May 2006,
Hillcot Holdings repaid the promissory note and reduced the bank
borrowings to $19.2 million, which is repayable in 2010.
In connection with the recapitalization, Castlewood will
purchase the interest of an affiliate of Trident, in B.H.
Acquisition, a company partially owned by Castlewood, Enstar and
an affiliate of Trident II, L.P. Following the merger, B.H.
Acquisition will be an indirect wholly-owned subsidiary of
Castlewood. In July 2000, B.H. Acquisition acquired as an
operating business two reinsurance companies, Brittany Insurance
Company Ltd., or Brittany, and Compagnie Europeénne
dAssurances Industrielles S.A., or CEAI. Brittany and CEAI
are principally engaged in the active management of books of
reinsurance business from international markets.
Management
of Run-Off Portfolios
Castlewood is a party to several management engagements pursuant
to which it has agreed to manage the run-off portfolio of a
third party. Such arrangements are advantageous for third-party
insurers because they allow a third-party insurer to focus their
management efforts on their core competency while allowing them
to maintain the portfolio of business on their balance sheet. In
addition, Castlewoods expertise in managing portfolios in
run-off allows the third-party insurer the opportunity to
potentially realize positive operating results if Castlewood
achieves its objectives in management of the run-off portfolio.
Castlewood specializes in the collection of reinsurance
receivables through its indirect subsidiary Kinsale Brokers
Limited. Through Castlewoods subsidiaries, Castlewood (US)
Inc. and Cranmore Adjusters Limited, Castlewood also specializes
in providing claims inspection services whereby Castlewood is
engaged by third-party insurance and reinsurance providers to
review certain of their existing insurance and reinsurance
exposures, relationships, policies and/or claims history.
Castlewoods primary objective in structuring its
management arrangements is to align the third-party
insurers interests with those of Castlewood. Consequently,
management agreements typically are structured so that
Castlewood receives fixed fees in connection with the management
of the run-off portfolio and also typically receives certain
incentive payments based on a portfolios positive
operating results.
Management
Agreements
Castlewood has entered into approximately 15 management
agreements with third-party clients to manage certain run-off
portfolios with gross loss reserves (as of June 30, 2006) of
approximately $3 billion. The fees generated by these
engagements include both fixed and incentive-based remuneration
based on Castlewoods success in achieving certain
objectives. These agreements do not include the recurring
engagements managed by Castlewoods special claims
inspection and reinsurance collection subsidiaries, Cranmore
Adjusters Limited and Kinsale Brokers Limited,
respectively.
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Claims
Management and Administration
An integral factor to Castlewoods success is its ability
to analyze, administer, manage and settle claims and related
expenses, such as loss adjustment expenses. Castlewoods
claims teams are located in different offices within its
organization and provide global claims support. Castlewood has
implemented claims handling guidelines and claims reporting and
control procedures in all of its claims units. To ensure that
claims are handled and reported in accordance with these
guidelines, all claims matters are reviewed regularly, with all
material claims matters being circulated to and reviewed by
management prior to any action being taken.
When Castlewood receives notice of a claim, regardless of size
and regardless of whether it is a paid claim request or a
reserve advice, it is reviewed and recorded within its claims
system reserving Castlewoods rights where appropriate.
Claims reserve movements and payments are reviewed daily, with
any material movements being reported to management for review.
This enables flash reporting of significant events
and potential insurance or reinsurance losses to be communicated
to senior management worldwide on a timely basis irrespective
from which geographical location or business unit location the
exposure arises.
Castlewood also is able to efficiently manage claims and obtain
savings through its extensive relationships with defense counsel
(both in-house and external), liquidators, third-party claims
administrators and other professional advisors and experts.
Castlewood has developed relationships and protocols to reduce
the number of outside counsel by consolidating claims of similar
types and complexity with appropriate law firms specializing in
the particular type of claim. This approach has enabled
Castlewood to more efficiently manage outside counsel and other
third parties, thereby reducing expenses, and to establish
closer relationships with ceding companies.
When appropriate, Castlewood negotiates with direct insureds to
buy back policies either on favorable terms or to mitigate
against potential future indemnity exposures and legal costs in
an uncertain and constantly evolving legal environment. Where
appropriate, Castlewood also pursues commutations on favorable
terms with ceding companies of reinsurance business in order to
realize savings or to mitigate against potential future
indemnity exposures and legal costs. Such buy-backs and
commutations eliminate all past, present and future liability to
direct insureds and reinsureds in return for a lump sum payment.
With regard to reinsurance receivables, Castlewood manages cash
flow by working with reinsurers, brokers and professional
advisors to achieve fair and prompt payment of reinsured claims,
taking appropriate legal action to secure receivables where
necessary. Castlewood also attempts where appropriate to
negotiate favorable commutations with its reinsurers by securing
a lump sum settlement from reinsurers in complete satisfaction
of the reinsurers past, present and future liability in
respect of such claims. Properly priced commutations reduce the
expense of adjusting direct claims and pursuing collection of
reinsurance receivables (both of which may often involve
extensive legal expense), realize savings, remove the potential
future volatility of claims and reduce required regulatory
capital.
Reserves
for Unpaid Losses and Loss Adjustment Expense
Applicable insurance laws require Castlewood to maintain
reserves to cover its estimated losses under insurance policies
that it has assumed and for loss adjustment expense, or LAE,
relating to the investigation and settlement of policy claims.
Castlewood and its subsidiaries establish losses and LAE
reserves for individual claims by evaluating reported claims on
the basis of:
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its knowledge of the circumstances surrounding the claim;
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the severity of the injury or damage;
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the jurisdiction of the occurrence;
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the potential for ultimate exposure;
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the type of loss; and
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its experience with the line of business and policy provisions
relating to the particular type of claim.
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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, the
liability for unpaid losses and LAE is based largely upon
estimates. Castlewoods management must use considerable
judgment in the process of developing these estimates. The
liability for unpaid losses and LAE for property and casualty
business includes amounts determined from loss reports on
individual cases and amounts for losses incurred but not
reported, or IBNR. Such reserves, including IBNR reserves, are
estimated by management based upon loss reports received from
ceding companies, supplemented by Castlewoods own
estimates of losses for which no ceding company loss reports
have yet been received.
In establishing reserves, management also considers actuarial
estimates of ultimate losses. Castlewoods actuaries employ
generally accepted actuarial methodologies and procedures to
estimate ultimate losses and loss expenses. In addition, a loss
reserve study is prepared by an independent actuary annually in
order to provide additional insight into the reasonableness of
Castlewoods reserves for losses and loss expenses.
Castlewoods loss reserves are largely related to casualty
exposures including latent exposures primarily relating to
asbestos and environmental, or A&E, as discussed below. In
establishing the reserves for unpaid 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, reserves are
established to cover loss development related to both known and
unasserted claims.
The estimation of unpaid claim liabilities is subject to a high
degree of uncertainty for a number of reasons. Unpaid claim
liabilities for property and casualty exposures in general are
impacted by changes in the legal environment, jury awards,
medical cost trends, and general inflation. Moreover, for latent
exposures in particular, developed case law and adequate claims
history do not exist. There is significant coverage litigation
involved with these exposures which creates further uncertainty
in the estimation of the liabilities. As such, for these types
of exposures, it is especially unclear whether past claim
experience will be representative of future claim experience.
Ultimate values for such claims cannot be estimated using
reserving techniques that extrapolate losses to an ultimate
basis using loss development factors, and the uncertainties
surrounding the estimation of unpaid claim liabilities are not
likely to be resolved in the near future. Further, there can be
no assurance that the reserves established by Castlewood will be
adequate or will not be adversely affected by the development of
other latent exposures. The actuarial methods used to estimate
ultimate loss and LAE for Castlewoods latent exposures are
discussed below.
Non-latent claims are less significant to Castlewood, both in
terms of reserves held, and in terms of risk of significant
reserve deficiency. For the non-latent loss exposures, a range
of traditional loss development extrapolation techniques is
applied. Incremental paid and incurred loss development
methodologies are the most commonly used methods. Traditional
cumulative paid and incurred loss development methods are used
where
inception-to-date,
cumulative paid and reported incurred loss development history
is available.
These methods assume that cohorts, or groups, of losses from
similar exposures will increase over time in a predictable
manner. Historical paid and incurred loss development experience
is examined for earlier underwriting years to make inferences
about how later underwriting years losses will develop.
Where company-specific loss information is not available or not
reliable, industry loss development information published by
reliable industry sources such as the Reinsurance Association of
America is considered.
The reserving process is intended to reflect the impact of
inflation and other factors affecting loss payments by taking
into account changes in historical payment patterns and
perceived trends. However, there is no precise method for the
subsequent evaluation of the adequacy of the consideration given
to inflation, or to any other specific factor, or to the way one
factor may affect another.
The loss development tables below show changes in
Castlewoods gross and net loss reserves in subsequent
years from the prior loss estimates based on experience as of
the end of each succeeding year. The estimate is increased or
decreased as more information becomes known about the frequency
and severity of
77
losses for individual years. A redundancy means the original
estimate was higher than the current estimate; a deficiency
means that the current estimate is higher than the original
estimate.
The tables below show Castlewoods loss reserve development
for the years indicated. The first table shows, in the first
section of the table, Castlewoods gross reserve for unpaid
losses (including IBNR losses) and LAE and gross reserve for
unpaid losses (including IBNR losses) excluding LAE. The second
table shows, in the first section of the table,
Castlewoods reserve for unpaid losses (including IBNR
losses) and LAE net of reinsurance and reserve for unpaid losses
(including IBNR losses) excluding LAE net of reinsurance. The
second section of each table shows Castlewoods
re-estimates of the reserve excluding LAE in later years. The
third section of each table shows the cumulative amounts of
losses paid as of the end of each succeeding year. The
cumulative redundancy (deficiency) line in each
table represents, as of the date indicated, the difference
between the latest re-estimated liability and the reserves
(excluding LAE) as originally estimated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
(in thousands of U.S.
dollars)
|
|
|
Gross reserve
for unpaid losses and
loss adjustment expenses
|
|
|
419,717
|
|
|
|
284,409
|
|
|
|
381,531
|
|
|
|
1,047,313
|
|
|
|
806,559
|
|
Less: Reserve for loss adjustment
expense
|
|
|
(24,337
|
)
|
|
|
(32,987
|
)
|
|
|
(41,940
|
)
|
|
|
(66,339
|
)
|
|
|
(50,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserve for unpaid losses
|
|
|
395,380
|
|
|
|
251,422
|
|
|
|
339,591
|
|
|
|
980,974
|
|
|
|
756,484
|
|
1 Yr Later
|
|
|
302,066
|
|
|
|
255,995
|
|
|
|
332,175
|
|
|
|
873,178
|
|
|
|
|
|
2 Yrs Later
|
|
|
315,354
|
|
|
|
251,020
|
|
|
|
249,831
|
|
|
|
|
|
|
|
|
|
3 Yrs Later
|
|
|
313,298
|
|
|
|
228,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 Yrs Later
|
|
|
285,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross paid losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Yr Later
|
|
|
80,061
|
|
|
|
23,942
|
|
|
|
15,412
|
|
|
|
96,448
|
|
|
|
|
|
2 Yrs Later
|
|
|
102,931
|
|
|
|
38,119
|
|
|
|
30,672
|
|
|
|
|
|
|
|
|
|
3 Yrs Later
|
|
|
115,181
|
|
|
|
52,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 Yrs Later
|
|
|
128,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative redundancy/(deficiency)
|
|
|
110,302
|
|
|
|
23,395
|
|
|
|
89,760
|
|
|
|
107,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
(in thousands of U.S.
dollars)
|
|
|
Net reserve
for unpaid losses and
loss adjustment expenses
|
|
|
224,507
|
|
|
|
184,518
|
|
|
|
230,155
|
|
|
|
736,660
|
|
|
|
593,160
|
|
Less: Reserve for loss adjustment
expense
|
|
|
(24,337
|
)
|
|
|
(32,987
|
)
|
|
|
(41,940
|
)
|
|
|
(66,339
|
)
|
|
|
(50,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserve for unpaid losses
|
|
|
200,170
|
|
|
|
151,531
|
|
|
|
188,215
|
|
|
|
670,321
|
|
|
|
543,085
|
|
1 Yr Later
|
|
|
169,644
|
|
|
|
129,453
|
|
|
|
190,121
|
|
|
|
597,555
|
|
|
|
|
|
2 Yrs Later
|
|
|
156,003
|
|
|
|
129,827
|
|
|
|
132,715
|
|
|
|
|
|
|
|
|
|
3 Yrs Later
|
|
|
159,251
|
|
|
|
88,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 Yrs Later
|
|
|
113,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net paid losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Yr Later
|
|
|
46,748
|
|
|
|
(9,222
|
)
|
|
|
7,505
|
|
|
|
64,743
|
|
|
|
|
|
2 Yrs Later
|
|
|
36,467
|
|
|
|
(1,803
|
)
|
|
|
(6,098
|
)
|
|
|
|
|
|
|
|
|
3 Yrs Later
|
|
|
42,141
|
|
|
|
(15,101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
4 Yrs Later
|
|
|
27,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative redundancy/(deficiency)
|
|
|
86,688
|
|
|
|
63,274
|
|
|
|
55,500
|
|
|
|
72,766
|
|
|
|
|
|
78
The following table provides a reconciliation of the liability
for losses and LAE, net of reinsurance ceded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(in thousands of U.S.
dollars)
|
|
|
Net reserves for losses and loss
adjustment expenses, beginning of period
|
|
$
|
593,160
|
|
|
$
|
736,660
|
|
|
$
|
736,660
|
|
|
$
|
230,155
|
|
|
$
|
184,518
|
|
|
$
|
224,507
|
|
|
$
|
|
|
Incurred related to prior years
|
|
|
(2,457
|
)
|
|
|
(1,550
|
)
|
|
|
(96,007
|
)
|
|
|
(13,706
|
)
|
|
|
(24,044
|
)
|
|
|
(48,758
|
)
|
|
|
(90
|
)
|
Paids related to prior years
|
|
|
(4,212
|
)
|
|
|
(30,060
|
)
|
|
|
(69,007
|
)
|
|
|
(19,019
|
)
|
|
|
(4,094
|
)
|
|
|
(32,272
|
)
|
|
|
(2,260
|
)
|
Effect of exchange rate movement
|
|
|
(3,132
|
)
|
|
|
(6,821
|
)
|
|
|
3,652
|
|
|
|
4,124
|
|
|
|
10,575
|
|
|
|
6,774
|
|
|
|
2,750
|
|
Acquired on acquisition of
subsidiaries
|
|
|
208,248
|
|
|
|
0
|
|
|
|
17,862
|
|
|
|
535,106
|
|
|
|
63,200
|
|
|
|
34,267
|
|
|
|
224,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves for losses and loss
adjustment expenses, end of period
|
|
$
|
791,607
|
|
|
$
|
698,229
|
|
|
$
|
593,160
|
|
|
$
|
736,660
|
|
|
$
|
230,155
|
|
|
$
|
184,518
|
|
|
$
|
224,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in loss and loss adjustment expense liabilities
for the three months ended March 31, 2006 and 2005 were
$2.5 million and $1.6 million, respectively. The net
reduction in loss and loss adjustment expense liabilities for
both three-month periods was primarily attributable to the
reduction in estimates of loss adjustment expense liabilities
relating to 2006 and 2005 run-off activity partially offset by
reductions in estimates of reinsurance balances receivable.
Net reduction in loss and loss adjustment expense liabilities
for the year ended December 31, 2005 was
$96.0 million. The net reduction in loss and loss
adjustment expense liabilities for 2005 was primarily
attributable to a reduction in estimates of ultimate losses of
$65.3 million that arose from commutations and policy
buy-backs, the settlement of losses in the year below carried
reserves, lower than expected incurred adverse loss development
and the resulting reductions in actuarial estimates of IBNR
losses. As a result of the collection of certain reinsurance
receivables, against which bad debt provisions had been provided
in earlier periods, Castlewood reduced its aggregate provisions
for bad debt by $20.2 million in 2005. During 2005,
Castlewood reduced its estimate of loss adjustment expense
liabilities by $10.5 million relating to 2005 run-off
activity.
Net reduction in loss and loss adjustment expense in 2004
amounted to $13.7 million. In 2004, the estimate of net
ultimate losses increased by $1.0 million primarily as a
result of adverse development of incurred asbestos and
environmental losses partially offset by certain commutations
and settlement of losses below carried reserves. There was no
change to the provisions for bad debts in 2004. In 2004,
Castlewood reduced its estimate of loss adjustment expense
liabilities by $14.7 million relating to 2004 run-off
activity.
Net reduction in loss and loss adjustment expense liabilities
for the year ended December 31, 2003 was
$24.0 million. In 2003, the estimate of net ultimate losses
was reduced by $13.6 million as a result of commutation and
policy buy-backs, the settlement of losses below carried
reserves and the resulting reductions in actuarial estimates of
IBNR losses. During 2003, Castlewood reduced its estimate of
loss adjustment expense liabilities $10.4 million relating
to 2003 run-off activity.
Net reduction in loss and loss adjustment expense liabilities
for the year ended December 31, 2002 was
$48.8 million. In 2002, the estimate of net ultimate losses
was reduced as a result of commutation and policy buy-backs, the
settlement of losses below carried reserves and the resulting
reductions in actuarial estimates of IBNR losses.
79
The loss development tables below relate to
B.H. Acquisition. All of the numbers shown in the tables
below represent Castlewoods 45% economic interest in
B.H. Acquisition. The first table shows, in the first
section of the table, B.H. Acquisitions gross reserve for
unpaid losses (including IBNR losses) and LAE and gross reserve
for unpaid losses (including IBNR losses) excluding LAE. The
second table shows, in the first section of the table, B.H.
Acquisitions reserve for unpaid losses (including IBNR
losses) and LAE net of reinsurance and reserve for unpaid losses
(including IBNR losses) excluding LAE net of reinsurance. The
second section of each table shows B.H. Acquisitions
re-estimates of the reserve excluding LAE in later years. The
third section of each table shows the cumulative amounts of
losses paid as of the end of each succeeding year. The
cumulative redundancy (deficiency) line in each
table represents, as of the date indicated, the difference
between the latest re-estimated liability and the reserves
(excluding LAE) as originally estimated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
(in thousands of U.S.
dollars)
|
|
Gross reserve
for unpaid losses and
loss adjustment expenses
|
|
|
51,666
|
|
|
|
45,286
|
|
|
|
32,589
|
|
|
|
32,048
|
|
|
|
28,057
|
|
|
|
26,312
|
|
Less: Reserve for loss adjustment
expense
|
|
|
(4,050
|
)
|
|
|
(3,038
|
)
|
|
|
(2,025
|
)
|
|
|
(2,733
|
)
|
|
|
(1,965
|
)
|
|
|
(1,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserve for unpaid losses
|
|
|
47,616
|
|
|
|
42,248
|
|
|
|
30,564
|
|
|
|
29,315
|
|
|
|
26,092
|
|
|
|
24,739
|
|
1 Yr Later
|
|
|
46,985
|
|
|
|
32,959
|
|
|
|
29,849
|
|
|
|
29,362
|
|
|
|
27,345
|
|
|
|
|
|
2 Yrs Later
|
|
|
37,695
|
|
|
|
32,243
|
|
|
|
29,896
|
|
|
|
30,615
|
|
|
|
|
|
|
|
|
|
3 Yrs Later
|
|
|
36,980
|
|
|
|
32,290
|
|
|
|
31,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 Yrs Later
|
|
|
37,027
|
|
|
|
35,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 Yrs Later
|
|
|
38,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross paid losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Yr Later
|
|
|
4,737
|
|
|
|
2,394
|
|
|
|
534
|
|
|
|
3,270
|
|
|
|
2,606
|
|
|
|
|
|
2 Yrs Later
|
|
|
7,131
|
|
|
|
2,929
|
|
|
|
3,804
|
|
|
|
5,876
|
|
|
|
|
|
|
|
|
|
3 Yrs Later
|
|
|
7,665
|
|
|
|
6,198
|
|
|
|
6,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 Yrs Later
|
|
|
10,935
|
|
|
|
8,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 Yrs Later
|
|
|
13,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Redundancy (Deficiency)
|
|
|
9,336
|
|
|
|
8,705
|
|
|
|
(584
|
)
|
|
|
(1,300
|
)
|
|
|
(1,253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
(in thousands of U.S.
dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
reserve for unpaid
losses and loss adjustment expenses
|
|
|
37,345
|
|
|
|
32,643
|
|
|
|
21,860
|
|
|
|
19,220
|
|
|
|
17,474
|
|
|
|
25,070
|
|
Less: Reserve for loss adjustment
expense
|
|
|
(4,050
|
)
|
|
|
(3,038
|
)
|
|
|
(2,025
|
)
|
|
|
(2,733
|
)
|
|
|
(1,965
|
)
|
|
|
(1,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserve for unpaid losses
|
|
|
33,295
|
|
|
|
29,605
|
|
|
|
19,835
|
|
|
|
16,487
|
|
|
|
15,509
|
|
|
|
23,497
|
|
1 Yr Later
|
|
|
31,370
|
|
|
|
21,218
|
|
|
|
14,487
|
|
|
|
16,715
|
|
|
|
14,824
|
|
|
|
|
|
2 Yrs Later
|
|
|
22,982
|
|
|
|
15,869
|
|
|
|
14,714
|
|
|
|
16,030
|
|
|
|
|
|
|
|
|
|
3 Yrs Later
|
|
|
17,633
|
|
|
|
16,096
|
|
|
|
14,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 Yrs Later
|
|
|
17,861
|
|
|
|
15,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 Yrs Later
|
|
|
17,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net paid losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Yr Later
|
|
|
1,765
|
|
|
|
1,382
|
|
|
|
(2,001
|
)
|
|
|
1,206
|
|
|
|
(8,673
|
)
|
|
|
|
|
2 Yrs Later
|
|
|
3,147
|
|
|
|
(619
|
)
|
|
|
(795
|
)
|
|
|
(7,467
|
)
|
|
|
|
|
|
|
|
|
3 Yrs Later
|
|
|
1,146
|
|
|
|
587
|
|
|
|
(9,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
4 Yrs Later
|
|
|
2,352
|
|
|
|
(8,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 Yrs Later
|
|
|
(6,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Redundancy (Deficiency)
|
|
|
16,119
|
|
|
|
14,194
|
|
|
|
5,806
|
|
|
|
457
|
|
|
|
685
|
|
|
|
|
|
80
The following table provides a reconciliation of the liability
for losses and LAE, net of reinsurance ceded for B.H.
Acquisition. All of the numbers shown in the table below
represent Castlewoods 45% economic interest in B.H.
Acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(in thousands of
U.S. dollars)
|
|
|
Net reserves for Losses and Loss
Expenses, beginning of period
|
|
$
|
25,070
|
|
|
$
|
17,474
|
|
|
$
|
17,474
|
|
|
$
|
19,220
|
|
|
$
|
21,860
|
|
|
$
|
32,643
|
|
|
$
|
37,345
|
|
Incurred Related to Prior Years
|
|
|
34
|
|
|
|
26
|
|
|
|
(23
|
)
|
|
|
(771
|
)
|
|
|
931
|
|
|
|
(10,615
|
)
|
|
|
(1,220
|
)
|
Paids Related to Prior Years
|
|
|
(233
|
)
|
|
|
(495
|
)
|
|
|
8,673
|
|
|
|
(1,097
|
)
|
|
|
(4,556
|
)
|
|
|
(1,382
|
)
|
|
|
(1,714
|
)
|
Effect of Exchange Rate Movement
|
|
|
166
|
|
|
|
(364
|
)
|
|
|
(1,054
|
)
|
|
|
122
|
|
|
|
985
|
|
|
|
1,214
|
|
|
|
(1,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Reserves for Losses and Loss
Expenses, end of period
|
|
$
|
25,037
|
|
|
$
|
16,641
|
|
|
$
|
25,070
|
|
|
$
|
17,474
|
|
|
$
|
19,220
|
|
|
$
|
21,860
|
|
|
$
|
32,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos
and Environmental (A&E) Exposure
General
A&E Exposures
A number of Castlewoods subsidiaries wrote general
liability policies and reinsurance prior to their acquisition by
Castlewood under which policyholders continue to present
asbestos-related injury claims, claims alleging injury, damage
or clean-up costs arising from environmental pollution, and
other health hazard or mass tort claims, or A&E claims or
exposures. The vast majority of these latent claims are
presented under policies written many years ago.
There is a great deal of uncertainty surrounding A&E claims.
This uncertainty impacts the ability of insurers and reinsurers
to estimate the ultimate amount of unpaid claims and related
LAE. The majority of these claims differ from any other type of
claim because there is inadequate loss development and there is
significant uncertainty regarding what, if any, coverage exists,
to which, if any, policy years claims are attributable and
which, if any, insurers/reinsurers may be liable. These
uncertainties are exacerbated by lack of clear judicial
precedent and legislative interpretations of coverage that may
be inconsistent with the intent of the parties to the insurance
contracts and expand theories of liability. The insurance and
reinsurance industry as a whole is engaged in extensive
litigation over these coverage and liability issues and is,
thus, confronted with continuing uncertainty in its efforts to
quantify A&E exposures.
Castlewoods A&E exposure is managed out of its offices
in the United Kingdom and Rhode Island and centrally
managed from the United Kingdom. In light of the intensive claim
settlement process for these claims, which involves
comprehensive fact gathering and subject matter expertise,
management believes it is prudent to have a centrally managed
claim facility to handle A&E claims on behalf of all of
Castlewoods subsidiaries. Castlewoods A&E claims
staff, headed by a
U.S.-qualified
attorney experienced in A&E liabilities, proactively
manages, on a cost effective basis, the A&E claims submitted
to Castlewoods insurance and reinsurance subsidiaries. The
staff employs professional and disciplined claim handling
strategies to achieve favorable results for Castlewoods
insurance and reinsurance subsidiaries and its clients while
minimizing costs.
The actuarial methods used to estimate ultimate loss and LAE for
A&E exposures largely rely on benchmarking against industry
historical loss experience and estimates of industry ultimate
loss. Industry historical loss experience for
A&E exposures is taken from information published by
A.M. Best, an insurance rating agency. Estimates of
industry ultimate loss are taken from a number of sources,
including A.M. Best, and are reviewed on an on-going basis.
The relationships between various aspects of industry loss
experience and Castlewood loss experience are used to develop a
range of indications of unpaid claim liability. Estimates of
remaining liability on A&E exposures are derived separately
for each relevant Castlewood subsidiary and, for some
subsidiaries, separately
81
for distinct portfolios of exposure. The discussion that follows
describes the primary actuarial methodologies used to estimate
Castlewoods reserves for A&E exposures.
In addition to the specific considerations for each method
described below, many general factors are considered in the
application of the methods and the interpretation of results for
each portfolio of exposures. These factors include the mix of
product types (e.g. primary insurance versus reinsurance of
primary versus reinsurance of reinsurance), the average
attachment point of coverages (e.g. first-dollar primary versus
umbrella over primary versus high-excess), payment and reporting
lags related to the international domicile of Castlewood
subsidiaries, payment and reporting pattern acceleration due to
large wholesale settlements (e.g. policy buybacks
and commutations) pursued by Castlewood, lists of individual
risks remaining and general trends within the legal and tort
environments.
Paid Survival Ratio Method. In this method,
Castlewoods expected annual average payment amount is
multiplied by an expected future number of payment years to get
an indicated reserve. Castlewoods historical calendar year
payments are examined to determine an expected future annual
average payment amount. This amount is multiplied by an expected
number of future payment years to estimate a reserve. Trends in
calendar year payment activity are considered when selecting an
expected future annual average payment amount. Accepted industry
benchmarks are used in determining an expected number of future
payment years. Each year, annual payments data is updated,
trends in payments are re-evaluated and changes to benchmark
future payment years are reviewed.
Paid Market Share Method. In this method,
Castlewoods estimated market share is applied to the
industry estimated unpaid losses. The ratio of Castlewoods
historical calendar year payments to industry historical
calendar year payments is examined to estimate Castlewoods
market share. This ratio is then applied to the estimate of
industry unpaid losses. Each year, calendar year payment data is
updated (for both Castlewood and industry), estimates of
industry unpaid losses are reviewed and the selection of
Castlewoods estimated market share is revisited.
Reserve-to-Paid
Method. In this method, the ratio of estimated
industry reserves to industry
paid-to-date
losses is multiplied by Castlewoods
paid-to-date
losses to estimate Castlewoods reserves. Specific
considerations in the application of this method include the
completeness of Castlewoods
paid-to-date
loss information, the potential acceleration or deceleration in
Castlewoods payments (relative to the industry) due to
Castlewoods claims handling practices, and the impact of
large individual settlements. Each year,
paid-to-date
loss information is updated (for both Castlewood and the
industry) and updates to industry estimated reserves are
reviewed.
IBNR:Case Ratio Method. In this method, the
ratio of estimated industry IBNR reserves to industry case
reserves is multiplied by Castlewoods case reserves to
estimate Castlewood IBNR reserves. Specific considerations in
the application of this method include the presence of policies
reserved at policy limits, changes in overall industry case
reserve adequacy and recent loss reporting history for
Castlewood. Each year, Castlewood case reserves are updated,
industry reserves are updated and the applicability of the
industry IBNR:case ratio is reviewed.
Ultimate-to-Incurred
Method. In this method, the ratio of estimated
industry ultimate losses to industry
incurred-to-date
losses is applied to Castlewood
incurred-to-date
losses to estimate Castlewoods IBNR reserves. Specific
considerations in the application of this method include the
completeness of Castlewoods
incurred-to-date
loss information, the potential acceleration or deceleration in
Castlewoods incurred losses (relative to the industry) due
to Castlewoods claims handling practices and the impact of
large individual settlements. Each year
incurred-to-date
loss information is updated (for both Castlewood and the
industry) and updates to industry estimated ultimate losses are
reviewed.
The liability for unpaid losses and LAE, inclusive of A&E
reserves, reflects Castlewoods best estimate for future
amounts needed to pay losses and related LAE as of each of the
balance sheet dates reflected in the financial statements herein
in accordance with GAAP. As of December 31, 2005,
Castlewood had $313.4 million of net loss reserves for
asbestos-related claims and $70.6 million for environmental
pollution-related claims. The following table provides an
analysis of Castlewoods gross and net loss and ALAE
reserves
82
from A&E exposures at year-end 2005, 2004 and 2003 and the
movement in gross and net reserves for those years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
|
(in thousands of U.S.
dollars)
|
|
|
Provision for A&E claims and
ALAE at January 1
|
|
$
|
743,294
|
|
|
$
|
479,048
|
|
|
$
|
196,217
|
|
|
$
|
92,745
|
|
|
$
|
154,856
|
|
|
$
|
48,746
|
|
A&E losses and ALAE incurred
during the year
|
|
|
(93,705
|
)
|
|
|
(31,566
|
)
|
|
|
(4,216
|
)
|
|
|
(29,348
|
)
|
|
|
44,660
|
|
|
|
43,035
|
|
A&E losses and ALAE paid
during the year
|
|
|
(78,635
|
)
|
|
|
(69,014
|
)
|
|
|
(9,436
|
)
|
|
|
(4,087
|
)
|
|
|
(12,220
|
)
|
|
|
(4,177
|
)
|
Provision for A&E claims and
ALAE acquired during the year
|
|
|
7,125
|
|
|
|
5,489
|
|
|
|
560,729
|
|
|
|
419,738
|
|
|
|
8,921
|
|
|
|
5,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for A&E claims and
ALAE at December 31
|
|
$
|
578,079
|
|
|
$
|
383,957
|
|
|
$
|
743,294
|
|
|
$
|
479,048
|
|
|
$
|
196,217
|
|
|
$
|
92,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos continues to be the most significant and difficult mass
tort for the insurance industry in terms of claims volume and
expense. Castlewood believes that the insurance industry has
been adversely affected by judicial interpretations that have
had the effect of maximizing insurance recoveries for asbestos
claims, from both a coverage and liability perspective.
Generally, only policies underwritten prior to 1986 have
potential asbestos exposure, since most policies underwritten
after this date contain an absolute asbestos exclusion.
In recent years, especially from 2001 through 2003, the industry
has experienced increasing numbers of asbestos claims, including
claims from individuals who do not appear to be impaired by
asbestos exposure. Since 2003, however, new claim filings have
been fairly stable. It is possible that the increases observed
in the early part of the decade were triggered by various state
tort reforms (discussed immediately below). At this point,
Castlewood can not predict whether claim filings will return to
pre-2004 levels, remain stable, or begin to decrease.
Since 2001, several U.S. states have proposed, and in many
cases enacted, tort reform statutes that impact asbestos
litigation by, for example, making it more difficult for a
diverse group of plaintiffs to jointly file a single case,
reducing forum-shopping by requiring that a
potential plaintiff must have been exposed to asbestos in the
state in which
he/she files
a lawsuit, or permitting consolidation of discovery. These
statutes typically apply to suits filed after a stated date.
When a statute is proposed or enacted, asbestos defendants often
experience a marked increase in new lawsuits, as
plaintiffs attorneys seek to file suit before the
effective date of the legislation. Some of this increased claim
volume likely represents an acceleration of valid claims that
would have been brought in the future, while some claims will
likely prove to have little or no merit. As many of these claims
are still pending, Castlewood cannot predict what portion of the
increased number of claims represent valid claims. Also, the
acceleration of claims increases the uncertainty surrounding
projections of future claims in the affected jurisdictions.
During the same timeframe as tort reform, the U.S. federal
and various U.S. state governments sought comprehensive
asbestos reform to manage the growing court docket and costs
surrounding asbestos litigation, in addition to the increasing
number of corporate bankruptcies resulting from overwhelming
asbestos liabilities. Whereas the federal government has thus
far unsuccessfully pursued the establishment of a national
asbestos trust fund at an estimated cost of $140 billion,
states, including Texas and Florida, have implemented a medical
criteria approach that only permits litigation to proceed when a
plaintiff can establish and demonstrate actual physical
impairment.
83
Much like tort reform, asbestos litigation reform has also
spurred a significant increase in the number of lawsuits filed
in advance of the laws enactment. Castlewood cannot
predict whether the drop off in the number of filed claims is
due to the accelerated number of filings or an actual trend
decline in alleged asbestos injuries.
Environmental
Pollution Exposures
Environmental pollution claims represent another significant
exposure for Castlewood. However, environmental claims have been
developing as expected over the past few years as a result of
stable claim trends. Claims against Fortune 500 companies
are generally declining, and while insureds with single-site
exposures are still active, in many cases claims are being
settled for less than initially anticipated due to improved site
remediation technology and effective policy buy-backs.
Despite the stability of recent trends, there remains
significant uncertainty involved in estimating liabilities
related to these exposures. First, the number of waste sites
subject to cleanup is unknown. Approximately 1,200 sites are
included on the National Priorities List (NPL) of the United
States Environmental Protection Agency. State authorities have
separately identified many additional sites and, at times,
aggressively implement site cleanups. Second, the liabilities of
the insureds themselves are difficult to estimate. At any given
site, the allocation of remediation cost among the potentially
responsible parties varies greatly depending upon a variety of
factors. Third, as with asbestos liability and coverage issues,
judicial precedent regarding liability and coverage issues
regarding pollution claims does not provide clear guidance.
There is also uncertainty as to the federal
Superfund law itself and, at this time, Castlewood
cannot predict what, if any, reforms to this law might be
enacted by the U.S. Congress, or the effect of any such
changes on the insurance industry.
Other
Latent Exposures
While Castlewood does not view health hazard exposures such as
silica and tobacco as becoming a material concern, recent
developments in lead litigation have caused Castlewood to watch
these matters closely. Recently, municipal and state governments
have had success, using a public nuisance theory, pursuing the
former makers of lead pigment for the abatement of lead paint in
certain home dwellings. As lead paint was used almost
exclusively into the early 1970s, large numbers of old
housing stock contain lead paint that can prove hazardous to
people and, particularly, children. Although governmental
success has been limited thus far, Castlewood continues to
monitor developments carefully due to the size of the potential
awards sought by plaintiffs.
Investments
Investment
Strategy and Guidelines
Castlewood derives a significant portion of its income from its
invested assets. As a result, its operating results depend in
part on the performance of its investment portfolio. Because of
the unpredictable nature of losses that may arise under
Castlewoods insurance and reinsurance subsidiaries
insurance or reinsurance policies and as a result of
Castlewoods opportunistic commutation strategy,
Castlewoods liquidity needs can be substantial and may
arise at any time. Castlewood generally follows a conservative
investment strategy designed to emphasize the preservation of
its invested assets and provide sufficient liquidity for the
prompt payment of claims and settlement of commutation payments.
Castlewoods cash and cash equivalent portfolio is mainly
comprised of high-grade fixed deposits and commercial paper with
maturities of less than three months, liquid reserve funds and
money market funds. Castlewoods investment portfolio
consists primarily of high investment grade-rated, liquid,
fixed-maturity securities of short-to-medium term duration and
an enhanced cash mutual fund 96.3% of its total
investment portfolio consists of investment grade securities. In
addition, Castlewood has investments in a limited partnership,
and has committed to invest in two private investment funds that
are non-investment grade securities these
investments accounted for 3.7% of Castlewoods total
investment portfolio as of March 31, 2006. Assuming the
commitments to the two private
84
investment funds were fully funded as of March 31, 2006 out
of cash balances on hand at that time, the percentage of
investments held in other than investment grade securities would
increase to 13.7%.
Castlewood strives to structure its investments in a manner that
recognizes its liquidity needs for future liabilities. In that
regard, Castlewood attempts to correlate the maturity and
duration of its investment portfolio to its general liability
profile. If Castlewoods liquidity needs or general
liability profile unexpectedly change, it may not continue to
structure its investment portfolio in its current manner and
would adjust as necessary to meet new business needs.
Castlewoods investment performance is subject to a variety
of risks, including risks related to general economic
conditions, market volatility, interest rate fluctuations,
liquidity risk and credit and default risk. Interest rates are
highly sensitive to many factors, including governmental
monetary policies, domestic and international economic and
political conditions and other factors beyond Castlewoods
control. A significant increase in interest rates could result
in significant losses, realized or unrealized, in the value of
Castlewoods investment portfolio. Alternative investments,
such as the commitment to the J.C. Flowers Fund, subject
Castlewood to restrictions on redemption, which may limit its
ability to withdraw funds for some period of time after the
initial investment. The values of, and returns on, such
investments may also be more volatile.
Investment
Committee and Investment Manager
The investment committee of Castlewoods board of directors
supervises its investment activity. The investment committee
regularly monitors Castlewoods overall investment results
which it ultimately reports to the board of directors.
Castlewood has engaged Goldman Sachs to provide discretionary
investment management services. Castlewood has agreed to pay
investment management fees based on the month-end market values
of a portion of the investments in the portfolio. The fees,
which vary depending on the amount of assets under management,
are included in net investment income. Castlewood also pays
investment advisory fees to Enstar. These fees are also included
as part of net investment income.
Castlewoods
Portfolio
Accounting
Treatment
Castlewoods investments primarily consist of fixed income
securities. Castlewoods fixed income investments are
comprised of both available-for-sale investments and held to
maturity investments as defined in FAS 115,
Accounting for Certain Investments in Debt and Equity
Securities. Available-for-sale investments are carried at
their fair market value on the balance sheet date and held to
maturity investments are carried at their amortized cost.
Unrealized gains and losses on available-for-sale investments,
which represent the difference between the amortized cost and
the fair market value of securities, are reported in the balance
sheet, as accumulated other comprehensive income in a separate
component of shareholders equity.
Composition
as of March 31, 2006
As of March 31, 2006, Castlewoods aggregate investe