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)

 

 

 

 

 

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 registrant’s 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:

 

 

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

 

 

 

 

 

 

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.

 

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, Enstar’s shareholders must approve the merger agreement and the transactions contemplated by the merger agreement. As of May 23, 2006, Enstar’s 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.

 

Enstar’s annual meeting was originally scheduled for June 2, 2006. On May 21, 2006, Enstar’s board of directors voted to postpone the June 2, 2006 annual meeting. Enstar’s 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. Enstar’s 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:

 

 

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, Enstar’s 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. Enstar’s 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.

 

Enstar’s 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 Enstar’s 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.

 

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 Enstar’s 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.

 

 

SUMMARY

“Annual Meeting”		Enstar’s 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”		U.S. Internal Revenue Code of 1986, as amended.
“Commission”		U.S. Securities and Exchange Commission.
“Direct Foreign Shareholder Group”		A shareholder or group of commonly controlled shareholders of New Enstar that are not U.S. persons.
“Enstar”		The Enstar Group, Inc., a Georgia corporation, and its subsidiaries, prior to the merger.
“Exchange Act”		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. O’Shea, 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.

 

The Companies (see “Information About Castlewood” on page 71 and “Information About Enstar” on page 125)

 

The Proposed Merger (see page 41)

*		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.

*		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 Enstar’s bye-laws. Inactive subsidiaries of Enstar USA, Inc. are omitted.

 

Recommendation of Enstar’s Board of Directors Relating to the Merger (see page 44)

 

Reasons for the Merger (see page 43)

	•	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 Enstar’s shareholders;
	•	provide a positive economic result for Enstar’s 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 Enstar’s shareholders to participate in approximately 48.7% (on an undiluted basis) of the earnings and cash flows of New Enstar;
	•	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;
	•	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;
	•	enhance New Enstar’s access to capital as a result of both its larger asset base and simplified ownership structure;
	•	expand the opportunities for New Enstar to deploy its capital in attractive investments; and
	•	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

 

The Enstar Dividend

 

Treatment of Enstar Stock Options and Restricted Stock Units (see page 53)

 

Ownership of New Enstar after the Merger

 

Listing of New Enstar Ordinary Shares

 

Effects of the Merger on the Rights of Enstar Shareholders

 

Risk Factors (see page 19)

 

Conditions to the Consummation of the Merger (see page 58)

	•	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;
	•	the absence of any law, order or injunction prohibiting consummation of the merger in the United States, Bermuda or the European Union;
	•	the Commission having declared effective the Castlewood registration statement of which this proxy statement/prospectus is a part;
	•	the approval for listing by Nasdaq of the New Enstar ordinary shares to be issued in the merger, subject to official notice of issuance;

	•	the approval of the merger agreement and the transactions contemplated by the merger agreement by the Enstar shareholders;
	•	the approval of the recapitalization agreement and certain actions contemplated by the recapitalization agreement by the Castlewood shareholders;
	•	the completion of the recapitalization of Castlewood pursuant to the recapitalization agreement (see “Material Terms of Related Agreements — Recapitalization Agreement” beginning on page 62);
	•	no event having occurred which would trigger a distribution under Enstar’s shareholders rights plan;
	•	the receipt by Enstar and Castlewood of an opinion of Enstar’s tax counsel to the effect that the merger should qualify as a reorganization within the meaning of section 368(a) of the Code;
	•	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
	•	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 party’s covenants regarding the issuance of securities, and Enstar’s 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)

	•	by mutual written consent of Enstar and Castlewood;
	•	by either Enstar or Castlewood:

	•	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 party’s failure to fulfill its material obligations under the merger agreement;
	•	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
	•	if Enstar’s shareholders fail to approve the merger agreement and the transactions contemplated by the merger agreement.

	•	by Castlewood:

	•	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:

	•	is incapable of being cured by or remains uncured prior to January 31, 2007; or
	•	would result in the failure of certain closing conditions to the merger being satisfied; or

	•	if:

	•	Enstar or Enstar’s 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;
	•	Enstar’s board of directors changes its recommendation to the Enstar shareholders to approve the merger agreement and the transactions contemplated by the merger agreement; or
	•	Enstar fails to call the annual meeting of shareholders to vote on the merger by November 23, 2006; or

	•	by Enstar:

	•	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:

	•	is incapable of being cured by or remains uncured prior to January 31, 2007; or
	•	would result in the failure of certain closing conditions to the merger being satisfied; or

	•	if there has been a change in the recommendation by Enstar’s board of directors in respect of the merger agreement and the transactions contemplated by the merger agreement and:

	•	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
	•	Castlewood, within five business days of receiving such notice from Enstar, does not make an offer that Enstar’s board of directors determines is at least as favorable to the Enstar shareholders as the superior proposal Enstar received from the third party.

 

Support Agreement (see page 66)

 

Recapitalization Agreement (see page 62)

	•	a recapitalization of Castlewood in which all issued shares will be exchanged for newly-created ordinary shares;
	•	the appointment of the board of directors of New Enstar immediately following the merger;
	•	the repurchase of certain shares of Castlewood from Trident;
	•	payments to certain officers and employees of Castlewood;
	•	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
	•	the adoption of new bye-laws that will include, among other things, certain restrictions on transfers and voting of the ordinary shares.

 

Other Related Agreements

Regulatory Approvals (see page 48)

Material U.S. Federal Income Tax Consequences of the Merger (see page 46)

	•	the exercise of options to purchase Enstar common stock before the effective time of the merger;
	•	the exchange of options to purchase Enstar common stock for options to purchase New Enstar ordinary shares in the merger; or

	•	the exchange of Enstar restricted stock units for a right to receive restricted stock units in respect of New Enstar ordinary shares.

Accounting Treatment of the Merger (see page 46)

No Dissenters’ Rights

Information about the Enstar Annual Meeting and Voting (see page 34)

	•	to consider and vote upon a proposal to approve the merger agreement and the transactions contemplated by the merger agreement;
	•	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;
	•	to ratify the appointment of Deloitte & Touche LLP as the independent registered public accounting firm of Enstar to serve for 2006; and
	•	to transact such other business as may properly come before the Annual Meeting or any adjournment thereof.

 

Enstar Shareholder Votes Required

shares of Enstar common stock in favor of the merger agreement and the transactions contemplated by the merger agreement.

 

When you consider the recommendation of Enstar’s 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 Enstar’s directors and executive officers have interests in the merger that are different from, or in addition to, yours. These interests include:

 

 

Enstar’s board of directors considered these interests in making its recommendation.

Recent Developments (see page 98)

 

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 company’s 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.

 

The following selected historical financial information of Castlewood for each of the past five fiscal years has been derived from Castlewood’s 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 Castlewood’s unaudited financial statements which include, in management’s 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 management’s 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 Castlewood’s acquisitions.

 

 

		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.

 

Enstar Summary Historical Financial Data

 

		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.

 

Summary Unaudited Pro Forma Condensed Combined Financial Data

		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

Comparative Per Share Information

		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

 

Dividend Information

 

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 Enstar’s 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 Enstar’s 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.

 

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 Enstar’s and Castlewood’s 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.

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 shareholder’s adjusted tax basis in the shares of Enstar common stock exchanged therefor.

 

Certain of Enstar’s 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 Enstar’s 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 Enstar’s 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 Enstar’s 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:

 

 

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.

 

If we are unable to implement our business strategies, our business and financial condition may be adversely affected.

 

New Enstar’s 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 Castlewood’s 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

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.

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 industry’s profitability may be affected significantly by:

 

 

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 authority’s 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.

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:

 

 

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 company’s 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

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. O’Shea 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, O’Shea 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 resident’s 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 resident’s certificate) is available who meets the minimum standard requirements for the advertised position. The Bermuda government’s 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

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.

 

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 Enstar’s common stock historically has been thinly traded, we expect that, at least initially, New Enstar’s 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 holder’s 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 Trident’s 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:

 

 

 

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 O’Shea 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 O’Shea 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 O’Shea 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 O’Shea 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.

 

Enstar’s 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

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 jurisdiction’s 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 Enstar’s Share Capital — Differences in Corporate Law” beginning on page 180 for more information on the differences between Bermuda and Georgia corporate laws.

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.

 

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 subsidiary’s 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.

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 shareholder’s 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 shareholder’s share of the corporation’s 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

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 Finance’s 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.

 

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:

 

 

 

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.

 

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.

 

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.

 

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 Enstar’s common stock on the Record Date.

 

As of May 23, 2006, Enstar’s 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.

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 Enstar’s 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.

 

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 Enstar’s 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.

 

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 ENSTAR’S SHAREHOLDERS APPROVE THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT.

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.”

 

Under Georgia law, Enstar shareholders are not entitled to dissenters’ rights in connection with the merger.

 

In accordance with the bylaws of Enstar, Enstar’s board of directors currently consists of seven members. Enstar’s articles of incorporation divide Enstar’s 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 director’s 70th birthday.

 

Enstar’s 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 Enstar’s board of directors either (1) to elect a substitute nominee recommended by Enstar’s board of directors, (2) to allow the vacancy created thereby to remain open until filled by Enstar’s 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 Enstar’s board of directors in accordance with the merger agreement after the merger.

 

Recommendation of Enstar’s Board of Directors

 

ENSTAR’S 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.

 

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 Enstar’s 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.

 

Enstar’s 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 Enstar’s 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

 

Enstar’s Board of Directors

 

Enstar’s 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. Enstar’s 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 Nasdaq’s financial knowledge requirements. Enstar’s 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 Nasdaq’s professional experience requirements. Enstar’s 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. Enstar’s Audit Committee is also responsible for overseeing Enstar’s financial reporting and accounting practices and monitoring the adequacy of internal accounting, compliance and control systems. Enstar’s 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 Enstar’s Compensation Committee until Mr. Curl was appointed to the Compensation Committee in June 2005. Other than Mr. Flowers, each director who served on Enstar’s 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). Enstar’s 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 Enstar’s executive officers and for administering Enstar’s stock option plans.

 

Enstar does not have a nominating committee or a nominating committee charter. It is the position of Enstar’s 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, Enstar’s board of directors adopted a resolution regarding the nomination of directors. Pursuant to such resolution, director nominees must be recommended to Enstar’s board of directors by a majority of the “independent directors” as such term is defined in Nasdaq Marketplace Rule 4200(a)(15). Enstar’s 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 director’s overall service to Enstar during such director’s 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 Enstar’s board of directors unanimously agreeing on all actions taken in this regard.

 

During 2005, Enstar’s board of directors held a total of five meetings, Enstar’s Audit Committee held a total of four meetings and Enstar’s Compensation Committee held one meeting. In addition, the independent directors met in an executive session of Enstar’s board of directors a total of four times. All directors attended all of the meetings of Enstar’s 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 Enstar’s annual meetings. Except for Gregory L. Curl, all directors attended the 2005 annual meeting of shareholders.

Communications with Enstar’s Board of Directors

 

Shareholders may communicate with Enstar’s 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. Enstar’s Treasurer will receive the correspondence and forward it to Enstar’s Chairman of the Audit Committee or to any individual director or directors to whom the communication is directed. Enstar’s 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 Enstar’s outside directors were payable at the election of the director either in cash or in stock units under Enstar’s 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 director’s 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.

 

Enstar’s 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.

 

ENSTAR’S 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.

 

The following table sets forth the aggregate fees billed to Enstar for the fiscal years ended December 31, 2005 and December 31, 2004 by Enstar’s principal accounting firm, Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates, or collectively, Deloitte.

 

 

 

 

Pre-Approval of Audit and Permissible Non-Audit Services

 

The amended and restated charter of the Audit Committee, adopted on May 29, 2003, charges Enstar’s Audit Committee with review of all aspects of Enstar’s 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 Enstar’s 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.

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. Silvester’s 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. O’Shea, 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 Trident’s interest in such a transaction as proposed. During this time, Mr. Silvester and Mr. O’Shea also spoke with Mr. Carey and Mr. Davis about Trident’s possible interest in such a transaction.

 

During January 2006, Messrs. Flowers, Oros and Frazer and Messrs. Silvester, O’Shea 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, O’Shea, 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. O’Shea 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, Enstar’s 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 Enstar’s outside legal counsel, Parker, Hudson, Rainer & Dobbs, and special legal counsel, Debevoise & Plimpton LLP, or Debevoise, reviewed in detail the board’s 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 Castlewood’s ordinary shares in exchange for its existing outstanding shares, and the consideration to be issued to the shareholders of Enstar.

 

On April 26, 2006, Enstar’s 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