As filed with the Securities and Exchange Commission on November 6, 2006

Registration No. 333-135699

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

AMENDMENT NO. 2

to

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

 

 

 

 

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 NOVEMBER 6, 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, a partially-owned affiliate of Enstar engaged in the acquisition and management of insurance and reinsurance companies in run-off and the provision of management, consultancy and other services to the insurance and reinsurance industry, have agreed on a merger transaction involving the two companies. If the merger agreement and the transactions contemplated by the merger agreement are approved and the merger is consummated:

 

 

 

 

 

 

Castlewood has applied 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, including all its independent 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. In addition, Enstar’s board of directors, with all of Enstar’s directors present and voting, 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. Some of Enstar’s directors and executive officers have interests in the merger and relationships that are different from, or in addition to, yours. These interests and relationships are discussed in “Interests of Certain Persons in the Merger” beginning on page 58 and “Certain Relationships and Related Transactions” beginning on page 178 of the enclosed proxy statement/prospectus. In order to consummate the merger, Enstar’s shareholders must approve the merger agreement and the transactions contemplated by the merger agreement.

 

As of September 28, 2006, Enstar’s directors and executive officers owned 1,904,753 shares of Enstar common stock, representing approximately 33.2% 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, at which shareholders were to elect directors and ratify the appointment of Enstar’s independent registered public accounting firm, 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 so that the merger transaction could be described to Enstar shareholders and voted on by them at the same meeting. This proxy statement/prospectus describes the merger transaction.

 

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 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 the approval of 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 20 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 September 28, 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, with all of Enstar’s directors present and voting, has unanimously approved the merger agreement and the transactions contemplated by the merger agreement and unanimously recommends that the shareholders of Enstar vote for the approval of the merger agreement and the transactions contemplated by the merger agreement. The board of directors of Enstar also recommends that you vote for T. Whit Armstrong and T. Wayne Davis to hold office until the 2009 annual meeting of shareholders, or until their successors are duly elected and qualified, and that you vote for the proposal to ratify the appointment of Deloitte & Touche LLP as the independent registered public accounting firm of Enstar for 2006.

 

Your attention is directed to the proxy statement/prospectus submitted with this notice. This notice is being given at the direction of the board of directors of Enstar.

 

By Order of the Board of Directors

 

 

Cheryl D. Davis

Chief Financial Officer, Vice-President of

Corporate Taxes and Secretary

 

Montgomery, Alabama

          , 2006

 

WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. IF YOU ATTEND THE MEETING, YOU MAY REVOKE THE PROXY AND VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY.

 

Table of Contents

 

 

NOTE ON REFERENCES TO ADDITIONAL INFORMATION

 

THIS PROXY STATEMENT/PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND FINANCIAL INFORMATION ABOUT THE ENSTAR GROUP, INC. THAT MAY NOT BE INCLUDED IN OR DELIVERED WITH THIS DOCUMENT. THIS INFORMATION IS AVAILABLE WITHOUT CHARGE TO SHAREHOLDERS OF ENSTAR AT A WEBSITE MAINTAINED BY THE SECURITIES AND EXCHANGE COMMISSION AT HTTP://WWW.SEC.GOV, AS WELL AS UPON WRITTEN OR ORAL REQUEST TO:

 

THE ENSTAR GROUP, INC.

CORPORATE SECRETARY

401 MADISON AVENUE

MONTGOMERY, ALABAMA 36104

(334) 834-5483

 

IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY          , 2006 IN ORDER TO RECEIVE THEM BEFORE THE ANNUAL MEETING.

 

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

 

The Companies (see “Information About Castlewood” on page 79 and “Information About Enstar” on page 155)

The Proposed Merger (see page 43)

*		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 51)

Interests of Certain Persons in the Merger; Certain Relationships and Related Transactions (see pages 58 and 178)

	•	A new employment agreement between New Enstar, Castlewood (US) Inc., a subsidiary of Castlewood, and Mr. Oros, Enstar’s President and Chief Operating Officer, that will take effect at the effective time of the merger. Under the terms of Mr. Oros’ employment agreement, he will be paid a salary of $282,500 and will be entitled to participate in New Enstar’s incentive compensation programs. He will also receive other employee benefits consistent with those provided to New Enstar’s other executive officers. New Enstar expects that Mr. Oros will spend approximately 50% of his working time on matters related to New Enstar, but there is no minimum work commitment set forth in his employment agreement.

	•	Accelerated vesting of 80,000 options granted to certain Enstar directors and officers pursuant to one of Enstar’s equity incentive plans. Of these options, options to purchase 30,000 shares of Enstar common stock are held by Mr. Frazer, Enstar’s Chief Executive Officer, and options to purchase 50,000 shares of Enstar common stock are held by Mr. Oros.

	•	A severance payment of $350,000 to Mr. Frazer under his existing employment agreement.

	•	A tax indemnification by Castlewood of Mr. Flowers, a director of Enstar, pursuant to which Castlewood will reimburse and indemnify Mr. Flowers for, and hold him harmless on an after-tax basis against, any increase in Mr. Flowers’ U.S. federal, state or local income tax liability (including any interest or penalties relating thereto), and reasonable attorneys’ fees, incurred by Mr. Flowers as a result of certain dispositions by Enstar or New Enstar of shares or assets of Enstar, within the period beginning immediately after the effective time of the merger and ending five years after the last day of the taxable year that includes the effective time.

	•	Registration rights expected to be granted by New Enstar to Mr. Flowers and other holders of New Enstar ordinary shares, pursuant to which Mr. Flowers and such other holders may request after the first anniversary of the merger that New Enstar effect the registration under the U.S. Securities Act of 1933, as amended, or the Securities Act, of certain of their ordinary shares of New Enstar, and registration rights expected to be granted by New Enstar to the other directors of Enstar pursuant to which they may participate in certain registration statements filed by New Enstar under the Securities Act and sell their ordinary shares of New Enstar acquired in the merger pursuant to such registration statements.

	•	Rights of T. Whit Armstrong and T. Wayne Davis, directors of Enstar, to each sell up to 25,000 ordinary shares of New Enstar to New Enstar.

	•	Service of the current Enstar directors on New Enstar’s board of directors following the merger.

	•	Indemnification by New Enstar of past and present directors and officers of Enstar for losses in connection with any action arising out of or pertaining to acts or omissions, or alleged acts or omissions, by them in their capacities as such at or before the effective time of the merger.

	•	Payments on the first anniversary of the merger to Ms. Davis, the Chief Financial Officer, Vice President of Corporate Taxes and Secretary of Enstar, and Amy Dunaway, the Treasurer and Controller of Enstar, in an amount equal to 75% of their annual salary in consideration for their waiver of certain severance payouts to which they are entitled in connection with the merger pursuant to their severance benefits agreements with Enstar.

	•	having Messrs. Flowers, Frazer and Oros assume principal responsibility for the negotiation of the merger, given their expertise, experience and familiarity with Castlewood, the relative immateriality, in the board’s view, of such interests and relationships to them personally, when compared to their interests as Enstar shareholders, and that their interests as Enstar shareholders were aligned with those of the other Enstar shareholders;

	•	having all of the Enstar directors participate in the board’s deliberations concerning the merger, given the directors’ expertise, experience and familiarity with Castlewood, the relative immateriality, in the board’s view, of such interests and relationships to them personally, the fact that Georgia law permits interested directors to participate in deliberations so long as their interests are disclosed and the fact that, in the board’s view, with disclosure, the board would be able to appropriately weigh the views expressed by interested directors and not be inappropriately influenced; and

	•	having all of the Enstar directors vote on the merger, given the board’s desire to know, and the advisability of being able to advise the shareholders of, the positions of all directors regarding the merger, the relative immateriality, in the board’s view, of such interests and relationships to them personally, the fact that Georgia law permits interested directors to vote so long as their interests are disclosed, and the fact that the merger would only be approved if a majority of the disinterested directors approved the merger.

Reasons for the Merger (see page 50)

	•	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. Castlewood’s current ownership structure consists of several classes of shares that provide different voting rights to shareholders, with Enstar directly (and the Enstar shareholders indirectly) owning approximately 32.0% of the economic interest and 50.0% of the voting interest in Castlewood. Each of Enstar, Trident II, L.P. and certain of its affiliates, or Trident, and members of Castlewood senior management who own Castlewood shares has the right, among other things, to nominate a certain number of members of Castlewood’s board of directors. Major transactions are required to be approved by one or more directors representing each of Enstar, Trident and Castlewood senior management. The merger will eliminate these approval rights and is expected to better align the incentives of the management of Castlewood and Enstar by having all parties own shares with the same rights.

	•	Provide a positive economic result for Enstar’s shareholders, as a result of a one-time $3.00 per share dividend 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. As noted above, Enstar’s shareholders currently own an approximately indirect 32.0% economic interest in Castlewood. Enstar’s board of directors determined that the value to Enstar’s shareholders of converting their approximately 32.0% indirect economic interest in Castlewood into an approximately 48.7% direct interest in New Enstar exceeded the value of Enstar’s other assets that would be effectively transferred to New Enstar by virtue of the merger.

	•	Simplify the ownership and management structure of Castlewood, Enstar and B.H. Acquisition Ltd., or 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. In particular, the board of directors of Enstar believes the merger will:

	•	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.

	•	The costs to be incurred in connection with the merger, including customary transaction expenses and the diversion of management and employee attention during the period after the signing of the merger agreement.

	•	The risk that the merger might not be completed or that the closing might be delayed, which could result in Enstar incurring the costs described above but not realizing the potential benefits of the merger, or in any event incurring increases in such costs.

	•	The other risks described in “Risk Factors” beginning on page 20. The Enstar board of directors takes notice of such risk factors generally in the course of its oversight of Enstar’s business; the following risks were specifically discussed during the board’s deliberations regarding the merger;

	•	the risk that the merger will result in the holders of Enstar’s common stock owning a smaller percentage of New Enstar than they currently own of Enstar, which could reduce their ability to affect changes to New Enstar’s board of directors, management and policies;

	•	the risk that regulatory agencies may delay or impose conditions on approval of the merger, which may increase the costs or diminish the anticipated benefits of the merger;

	•	the risk that 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; and

	•	the risk that certain of Enstar’s officers and directors have interests in the merger and relationships that may have influenced their approval of the merger agreement and the transactions contemplated by the merger agreement.

What Enstar Shareholders Will Receive in the Merger

The Enstar Dividend

Treatment of Enstar Stock Options and Restricted Stock Units (see page 61)

Ownership of New Enstar after the Merger

Listing of New Enstar Ordinary Shares

 

Effects of the Merger on the Rights of Enstar Shareholders

	•	the fact that such influence must be exercised through Enstar,

	•	the fact that Enstar does not own a majority of the Castlewood voting shares, and

	•	the fact that Trident and the Castlewood management shareholders have substantial governance rights under the Castlewood shareholders agreement,

Risk Factors (see page 20)

 

Conditions to the Consummation of the Merger (see page 66)

	•	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 U.S. Securities and Exchange Commission, or 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, dated as of May 23, 2006, among Castlewood, Enstar, Trident, Dominic F. Silvester and certain other shareholders of Castlewood, or the recapitalization agreement, and certain actions contemplated by the recapitalization agreement by the Castlewood shareholders, which approval has been obtained;

	•	the completion of the recapitalization of Castlewood pursuant to the recapitalization agreement (see “Material Terms of Related Agreements — Recapitalization Agreement” beginning on page 70);

	•	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 U.S. Internal Revenue Code of 1986, as amended, or 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 68)

	•	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 74)

 

Recapitalization Agreement (see page 70)

	•	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 55)

Material U.S. Federal Income Tax Consequences of the Merger (see page 53)

	•	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 53)

No Dissenters’ Rights

Information about the Enstar Annual Meeting and Voting (see page 36)

	•	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

Recent Developments (see page 116)

 

SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

 

Castlewood Summary Historical Financial Data

		Three Months Ended
		June 30,								Six Months Ended June 30,								Year Ended December 31,
		2006				2005				2006				2005				2005				2004				2003				2002				2001(1)
		(in thousands of U.S. dollars, except per share data)
Summary Statement of Earnings Data:
Consulting fee income		$	5,251			$	3,857			$	11,600			$	8,345			$	22,006			$	23,703			$	24,746			$	20,627			$	983
Net investment income and net realized gain			11,066				8,255				20,726				13,283				29,504				10,502				7,072				8,927				990
Net reduction in loss and loss adjustment expense liabilities			4,323				3,873				6,780				5,423				96,007				13,706				24,044				48,758				90
Total other expenses			(3,940	)			(12,268	)			(14,343	)			(22,058	)			(57,299	)			(35,160	)			(21,782	)			(27,772	)			(2,859	)
Minority interest			(4,974	)			(612	)			(5,186	)			(991	)			(9,700	)			(3,097	)			(5,111	)			0				0
Share of income of partly owned companies			151				32				263				79				192				6,881				1,623				10,079				389
Net income from continuing operations			11,877				3,137				19,840				4,081				80,710				16,535				30,592				60,619				(407	)
Extraordinary gain —
Negative goodwill (net of minority interest)			0				0				4,347				0				0				21,759				0				0				0
Net income		$	11,877			$	3,137			$	24,187			$	4,081			$	80,710			$	38,294			$	30,592			$	60,619			$	(407	)
Per Share Data(2):
Income per ordinary share before extraordinary gain — basic		$	644.05			$	171.62			$	1,075.86			$	223.26			$	4,397.89			$	914.49			$	1,699.56			$	3,367.72			$	(22.61	)
Extraordinary gain — basic			—				—				235.72				—				—				1,203.42				—				—				—
Net income per ordinary share — basic		$	644.05			$	171.62			$	1,311.58			$	223.26			$	4,397.89			$	2,117.91			$	1,699.56			$	3,367.72			$	(22.61	)

		Three Months Ended
		June 30,								Six Months Ended June 30,								Year Ended December 31,
		2006				2005				2006				2005				2005				2004				2003				2002				2001(1)
		(in thousands of U.S. dollars, except per share data)
Income per ordinary share before extraordinary gains — diluted		$	633.17			$	167.32			$	1,057.68			$	217.66			$	4,304.30			$	906.13			$	1,699.56			$	3,367.72			$	(22.61	)
Extraordinary gain — diluted			—				—				231.74				—				—				1,192.40				—				—				—
Net income per ordinary share — diluted		$	633.17			$	167.32			$	1,289.42			$	217.66			$	4,304.30			$	2,098.53			$	1,699.56			$	3,367.72			$	(22.61	)
Weighted average ordinary shares outstanding — basic			18,441				18,279				18,441				18,279				18,352				18,081				18,000				18,000				18,000
Weighted average ordinary shares outstanding — diluted			18,758				18,749				18,758				18,749				18,751				18,248				18,000				18,000				18,000
Cash dividends paid per share		$	1,552.67			$	—			$	1,552.67			$	—			$	—			$	645.83			$	4,483.41			$	—			$	—

		As of
		June 30,				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		$	513,893			$	345,329			$	350,456			$	127,228			$	85,916			$	71,906
Investments			592,213				539,568				591,635				268,417				258,429				175,068
Reinsurance recoverable			316,571				250,229				341,627				175,091				122,937				238,162
Total assets			1,483,539				1,199,963				1,347,853				632,347				514,597				527,845
Reserves for losses and loss adjustment expenses			1,025,971				806,559				1,047,313				381,531				284,409				419,717
Total shareholder equity			257,760				260,906				177,338				147,616				167,473				63,696
Book Value per Share:
Basic			13,760.41				14,189.70				9,721.41				8,200.89				9,304.06				3,538.67
Diluted			13,610.73				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								Six Months Ended
		June 30,								June 30,								Year Ended December 31,
		2006				2005				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		$	1,132			$	796			$	2,960			$	835			$	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		$	1,132			$	796			$	3,835			$	835			$	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		$	0.20			$	0.14			$	0.53			$	0.15			$	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		$	0.20			$	0.14			$	0.69			$	0.15			$	3.45			$	1.89			$	2.42			$	4.12			$	0.30
Weighted average shares outstanding — basic			5,604,110				5,517,909				5,561,247				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		$	0.19			$	0.14			$	0.50			$	0.14			$	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		$	0.19			$	0.14			$	0.65			$	0.14			$	3.25			$	1.79			$	2.25			$	3.91			$	0.29
Weighted average shares outstanding — diluted			5,930,382				5,845,621				5,906,240				5,847,330				5,856,144				5,800,993				5,881,410				5,753,553				5,449,627
Cash dividends paid per share			—				—				—				—				—				—				—				—				—

		As of June 30,				As of December 31,
		2006				2005				2004				2003				2002				2001
		(in thousands of U.S. dollars)
Balance Sheet Data:
Total assets		$	195,854			$	185,220			$	158,977			$	152,620			$	128,609			$	99,621
Total liabilities			18,530				20,097				12,803				6,688				8,360				1,964
Minority interest			—				—				—				11,449				—				—
Shareholders’ equity			177,324				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 stockholders 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

		Six Months				Year Ended
		Ended June 30, 2006				December 31, 2005
		(in thousands of U.S. dollars)
Income
Income before extraordinary gain		$	19,490			$	81,859
Cash dividends paid per share			—				—

		At June 30,
		2006
Balance sheet data:
Total assets		$	1,629,273
Total liabilities			1,252,331
Minority interest			61,212
Shareholders’ equity			315,730

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
Six months ended June 30, 2006
Basic		$	1,311.58			$	0.69			$	1.65			$	1.65
Diluted		$	1,289.42			$	0.65			$	1.57			$	1.57
Book value per ordinary share as of June 30, 2006
Basic		$	13,760.41			$	30.90			$	26.79			$	26.79
Diluted		$	13,610.73			$	29.55			$	25.43			$	25.43
Cash dividends per ordinary share
Year ended December 31, 2005		$	—			$	—			$	—			$	—
Six months ended June 30, 2006 —
Basic(2)		$	1,552.67			$	—			$	3.84			$	3.84
Diluted(2)		$	1,552.67			$	—			$	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 in the pro forma column include the proposed $3.00 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 34, 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.

 

The merger will result in the holders of Enstar’s common stock owning a smaller percentage of New Enstar than they currently own of Enstar, which could reduce their ability to affect changes to New Enstar’s board of directors, management and policies.

 

As a result of the merger, the non-affiliated public shareholders of Enstar will own a 32.5% interest in New Enstar rather than a 66.8% interest in Enstar. Given the ownership of New Enstar by its officers, directors and their respective affiliates, this diminution in ownership may result in the former non-affiliated public shareholders of Enstar having a significantly reduced ability to effect changes in New Enstar’s board of directors, management and policies. For example, under New Enstar’s second amended and restated bye-laws many corporate actions require the approval of the holders of a majority of New Enstar’s ordinary shares and such actions may be approved without the approval of New Enstar’s non-affiliated public shareholders.

 

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 and relationships 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 New Enstar, Castlewood (US) Inc., a subsidiary of 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 under his existing employment agreement; 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 “Interests of Certain Persons in the Merger” beginning on page 58. In addition, each of Enstar and Castlewood has entered into transactions with companies and partnerships that are affiliated with Messrs. Flowers and/or Oros, and an entity of which Mr. Flowers is a director and the largest shareholder owns a minority interest in a subsidiary of Castlewood. See “Certain Relationships and Related Transactions” beginning on page 178. While Enstar does not believe that such interests and relationships adversely affected the efforts of representatives of Enstar to negotiate favorable merger terms, or the terms that were ultimately negotiated, you should take into account the possibility that such efforts or terms were adversely affected by such interests or relationships.

 

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, many of which are beyond our control.

 

The effects of emerging claims and coverage issues may result in increased provisions for loss reserves and reduced profitability in New Enstar’s insurance and reinsurance subsidiaries. Such adverse business issues may also reduce the level of incentive-based fees generated by New Enstar’s consulting operations. Adverse global economic conditions, such as rising interest rates and volatile foreign exchange rates, may cause widespread failure of our insurance and reinsurance subsidiaries’ reinsurers ability to satisfy their obligations as well as failure of companies to meet their obligations under debt instruments held by our subsidiaries. If the run-off industry becomes more attractive to investors, competition for run-off acquisitions and management and consultancy engagements may increase and, therefore, reduce our ability to continue to make profitable acquisitions or expand our consultancy operations. 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. Our run-off business differs from the business of traditional insurance and reinsurance underwriting in that our insurance and reinsurance companies in run-off no longer underwrite new policies and are subject to the risk that their stated provisions for losses and loss adjustment expense will not be sufficient to cover future losses and the cost of run-off. Because our companies in run-off no longer collect underwriting premiums, our sources of capital to cover losses are limited to our stated reserves, reinsurance coverage and retained earnings. As of June 30, 2006, our gross reserves for losses and loss adjustment expense totaled $1.0 billion, and our reinsurance receivables totaled $316.6 million.

 

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 and 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 insurance and reinsurance companies 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, which could adversely impact our financial results, and we may not win future engagements to provide these management services, which could slow the growth of our business. Consulting fees generated from management agreements amounted to $22.0 million, $23.7 million and $24.7 million for the years ended December 31, 2005, December 31, 2004 and December 31, 2003, respectively,

 

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. Our commutation activity and claims settlement and development in recent years has resulted in net reductions in provisions for loss and loss adjustment expenses of $96.0 million, $13.7 million and $24.0 million for the years ended December 31, 2005, December 31, 2004 and December 31, 2003, respectively. Although this recent experience indicates that our loss reserves have been more than adequate to meet our liabilities, 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. At December 31, 2005 our insurance and reinsurance companies recorded gross asbestos and environmental loss reserves of $578.1 million, or 71.7% of the total gross loss reserves. Net asbestos and environmental loss reserves at December 31, 2005 amounted to $384.0 million, or 64.7% of total net loss reserves. 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. We increased our insurance and reinsurance subsidiaries’ asbestos and environmental gross loss reserves by $32.4 million in 2003 ($38.9 million net increase) primarily as a result of industry-wide adverse claims developments. We reduced these gross loss reserves by $13.7 million in 2004 and $172.3 million in 2005 ($33.4 million net reduction in 2004 and $100.6 million net reduction in 2005) as a result of subsequent successful commutations, policy buybacks and favorable claims settlements. 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. To further understand this risk, see “Information about Castlewood — Reserves for Unpaid Losses and Loss Adjustment Expense” beginning on page 85.

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. As at June 30, 2006, the balances receivable from reinsurers amounted to $316.6 million of which $155.9 million was associated with a single reinsurer, with a credit rating of A. 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, amounting to $200.3 million at June 30, 2006, 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 our financial statements. Permanent impairments in the value of our subsidiaries’ fixed income securities are also reflected in our financial statements. As a result, a decline in the value of the securities in our subsidiaries’ portfolio may reduce our net income or cause us 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.