The Enstar Group will merge with its partially-owned Bermuda affiliate Castlewood Holdings Limited to form a new parent company in Bermuda.

The merger is intended to qualify as a reorganisation for federal income tax purposes, the company said in a regulatory filing.

Georgia-based Enstar is a publicly traded company engaged in the operation of several equity affiliates in the financial services industry.

Together with Trident Holdings and a group of investors known as Castlewood Principals, it formed Castlewood Holdings in Bermuda in November, 2001 to pursue the management and acquisition of insurance and reinsurance companies, including companies in run-off, and to provide management, consulting and other services to the insurance and reinsurance industry.

Under the agreement, Enstar will merge with Castlewood subsidiary CWMS Subsidiary Corporation.

The merged Georgia company will be renamed Enstar USA Inc. and become a direct wholly-owned subsidiary of Enstar Group Ltd. which will be headquartered in Bermuda.

Under the merger agreement, Enstar shareholders will receive one share of Castlewood for each share of Enstar common stock.

The regulatory filing said Enstar shareholders will own approximately 48.5 percent of the combined company which is expected to list its shares on Nasdaq.

Enstar also expects to pay a special dividend of $3 per share, or approximately $17.3 million in the aggregate.

Nimrod T. Frazer, chairman and chief executive officer of Enstar, said the agreement would allow the company to effectively deploy its capital in the reinsurance run-off business.

?This new corporate structure led by our proven business partners at Castlewood is a major step forward for Enstar,? said Mr. Frazer who will continue as a director of Enstar Group but will retire as chief executive officer of Enstar.

?The merger of the talents, capabilities and assets of Enstar and Castlewood will give us direct access to capital and expand opportunities to grow our business,? said Dominic F. Silvester, president and chief executive officer of Castlewood who will serve as CEO of the newly merged company.

Enstar currently owns 50 percent of the voting stock of Castlewood and Trident and certain members of management of Castlewood each own 25 percent of Castlewood?s voting stock. Enstar owns an approximately 32 percent economic interest in Castlewood.

The transaction is expected to close during the third quarter of 2006, subject to shareholder and regulatory approvals.