Bermuda-based CastlePoint Holdings Ltd. will be bought out by Tower Group Inc. for $490 million.

The acquisition will help Tower diversify its business, expand in high-margin segments and streamline operations in both companies.

CastlePoint shareholders will receive 0.47 shares of Tower common stock and $1.83 in cash for each share of CastlePoint.

Based on Monday's closing stock price for Tower, $23.09, CastlePoint shareholders will receive $12.68 per share in cash and stock.

CastlePoint's share price shot up 28 percent on the news yesterday to $11.36.

Tower Group, which had sponsored CastlePoint's formation, currently has a 6.7 percent stake in it. CastlePoint gets most of its premium revenue from Tower Group.

Michael Lee, who is currently the chairman and chief executive officer of both Tower and CastlePoint, said: "The combination of the two companies significantly strengthens our balance sheet and provides us with the ability to access and utilise CastlePoint's capital more efficiently and simplify our corporate structure.

"In contrast to the market conditions at the time of CastlePoint's formation in April 2006, changes in the reinsurance market that now benefit primary companies provide Tower with the opportunity to shift its quota share reinsurance programme currently placed with CastlePoint to other reinsurers on more favourable terms and conditions.

"By doing so, Tower can significantly increase its own capital base and access additional underwriting capacity from other reinsurers to support Tower's growth opportunities in higher margin segments, especially through strategic acquisitions.

"By combining with CastlePoint, Tower also will be able to continue to expand and further diversify its business platform through CastlePoint's programme and reinsurance businesses. In addition, this transaction will allow both companies to streamline corporate governance, realise cost savings and generate greater efficiency by operating as one public company."

The deal, expected to close in December, will not require any external financing, the companies said.

The transaction will also result in CastlePoint being a controlled foreign corporation subject to US taxation.

In the release yesterday CastlePoint said it expected to post approximately $13.2 million in operating income for the second quarter.