New York-based Tower Group Inc. plans to acquire CastlePoint, aBermuda-based insurance and reinsurance holding company, forapproximately $490 million, the companies announced.

Under terms of the deal shareholders of CastlePoint will receive$12.68 a share in combination stock and cash, the firms said.

The transaction is not without controversy, with one criticpromising to litigate.

During an investor's conference call Michael H. Lee, chairmanand chief executive officer of both Tower and CastlePoint, said thedeal will increase shareholder value and create efficiencies. Bothmanagement teams will merge, while the CastlePoint offices willremain in Bermuda.

The deal, expected to be completed in the fourth quarter of thisyear, will also give Tower more access to capital and expand thediversity and access to underwriters, said Mr. Lee.

He said the diversity of business would also help Tower becomeinsulated from market cycles. The company provides personal andcommercial line insurance to small and midsize customers. It alsoprovides underwriting, claims and reinsurance brokerage services toother carriers.

Discussions over the merger were begun in the summer of lastyear between the two companies' boards of directors. Mr. Lee saidhe did not take part in the discussions to avoid a conflict ofinterest.

He said he foresees no regulatory problems, with the primaryregulators in New York and Bermuda.

Tower currently owns close to 7 percent of CastlePoint.

With the acquisition and access to CastlePoint capital, he saidTower will seek to acquire small companies with high expense ratiosand profitable books of business.

During the conference call, Leon Cooperman with Omega Advisorswas critical of the deal, saying that CastlePoint is beingundersold.

"The price you're offering is inappropriate," he said.

He promised to be in court to seek appraisal rights, saying, "Ithink what you are doing is unfair." He said he would discuss theissue further privately with the management team.

Mr. Lee said the CastlePoint deal is substantially above what itis currently trading and was a good deal for shareholders.

Late today, A.M. Best placed the insurer financial strengthrating of "A-minus (Excellent)" for Tower, CastlePoint, and theirmembers under review with negative implications. The Oldwick,N.J.-based insurance rating agency said it has concerns overintegration risks, completing the agreements and allocation ofcapital.

Best noted that Tower sponsored the formation of CastlePoint in2006 and has ceded a "considerable" amount of business toCastlePoint.

(This story was updated at 4:27 p.m. EDT)