New York-based Tower Group Inc. plans to acquire CastlePoint, a Bermuda-based insurance and reinsurance holding company, for approximately $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 critic promising to litigate.

During an investor's conference call Michael H. Lee, chairman and chief executive officer of both Tower and CastlePoint, said the deal will increase shareholder value and create efficiencies. Both management teams will merge, while the CastlePoint offices will remain in Bermuda.

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

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

Discussions over the merger were begun in the summer of last year between the two companies' boards of directors. Mr. Lee said he did not take part in the discussions to avoid a conflict of interest.

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

Tower currently owns close to 7 percent of CastlePoint.

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

During the conference call, Leon Cooperman with Omega Advisors was critical of the deal, saying that CastlePoint is being undersold.

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

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

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

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

Best noted that Tower sponsored the formation of CastlePoint in 2006 and has ceded a "considerable" amount of business to CastlePoint.

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

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Tower Group To Buy CastlePoint For $490 Million

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