Fairfax Financial Holdings Ltd., the Toronto-based insurer led by investor Prem Watsa, won support from Catalina Holdings Bermuda Ltd. to proceed with a deal to buy American Safety Insurance Holdings Ltd.

American Safety dropped 3 percent to $30.14 at 1:00 p.m. in New York, below the $30.75 per share that closely held Catalina offered as a competing bid for the Bermuda-based insurer on Aug. 14. Fairfax’s most recent offer was for $30.25 a share.

As part of the agreement, Fairfax will sell American Safety’s reinsurance unit to Catalina after the acquisition is completed, according to a statement today from Fairfax. Watsa’s company also will give Tower Group International Ltd. $5 million to give up its rights to acquire the unit.

“We expressed our strong interest in acquiring American Safety but it became clear to us that a better option for all was to enter into the agreement with Fairfax,” Chris Fagan, Catalina’s chief executive officer, said in a separate statement. “Catalina is very well positioned to continue developing its portfolio through further acquisitions.”

John Varnell, Fairfax’s vice president of corporate development, didn’t respond to phone calls seeking comment. Tony Friend, a spokesman for Catalina at London-based College Hill Ltd., declined to comment beyond the statement.

Fairfax agreed to buy American Safety in June for $306 million, or $29.25 per share, representing a 22 percent premium to the insurer’s May 31 closing price. Fairfax boosted its offer on Aug. 7 after Catalina increased its own bid for American Safety to $29.75 and sent two letters to the board commenting on a “flawed auction process.” A week later, Catalina raised its offer to $30.75 per share.

As part of today’s deal, Catalina agreed to vote its American Safety shares in favor of Fairfax’s acquisition, according to the statement.

Fairfax declined 0.3 percent to C$419.70 in Toronto. The shares have gained 17 percent this year, compared with the 5.6 percent advance of the 45-company Standard & Poor’s/TSX Financials Index.

With assistance from Zachary Tracer in New York. Editors: Steven Crabill, Dan Kraut