XL Group Plc agreed to purchase Catlin Group Ltd., a Lloyd’s of London company, for about 2.8 billion pounds ($4.2 billion) as the property-casualty insurer expands in specialized commercial coverage.

XL said it will pay 388 pence in cash and 0.13 of its own shares for each Catlin share, valuing Catlinat 715.3 pence a share based on yesterday’s closing prices, according to a statement today. Catlin, based in Bermuda, announced on Dec. 17 that XL had made a tentative offer of about 2.5 billion pounds.

The deal would increase Dublin-based XL’s coverage of specialized risks and is part of Chief Executive Officer Mike McGavick’s plan to narrow its focus to commercial clients. Traditional insurers are working to retain clients as hedge funds and other investors enter the market.

“The combination will add immediate scale in specialty insurance,” McGavick said in the statement. “It will create a more efficient and more capable global network by bringing our two infrastructures together, and it creates a top 10 reinsurer with expanded alternative capital capabilities.”

Shares of Catlin Group jumped 4.5 percent to 690 pence at 11:27 a.m. in London, giving the company a market value of 2.5 billion pounds. XL shares rose 1.6 percent to $35.42 in New York yesterday, valuing the company at about $9 billion.

New Shares

XL plans to issue about $1.8 billion of new shares as part of the acquisition. Catlin shareholders will have to approve the acquisition in the second quarter and the takeover is estimated to be completed by the middle of this year, according to the statement.

Catlin Group, established at Lloyd’s in 1984 by CEO Stephen Catlin, sells commercial policies as well as reinsurance, or backup coverage for primary carriers. The firm wrote more than $5.3 billion in gross premiums in 2013 and has offices in more than 25 countries in North America, Asia, Latin America and Europe.

Stephen Catlin will become XL Group’s executive deputy chairman after the combination and intends to hold new XL shares as a long-term investment, according to the statement. McGavick will continue as CEO. The company will start operating under the name XL Catlin, while its legal name will remain XL Group.

Integration Costs

XL said in a separate statement today that it expects one- time integration costs of about $250 million and expects annual savings of at least $200 million, with the deal’s synergies fully achieved by the end of 2017.

The company’s shares have recovered after dipping 5.3 percent in the two days after XL said it had approached Catlin.

“We’re not convinced that specialty-insurance market leadership translates into improved underwriting results,” Keefe, Bruyette & Woods analysts led by Meyer Shields wrote in a Dec. 17 note. “Even if (as we suspect), the global brokers are focusing on a smaller group of insurers to the detriment of smaller carriers, we believe neither XL nor Catlin was at any real risk of being displaced.”

–With assistance from Oliver Suess in Munich.