Fairfax Financial Holdings Ltd. agreed to buy insurer Allied World Assurance Co. for $4.9 billion in cash and stock in Chief Executive Officer Prem Watsa’s largest purchase.

Fairfax will pay $54 per share, which is 18 percent higher than Allied World’s closing price on Friday. For every share, Allied investors will receive about $10 in cash — half from Fairfax and the rest from a pre-closing dividend by Allied — as well as $44 of Fairfax’s stock, according to a statement from the companies. Toronto-based Fairfax has the option to increase the cash portion by up to $30 per share.

Smaller carriers have sought merger partners in recent years as commercial insurance buyers and their brokers prefer companies with scale. The deal that Zug, Switzerland-based Allied reached will make it a wholly owned subsidiary, while keeping its executive and senior management teams.

“Allied World will operate within the Fairfax group on a decentralized basis after closing, and we are looking forward to supporting Scott and the entire team at Allied World in growing their business over the long-term,” Watsa said in the statement, referring to Allied CEO Scott Carmilani.

Buffett Comparisons

Fairfax is among major North American insurers that have been expanding in the specialty market through takeovers to diversify. Earlier this month, Boston-based Liberty Mutual Holding Co. agreed to buy Ironshore Inc. for about $3 billion to expand in the Bermuda market, where commercial clients go to insure unusual risks.

Watsa, often likened to value investor Warren Buffett, is known for acquisitions. His firm agreed in October to buy commercial and consumer units from American International Group Inc. in nations including Argentina and Turkey. Last year, he bought Brit Plc, which guards against losses in industries such as energy and aerospace.

His other insurance deals include the 2010 purchase of Zenith National Insurance Corp. for about $1.3 billion to expand in California. He also expanded into coverage for pet owners.

Like Buffett, he uses insurance premiums to invest in other industries. Fairfax controls one of the biggest stakes in BlackBerry Ltd. and profited in the U.S. financial crisis by using derivatives to bet against the creditworthiness of U.S. banks and insurers.

Bulking Up

Allied World was created in late 2001 by AIG and Chubb Corp. to help fill a void in the industry after the Sept. 11 terror attacks.

The firm, which counts North America as its largest market, helps guard clients including corporate executives against lawsuits. It also has been expanding in professional liability coverage, environmental-related policies and contracts protecting customers against costly surprises tied to mergers and acquisitions. Its reinsurance segment takes on risks tied to natural catastrophes and crop damage.

Allied World tried to expand in 2011 when it reached a deal to combine with Transatlantic Holdings Inc. However, Transatlantic backed out under pressure from its investors and later agreed to sell itself to Alleghany Corp. instead.

Allied World gained about 23 percent this year through Friday in New York trading, and the stock has more than doubled since the end of 2011.

‘Great Home’

The transaction with Fairfax would give Allied shareholders a roughly 27 percent stake in the combined company — or about 10 percent if Fairfax exercises the option to use more cash instead of stock, according to a presentation for investors. The companies expect the deal to close in the first half of 2017, subject to standard approvals. The combined firm will oversee a $39 billion asset portfolio, the presentation shows.

“Our shareholders will benefit from Fairfax’s tremendous investment capabilities,” Carmilani said in the statement. “Fairfax provides a great home for Allied World to continue to build a strong business for our customers, business partners and employees.”

Bank of America Corp.’s Merrill Lynch acted as financial adviser to Allied World. Fairfax retained Shearman & Sterling LLP, Torys LLP and Homburger AG as legal advisers. Willkie Farr & Gallagher LLP is acting as U.S. legal counsel to Allied World and Baker & McKenzie LLP and Walder Wyss Ltd. are acting as Swiss legal counsel.