The Toronto-based financial services holding company said Monday it will pay $29.25 per share in cash for the company, a 22 per cent premium to the closing price of American Safety common stock Friday.
As part of the deal, Fairfax will also sell the U.S. company's Bermuda subsidiary, American Safety Reinsurance Ltd., to Tower Group International Ltd.
Fairfax says the deal with provide it with US$480 million of additional investable assets.
Several of the American Safety specialty lines groups will move to Fairfax subsidiaries Crum & Forster and Hudson.
"We look forward to working with the talented professionals in the American Safety team," Fairfax chief executive Prem Watsa said in a statement.
"We expect to enhance our insurance operations in certain specialty lines of business with American Safety's expertise."
American Safety's board of directors has approved the merger, and says directors and executives owning about 10 per cent of the company's outstanding shares have agreed to vote their shares in favour of the merger.
The deal is expected to close in the fourth quarter.
Fairfax is engaged in property and casualty insurance and reinsurance as well as investment management.
American Safety is a Bermuda-based holding company that targets underserved specialty risks through U.S.-based American Safety Insurance Services Inc. and its U.S. insurance and Bermuda reinsurance companies.