Less than one year after its unsuccessful pursuit ofTransatlantic Holdings, Validus Holdings says it reached anagreement to buy Flagstone Reinsurance Holdings for about $623million in cash and stock.

The purchase, expected to close in the fourth quarter, willallow the Bermuda-based specialty insurer to “further build uponour market-leading position in catastrophe risk,” says Ed Noonan,Validus chairman and chief executive officer, in a statement.

The Validus brand, as well as its headquarters and executivemanagement, will be used for the combined company.

Validus says it has obtained agreements from investments firmsowning about 22.5 percent of Flagstone Re that they will vote infavor of the transaction.

Flagstone shareholders will get $2.00 in cash as well as 0.1935shares of Validus for each share of Flagstone.

“We believe this transaction offers a significant premium andimmediate value for our shareholders, and provides a more stablecapital base with which to underwrite over the long-term,” saysDavid Brown, CEO of Flagstone, in a statement.

Validus lost out on Transatlantic last year when Alleghany Corp. stepped in to buy the company for about $3.4billion.

Validus had made an unsolicited offer for Transatlantic after itreached a merger agreement with Allied World. That deal also fellapart under pressure from shareholders.

While Validus was in pursuit of Transatlantic, Luxembourg-basedFlagstone was announcing a plan to realign its business to focus on lines with the highestreturn on equity—property, property catastrophe and highest-marginshort-tail specialty reinsurance—and would sell its Lloyd's ofLondon and Island Heritage operations.

During a conference call with financial analysts today, JosephE. Consolino, president and chief financial officer for Validus,says the company faces a number of regulatory approvals includingLuxembourg, where Flagstone is based, Bermuda, the United Statesand a few in other European countries. However, he adds that thecompanies are not expecting any regulatory issues preventing themerger.

Touching on the integration of the two companies, Noonan saysBrown will be stepping down as part of the deal, and that it isanticipated a number of Flagstone's existing offices will be close.While no figure was given, management indicated that job cuts wouldbe coming, and it would be “done quickly so employees know wherethey stand going forward,” says Noonan. More than 200 Flagstone Reemployees could be affected.

Should the acquisition not go through, there is a $24.2 millionbreak-up fee that would be paid to Flagstone. However, managementsaid there were no reasons seen for that to occur.

Validus says after completing the transaction, it will increaseits position to become the largest property catastrophe reinsurerwith total premiums of more than $1.19 billion. Validus nearestcompetitor will be Renaissance Re with $1.18 billion inpremium.

Rating agency Standard & Poor's creadit analyst Jason Portersays of the deal, ”Upon completion of the transaction, Validusexpects to strengthen Flagstone's reserves by $76 million, take $59million of other charges, and record a $58 million bargain purchasegain.

“It will discontinue Flagstone's noncatastrophe portfolio andmigrate the property catastrophe book to, and optimized with,Validus's Bermuda business. The acquisition will boost Validus'scapital base by almost $800 million with additional shareholderequity and Flagstones junior subordinated debt. Although Validuscould potentially have the largest property catastrophe book inBermuda, the overall business mix shift will be modest.”