Berkshire Hathaway Inc. (BRK.B) announced on March 21 that it had agreed to purchase insurance firm Alleghany Corporation for $11.6 billion. After an almost six-year wait for a significant deal, the acquisition will be one of Berkshire’s five largest in history, putting some of the company’s $146.7 billion in cash and equivalents to work.
Berkshire will pay $848.02 in cash for each outstanding share of Alleghany under the terms of the agreement. The price is up 25% from Friday’s closing price, which was the last trading day before the agreement was disclosed. The purchase price is also a 29% premium to Alleghany’s 30-day average stock price and a 16% premium to the company’s 52-week high closing price.
The Alleghany deal means that Buffett is diving deeper into the world of insurance, the industry that has remained instrumental in the growth of Berkshire to become a conglomerate with a market value of above $750 billion.
Alleghany is currently headed by Joseph Brandon, previously the CEO of a Berkshire insurer, General Re.
In a statement, Berkshire’s CEO, Warren Buffett, said, “Berkshire will be a perfect permanent home for Alleghany, a company that I have closely observed for 60 years. I am particularly delighted that I will once again work together with my longtime friend, Joe Brandon.”
This lucrative deal joins the list of substantial acquisitions made by Buffett over the years. The reunion between Brandon and Buffett is believed to bring about a revolution in the insurance sector since they worked together between 2001 and 2008.
This deal further strengthens Berkshire’s insurance division, which currently has the likes of Gen Re, a reinsurance giant, and Geico.
As a key member of Berkshire Hathaway, General Re. was transformed from a railroad holding company to an investment and insurance firm, a key member of Berkshire Hathaway, often termed a Mini-Berkshire.
The agreement is set to close in the fourth quarter of 2022. While both companies’ boards of directors unanimously approved it, Alleghany’s shareholders and various regulatory agencies must still support it. Furthermore, Alleghany now has a 25-day shopping period during which it can seek a better deal with another potential buyer.
In a statement released towards the end of 2021, Buffett indicated that Berkshire’s insurance business was the most muscular arm. It contributed $5.5 billion in net earnings, translating to 21% of the total 2021 earnings of $26.1 billion.
While operating as a property and casualty reinsurance and insurance company, Alleghany has subsidiaries, including RSUI Group, Inc., which underwrites insurance coverages for wholesale specialties. Transatlantic Holdings, Inc. (TransRe), a global reinsurer, and CapSpecialty, Inc., an underwriter of specialty casualty and surety insurance coverages.