Overnight Berkshire Hathaway (NYSE: BRK.A) – run by the world’s most famous investor Warren Buffett – has made its first major investment since 2016.
Berkshire has purchased Alleghany Corporation for US$11.6 billion (AU$15.7 billion), doubling down on its already extensive insurance operations.
The deal values Alleghany shares at $848.02 per share, a 29% premium to its average stock price over the last 30 days and a 16% premium to Alleghany’s 52-week high closing price.
What is Alleghany Corporation?
Alleghany is a global property and casualty insurer that operates brands including Transatlantic, RSUI Group, and CapSpeciality.
The company also runs Alleghany Capital, which invests in a portfolio of non-financial businesses.
Commenting on the acquisition, Mr Buffett said:
“Berkshire will be the perfect permanent home for Alleghany, a company that I have closely observed for 60 years. Throughout 85 years the Kirby family has created a business that has many similarities to Berkshire Hathaway”
The acquisition brings current Alleghany CEO Joe Brandon back to Berkshire Hathaway.
Mr Brandon formerly held the chief executive role at Berkshire insurer, Gen Re.
The deal remains subject to customary regulatory and shareholder approval.
Why did Berkshire purchase Alleghany?
The purchase comes as somewhat of a surprise.
Just one month ago, Mr Buffett expressed difficulty in finding attractive investments in his annual letter to shareholders:
“Berkshire’s current 80%-or-so position in businesses is a consequence of my failure to find entire companies or small portions thereof which meet our criteria for longterm holding”
But the investment is well within Berkshire’s and Mr Buffett’s circle of competence.
The conglomerate will be able to support Alleghany with increased capital strength and insurance expertise to grow the business.
Historically, Berkshire has been attracted to the ‘float’ earnt by insurance companies.
Float refers to the excess cash held by insurers for future claim payouts.
That float can be then invested into other businesses or shares of companies to earn a return.
Subsequently, Berkshire has built ownership stakes in insurance companies over time such as GEICO.
What will Berkshire do with its remaining cash?
Despite splurging US$11.6 billion on Alleghany, the deal represents just 8% of Berkshire’s current cash holdings.
The business still has approximately $131 billion of fresh powder to deploy.
Warren Buffett has previously been reluctant to purchase new investments citing higher valuations.
But with the market taking a U-turn in 2022, this could be the moment Berkshire puts in the cash pile to work.
