The familiar and complementary natures of Alleghany Corp. look to be at the heart of Berkshire Hathaway Inc.'s decision to buy the reinsurer.
The move makes sense given the companies' similar operating philosophies and cultures, according to Keefe Bruyette & Woods analyst Meyer Shields. Reinsurance and specialty insurance are not unfamiliar to Berkshire, and Alleghany Capital Corp., a subsidiary that oversees a portfolio of noninsurance businesses, is also right up Berkshire's alley, the analyst said.
Another element that makes the $11.6 billion deal attractive to Berkshire is that Alleghany has a brokered reinsurance unit, whereas The Berkshire Hathaway Reinsurance Group, the company's reinsurance arm, sells directly to clients. A quota share with Alleghany's reinsurance company has given Berkshire good insight into the business and increased its broker market distribution, UBS analyst Brian Meredith said in a note.
"Obviously, a lot of companies want to use a reinsurance broker," KBW's Shields said in an interview. "This way, Berkshire can access that market."
An added bonus for Berkshire is the acquisition of CapSpecialty Inc., Alleghany's specialty insurer for small- and mid-sized businesses. Berkshire has no such unit, Shields said.
"The expertise at underwriting large accounts successfully doesn't translate automatically into the same expertise for smaller accounts," Shields said. "So now [Berkshire has] a business that has that expertise and experience."
Alleghany's price tag
Under the terms of the deal, announced March 21, Berkshire will buy all of Alleghany's outstanding shares for $848.02 per share in cash, well above Alleghany's stock price of $676.75 at the close of trading March 18.
The proposed acquisition does seem pricey at first glance, Morningstar analyst Greg Warren said in a note. But given that Berkshire has been buying back its own stock at an average of 1.37x prior-quarter book value per share for the past year, "a premium that lifts the deal price for Alleghany up to 1.26x book value seems reasonable to us from a price perspective," Warren said.
The agreement does include a 25-day go-shop period, during which Alleghany may solicit or consider other acquisition proposals. Shields does not expect any other bidders to emerge because Alleghany is "an unusual company with insurance, reinsurance and noninsurance stuff."
The Alleghany deal looks to be the second-largest insurance transaction in Berkshire's history, surpassed only by another reinsurance deal. Berkshire's purchase of General Re Corp. was valued at $24.59 billion when announced in June 1998.
Back in the fold
The transaction will mark the reunion of Berkshire Chairman and CEO Warren Buffett with Alleghany CEO Joe Brandon. Brandon, who Buffett called a "long-time friend" in the deal announcement, was General Re's CEO from 2001 to 2008 before moving over to Alleghany as president of the company's insurance group in 2011. At the time, Brandon was considered a possible successor to Buffett. That designation has since fallen to Vice Chairman Gregory Abel, as Buffett said during a 2021 interview with CNBC that Abel would take the reins if something were to happen to him.
"Everything that Warren Buffett does is intentional ... no matter how much pretense there is otherwise," Shields said. "I think highlighting the fact that there are good relations with someone who had left Berkshire, which doesn't always have to be the case, is an important communication."