Berkshire Acquires Alleghany for $11.6 Billion

We expect to increase our fair value estimate for Berkshire Hathaway (BRK.B) by 3%-5% following news that the wide-moat firm has agreed to acquire the outstanding equity of Alleghany, a property/casualty insurer with reinsurance and specialty insurance lines, for $11.6 billion. While the deal seems pricey at first glance, with Berkshire offering $848.02 per share in cash for Alleghany--a 29% premium to Alleghany's average stock price over the last 30 days (and a 16% premium to the firm's 52-week high closing price)--the acquisition price works out to a multiple of 1.26 times Alleghany's book value per share at the end of 2021. Berkshire has been buying back its own common stock for an average of 1.37 times prior quarter book value per share the past year, so a premium that lifts the deal price for Alleghany up to 1.26 times book seems reasonable to us from a price perspective.

That said, we'll have to see how much value Berkshire can extract from Alleghany's insurance operations, noting that insurance deals can be tricky as the acquirer is assuming potential future claims established by the acquired firm's past underwriting. While Alleghany's inability to generate excess returns on a consistent basis could be a sign of underwriting weakness, we'd note that the firm's reinsurance arm (which can be hit with large catastrophe losses at any given time) have had a greater influence on overall results the past decade. We'll also have to see how Berkshire handles the investment portfolio at Alleghany, which has been dedicated more to bonds (80%-85% of holdings the past two years) than equities (15%-20%), the complete opposite of Berkshire's insurance operations (which has had 80%-85% invested in equities). Should Berkshire avoid unforeseen underwriting issues and reallocate the acquired investment portfolio to more lucrative options, this could end up being a good deal (something Berkshire has struggled to find for much of the past decade).