Over the years, Warren Buffett and Berkshire Hathaway (BRK.A 0.97%) (BRK.B 1.21%) have been building up a huge cash balance. At the end of last year, the conglomerate had $150 billion in cash to put to work.
Earlier this week, Berkshire Hathaway said it would acquire the insurance giant Alleghany Corp. (Y)for $11.6 billion. Berkshire Hathaway's deal is its largest since 2016 when it bought Precision Castparts for $37 billion. Alleghany is the perfect Buffett acquisition -- here's why.
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A company in an industry Buffett loves
Alleghany sells a range of insurance products, including property and casualty insurance and reinsurance. Last year the insurer brought in $12 billion in total revenue, with $7.1 billion coming from net premiums earned on policies written. The company brought in another $1 billion from net investment income and gains on its securities.
Alleghany is an ideal acquisition for Buffett, who has long had a love affair with the insurance industry. What Buffett loves about insurance is something called "float."
Insurance companies are in a rare position where they collect money or premiums before knowing what their claims costs will be. Because they collect these premiums upfront, they have a big pile of cash, or "float," that is theirs to deploy until policyholder claims come through. Buffett loves the business model, and already owns three major insurers in Berkshire Hathaway Reinsurance, General Re, and GEICO. It also owns several smaller insurers, including National Indemnity -- Buffett's first insurance purchase 55 years ago.
Since purchasing National Indemnity, Berkshire Hathaway's float grew from $19 million to $147 billion, an impressive 18% compound annual growth rate. The purchase of Alleghany gives Berkshire Hathaway another $1.7 billion in cash and liquid assets.
The connection between Alleghany and Berkshire goes way back
It's not just the insurance aspect that drew Buffett to Alleghany, but also a personal connection between the two companies. The current chief executive officer of Alleghany, Joseph Brandon, previously headed up Buffett's General Re subsidiary. You can see where Buffett's wisdom rubbed off on Brandon by how the two companies are run.
Alleghany Capital is a growing share of Alleghany's overall business. Like Berkshire, Alleghany invests across several industries and owns many subsidiaries that operate independently. Alleghany Capital has an ownership stake in companies in steel fabrication, truck and trailer manufacturing, and toy production, just to name a few. Alleghany Capital revenue grew an impressive 51% to $3.7 billion last year. In a recent investor presentation, Alleghany's leadership has this to say: "Conservatism dominates our management philosophy. We shun investment fads and fashions in favor of acquiring relatively few interests in basic financial, industrial, and other enterprises that offer the potential to deliver long-term value to our investors."
Given the similarity in thinking and investment style, it's no surprise Buffett acquired Alleghany. The company is a perfect Buffett addition, giving Berkshire more investments in essential industries and helping Berkshire continue to build its cash position for long-term opportunities. As long as regulators approve the deal, it looks like Buffett has added another solid company to his growing portfolio.
