By Noor Zainab Hussain and Jonathan Stempel
NEW YORK (Reuters) -Warren Buffett's Berkshire Hathaway (NYSE:BRKa) Inc on Monday struck an agreement to buy insurance company Alleghany Corp for $11.6 billion, only weeks after the 91-year-old billionaire bemoaned a lack of good investment opportunities.
Alleghany, the owner of reinsurer Transatlantic Holdings Inc, would expand Berkshire's large portfolio of insurers, which includes auto insurer Geico, reinsurer General Re and a unit that insures against major catastrophes and unusual risks.
"Berkshire will be the perfect permanent home for Alleghany, a company that I have closely observed for 60 years," Buffett, who has run Berkshire since 1965, said in a statement.
The acquisition, one of the five largest in Berkshire's history, would reunite Buffett with Joseph Brandon, who led General Re from 2001 to 2008 and became Alleghany's chief executive in December.
It would also end Buffett's six-year drought of large acquisitions and help him to deploy some of the $146.7 billion of cash and equivalents his conglomerate had at the end of last year.
In his Feb. 26 annual shareholder letter, Buffett lamented that "internal opportunities deliver far better returns than acquisitions" and that little "excites us" in equity markets. He pledged to keep $30 billion cash on hand.
Cathy Seifert, an analyst at CFRA Research in New York, said the merger should offer no surprises, reflecting Buffett's familiarity with Alleghany and Brandon.
"Berkshire has been under pressure to do a deal, and this may be the path of least resistance, though Alleghany will be a positive addition," she said.
"In terms of its business model and culture, this is a very strong fit."
Berkshire agreed to pay $848.02 in cash per Alleghany share, representing a 25% premium over Friday's closing price.
Alleghany would operate as an independent unit of Berkshire, which is based in Omaha, Nebraska.
Shares of Alleghany closed up $167.85, or 24.8%, at $844.60 on Monday. Berkshire's Class A shares rose $12,009, or 2.3%, to $525,000, their highest-ever close.
'MINI-BERKSHIRE'
The transaction is expected to close in the fourth quarter, pending regulatory and Alleghany shareholder approvals.
Alleghany has a 25-day "go-shop" period to find a better offer. No break-up fee would be owed if the merger fell through.
Berkshire is known for its refusal to engage in bidding wars for whole companies.
Insurance typically generates more than 20% of operating profit at Berkshire, which has dozens of businesses including BNSF Railway, Berkshire Hathaway Energy and Dairy Queen ice cream and restaurant chain.
Berkshire also invests hundreds of billions of dollars in stocks such as Apple Inc (NASDAQ:AAPL), and has this year invested more than $6.4 billion in Occidental Petroleum Corp (NYSE:OXY).
New York-based Alleghany was founded in 1929 by railroad entrepreneurs Oris and Mantis Van Sweringen and was transformed into an insurance and investment operating company under Fred Morgan Kirby II's leadership from 1967 to 1992.
CFRA Research's Seifert said Alleghany has long held itself out as a "mini-Berkshire," being an insurance conglomerate that redeploys some of its excess capital in other businesses.
Buffett said the companies had "many similarities," including what Brandon described in a letter to Alleghany's more than 13,000 employees as a "shared philosophy of managing businesses for the long term."
Alleghany's other units include RSUI Group Inc, an underwriter of wholesale specialty insurance, and CapSpecialty, which provides specialist cover for small and medium-sized businesses.
Its Alleghany Capital Corp owns several non-insurance businesses, including companies that focus on industrial parts, machine tools, hotels, toys and funeral services.
Goldman Sachs (NYSE:GS) and the law firm Willkie Farr & Gallagher advised Alleghany on the transaction. The law firm Munger, Tolles & Olson advised Berkshire.