Buffett Acquires Chubb: Why His New Insurance Holdings Wants to Follow the Oracle of Omaha

Over the past two quarters, Warren Buffett has Berkshire Hathaway (BRK.A 0.68%) (BRK.B 0.93%) I have been buying “secret stocks.” This is confidential in that major investment funds can ask the SEC to withhold the names of new buys from the fund’s 13F quarterly reports. This is because disclosing positions may reveal ongoing buying programs. Affects price.

But this week, Berkshire’s “secret” purchases over the past few quarters were finally revealed. Chub Limited (CB 3.55%).

Why is Berkshire acquiring Chubb? The heralded insurance franchise actually fits perfectly with Buffett’s philosophy and Berkshire’s business mix. But it’s not just that. Buffett’s buy could be a reason to add the insurance giant to your portfolio.

Favorable environment for insurance companies

The first reason to buy Chubb applies to just about every property/casualty insurance company and reinsurance company today. Over the past five years, most insurance companies, especially property and casualty companies, have been able to significantly increase premium rates as the market has “hardened” for several consecutive years.

The story begins in 2017, when we experienced three major hurricanes. This served as a catalyst to break the insurance industry out of years of complacency. Unfortunately, that year marked the beginning of several consecutive years of more severe weather, including but not limited to hurricanes, and convective storms, wildfires, and unusual winter freezes became more frequent.

Moreover, insurers have faced increasing socio-economic inflation, especially after the pandemic in 2021. ‘Social inflation’ is the trend of more lawsuits against insurers and more expensive judgments against them, a trend that will continue. . Then, when economic inflation hit in 2021-2022, insurers began to realize that the “replacement cost” of insured property was actually more expensive than they thought.

The addition of higher interest rates to a tight market has led investors to demand higher returns, leading to several players leaving the market altogether. This includes some forms of ‘alternative capital’, such as hedge funds, which tapped into the reinsurance market in the era of rock-bottom interest rates before 2019.

All of these factors have combined to make many sectors of the insurance market very “tight,” leaving the remaining insurers free to raise rates and aggressively improve terms. Rising interest rates have now outstripped the sector’s inflationary losses, boosting profits and returns on capital in most cases.

Chubb, like his peers, has benefited greatly. Last quarter, net profit increased by 20.3% as the non-life insurance combined ratio improved to 86%, which is a very high margin for an insurance company. Core operating margin on tangible capital also improved from 19.4% in the same period last year to a still very good 21.9%.

Moreover, insurer valuation multiples are actually very low today. Chubb is trading at just 12 times earnings, even after the post-Buffett news surge. And other insurance companies are much cheaper. Many of Chubb’s peer insurers are trading at single-digit P/E ratios.

This means that the market thinks the insurance industry is at the top of its cycle and a recession is expected. But Buffett appears to have a different view. Keep in mind that Buffett has decades of experience working in the insurance industry.

The insurance industry sees favorable pricing with no end in sight. Image source: Getty Images.

Chubb fits well with Buffett’s premium brand tendencies.

In particular, the acquisition of Chubb also fits Berkshire’s penchant for high-quality companies that serve wealthy clients, unlike other property and casualty insurers. After all, many of Buffett’s famous investments include See’s Candies; Coca ColaHas pricing power compared to store brands, american expressThis is aimed at high-spending consumers, and of course apologizeIt is the world’s largest affluent consumer technology brand.

Like other brands, Chubb is the rare differentiated insurance company that dominates pricing power. That’s because Chubb is generally very fair and generous with claims, and when customers incur a loss, they don’t have a hard time getting their money and instead strive to make them whole as quickly as possible. That’s why the company’s “Masterpiece” homeowners insurance product is so popular with wealthy Americans, accounting for a 60% share of high-value personal lines despite only accounting for 3% of the total personal property insurance market in the U.S. and Canada. .

In return for the generous payouts, Chubb is receiving higher premiums and has historically earned higher-than-normal margins. Over the past 10 years, Chubb has achieved an average underwriting margin of 10%, well above the industry average of 4%.

Chubb has the best homeowners insurance brands for wealthy homeowners. Image source: Getty Images.

Another reason: Buffett could buy everything

It’s no secret that Berkshire Hathaway’s main business is actually its insurance empire, which encompasses Geico auto insurance, several reinsurance companies, and other specialty insurers. In fact, the last large public company acquisition was the $11.2 billion purchase of Alleghany Insurance in late 2022.

Berkshire certainly has the cash for a large, “elephant-sized” acquisition, as Buffett sold off some Apple stock and other holdings, bringing Berkshire’s cash reserves to $189 billion at the end of the first quarter.

Chubb will be a perfect fit for Berkshire because its commercial and personal property and casualty insurance franchises will be highly complementary to Berkshire’s existing franchises in automotive, global reinsurance and other specialties. And Chubb’s market cap is $111 billion, making it a company big enough to move the needle for a company as big as Berkshire.

Therefore, investing in Chubb could yield greater returns in the short term if Buffett decides to buy the entire company. It may be an unlikely event at this point, but it’s certainly possible and is another reason to see Chubb as an attractive investment today.