Could Chubb be the next Berkshire Hathaway?

At the end of last year, Warren Buffett’s holding company Berkshire HathawayI started buying shares of a mysterious company. No one knew about the company in question because Berkshire had requested an exemption from the SEC that would allow it to avoid disclosure rules. But in early 2024, the mystery stock was revealed to be: chub (CB 0.75%).

Here’s the weird part: Chubb operates a business model. very Similar to Berkshire. It was strange that Buffett chose to buy shares of a close competitor instead of simply buying Berkshire shares directly. Does Buffett believe Chubb could be the next Berkshire, and does he foresee a runway of tremendous growth ahead?

The two companies have a lot in common

Over several decades, Buffett transformed Berkshire into a massive organization now worth nearly $1 trillion. Although his exact tactics have varied over the years, his overarching strategy has remained consistent. At the core of Berkshire’s operations are numerous insurance businesses. These companies generate investable cash flow every time they write an insurance premium. And because this money doesn’t have to be paid out until a claim is filed, Berkshire can essentially invest this cash interest-free in the meantime. Berkshire currently owns dozens of companies across nearly every industry.

In many ways, Chubb is a microcosm of Berkshire. At its core, it has a portfolio of insurance companies offering everything from property and casualty insurance to personal accident and supplemental health insurance. The company even operates in the reinsurance market. This means that you are essentially providing the insurance policy to the insurance company itself. And like Berkshire, Chubb invests “liquid assets,” meaning excess cash generated by insurance operators, into securities to earn additional returns on top of underwriting profits.

Berkshire and Chubb not only have similar business models, but their long-term performance is also similar. Over the past 10 years, each stock’s total return has been roughly the same. However, there are two key differences to be aware of here. While one suggests Chubb could be the next Berkshire, the other calls for some caution.

BRK.B Total Return Level Data from YCharts

Two reasons Chubb is different from Berkshire

The biggest difference between Chubb and Berkshire is size. Ultimately, this is what makes Chubb the best company in the world. next Berkshire. Berkshire’s current market cap is about $1 trillion, while Chubb’s is only about $115 billion. If Chubb becomes the next Berkshire, it would signal a long-term upside potential of roughly 900%.

This size difference should excite investors. But if you look under the hood, there’s a problem. Over the past decade, Chubb has slightly underperformed Berkshire despite its smaller size. In theory, it should be much easier for smaller companies to generate higher growth rates. However, over the past 10 years, Berkshire has achieved an average return on equity of 10.6%, while Chubb has only managed an average return on equity of 9.9%.

This shows the key difference between Berkshire and Chubb. Berkshire directly benefits from Warren Buffett investing his capital. Having one of the greatest investors of all time at your side and all his hand-picked lieutenants to help manage your portfolio is no small advantage. Buffett’s investment success has grown Berkshire into a massive conglomerate, while Chubb remains a pure-play insurance company with a relatively small investment portfolio.

Will Chubb be the next Berkshire? Certainly all the key pieces are in place. But in the end, it wasn’t just business strategy that made Berkshire what it is today. Buffett’s investment insight was also an advantage. Given that Berkshire currently owns nearly $7 billion worth of Chubb stock, Buffett clearly likes what he sees. But there’s a reason Berkshire has been able to outperform Chubb’s total stock returns over the past decade. Berkshire operates like a hedge fund, while Chubb is closer to a classic insurance company.