Warren Buffett's Berkshire Hathaway (BRK.A 1.12%) (BRK.B 1.03%) has made news lately for selling stocks, including paring down its large stakes in Apple and Bank of America.
But Berkshire Hathaway, known for its patient investment approach, has been scooping up shares of some other companies. That includes insurer Chubb (CB 1.25%). Initially buying 8.1 million shares last year, it now owns over 27 million shares. In the second quarter, Berkshire added 1.1 million shares.
While you shouldn't blindly follow anyone's investments, no matter how successful, it's useful to look at Buffett's investment philosophy to see what drew him to Chubb. After that, you can determine if the stock fits into your portfolio.
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Industry knowledge
Buffett believes in investing in what he understands. And Buffett and Berkshire Hathaway certainly understand the insurance industry.
He had an in-depth conversation with a GEICO executive in 1951 when he first purchased the shares while attending graduate school. Berkshire Hathaway ultimately purchased the entire company in 1996.
Insurance remains a significant part of Berkshire's equity holdings and operations. It held $95 billion in bank, insurance, and finance companies' equity securities as of June 30. Berkshire also owns insurance and reinsurance companies, aside from GEICO, outright. During the first half of the year, insurance operations had $50.7 billion in revenue, or 28% of the operating business' top line.
Given Buffett's extensive history as an investor, running insurance companies, and the importance of those companies to Berkshire Hathaway's results, it's a safe bet to say he knows the industry extremely well. Hence, his aggressive buying of Chubb shares means he sees something special.
Underwriting profit
Buffett likes the industry for a couple of very good reasons. For starters, the business collects premiums up front but doesn't have to make a payout unless an event (such as a car accident) happens. The further into the future, the more time the insurance company has to invest premiums paid.
Chubb provides commercial, personal property, and casualty insurance. With property and casualty insurance, there can be long periods before claims get filed and paid. Its property and casualty business made up more than 88% of the second quarter's net premiums written, with life insurance accounting for the balance.
Buffett also likes companies to underwrite a lot of insurance, but only at premiums that make sense for the risk it's taking. And Chubb fits the bill. One way to measure insurance underwriting profitability is by examining the combined ratio. The industry metric is calculated by adding the amount paid for claims and expenses, then dividing by earned premiums. Anything below 100% indicates an underwriting profit.
Fortunately, Chubb has profitable property and casualty insurance operations. Even better, the unit's combined ratio fell from 2021's 89.1% to 86.5% in 2023. In the latest quarter, it had an 86.8% combined ratio versus 85.4% a year ago.
Should you follow Berkshire's lead?
Some have speculated that Berkshire Hathaway will purchase Chubb's remaining equity. It may have to pay a premium above the current market price, and shareholders could potentially pocket a quick profit. However, that's speculation. You're better off examining the long-term investing thesis rather than hoping for certain events.
You likely will never have the same level of insurance industry knowledge as Buffett has accumulated in more than seven decades as an investor. But you don't have to have the same expertise to grasp Chubb.
While other insurers might try to bring in a lot of insurance business in the hopes of investing the premiums, Chubb has taken a more prudent, long-term approach. By purchasing the shares, you will own an insurance company that clearly understands its underwriting risks and has done a good job managing them.
