Warren Buffett was apparently pretty bearish on the stock market late last year. The company he led as CEO until year end, Berkshire Hathaway (BRK.A 0.46%)(BRK.B 0.34%), was holding a record amount of cash, having sold off big chunks of several major positions.
But Buffett did opt to add to certain positions -- a signal of bullishness, at least for certain stocks. In fact, after a sizable purchase, Buffett now owns 9.3% of an iconic value stock, pushing this position into his top 10 bets at Berkshire Hathaway.
NYSE: CB
Key Data Points
This might be my favorite Buffett stock
Berkshire has shown itself to be a huge fan of Chubb (NYSE: CB), purchasing around 2.9 million more shares of the insurance giant in last year's third quarter, resulting in a total investment of more than $10 billion. Berkshire first bought shares in the first quarter of 2024, and the position now accounts for roughly 3.9% of Berkshire's total publicly traded portfolio.
If you know anything about Berkshire, you can probably guess what made Buffett so interested in Chubb stock. Chubb is essentially a global, diversified insurance provider. The company specializes in commercial and personal property and casualty insurance, but it also dabbles in accident insurance, health insurance, life insurance, and reinsurance.
This is a business that Buffett and Berkshire understand very well. While Berkshire now owns a giant portfolio of companies, the core of Berkshire has always been a portfolio of privately held insurance businesses. The reason for this is simple: These businesses generate consistent cash that Buffett can invest.
When an insurance company writes a policy, the premiums are paid up front, with claims only being paid out at a later date. This generates extra cash that can be invested until those claims must be paid. Buffett calls this extra cash "float." By investing the float, Buffett and Berkshire essentially earn returns on interest-free capital. Put simply, Buffett knows the insurance business like the back of his hand. But there's one reason in particular that he might have been interested in Chubb stock recently.
Image source: Berkshire Hathaway.
Chubb stock is a great way to protect your portfolio
According to many key indicators, the stock market is historically expensive right now. Boring insurance stocks like Chubb, however, still trade at reasonable valuations. Shares currently trade at a price-to-book ratio of about 1.8. Three years ago, shares traded at 2.2 times book value. It's hard to find quality stocks that are cheaper today than they were three years ago, but that's exactly what Chubb stock offers.
Competition in the insurance space has increased in recent decades due to increased attention from portfolio managers seeking to replicate Buffett's business model at Berkshire. This caused industry profits to fall from an underwriting perspective. The insurance industry uses a metric called the combined ratio to track underwriting profits. If the ratio is 90%, that means the insurer paid out just $0.90 in claims for every $1 in premiums -- resulting in a 10% underwriting profit. But due to competition, combined ratios have often hit 100% or more in recent years. Yet last quarter, Chubb posted a record 85% combined ratio!
The fit for Berkshire's portfolio is clear. Chubb not only generates extra investable cash for itself, but it does so at a strong underwriting premium. While there may be regulatory constraints, I wouldn't be surprised to see Berkshire attempt to buy the entirety of Chubb in the coming years. This isn't the most exciting business, but it's a reliable winner trading at a very reasonable valuation -- a rare combination in today's market.
