Buffett's Latest Bet: Why Did Berkshire Hathaway Invest in Chubb Insurance?

Warren Buffett's Berkshire Hathaway has disclosed a significant investment in the insurance company Chubb, revealing a position that had been kept confidential since the prior year. As of the end of March 2024, Berkshire Hathaway had accumulated nearly 26 million shares in Chubb, with the investment valued at around $6.7 billion. This stake, which accounts for 6.4% of Chubb, ranks as the ninth-largest holding within the Berkshire Hathaway portfolio.

Buffett's interest in Chubb may stem from the company's long history and strong expertise in property and casualty insurance. The property insurance field naturally possesses a stable cash flow, which is logically similar to Buffett's investment in auto insurance.

Chubb's birth can be traced back to 1882. Thomas Caldecot Chubb started business for insuring ships and cargoes in the harbor area of New York, USA. After decades of evolution and innovation, it gradually expanded its business to other areas such as fire insurance, accident insurance, aviation insurance, etc.

On July 1, 2015, ACE Limited, known as American Casualty Excess, declared its intention to purchase Chubb Corporation for $28.3 billion, a deal structured in both cash and ACE stock. After the transaction was finalized, ACE shareholders retained a 70% stake in the merged entity, while former Chubb shareholders received a 30% interest. The headquarters of the newly merged company were established in Zürich, the location of ACE Limited's former headquarters. In a strategic move to capitalize on the strong brand recognition, the combined entity chose to continue operating under the Chubb name.

In 2023, Chubb's underlying Combined Ratio (Expense Ratio + Loss Ratio) outperformed both its own historical average and that of its competitors. This trend is expected to persist into 2024. With price hikes and the benefit of expense leverage due to premium growth, analysts predict further enhancements in the underlying loss and expense ratios for the year. The company's reported and underlying combined ratios have regularly been superior to its peers, primarily due to its margin advantages. It expects technology investments to further trim expenses in General and Administrative (G&A), while its continued shift away from consumer lines lowers the respective acquisition ratios.

Chubb's premium growth is faster than its peers. Last year, pure rate increases peaked in the second quarter, and despite a subsequent slowdown, they have stayed above the 3.5% average seen from 2017 to 2019, indicating a positive outlook for expansion in 2024. The consensus on Chubb's premium growth for 2024 is between 7-8%, which exceeds the nominal GDP growth expectation of 4.5%, as heightened pricing in commercial insurance continues. Considering Chubb’s existing scale, excluding agricultural insurance, its global property insurance premiums still maintained double-digit growth (13.3%) in the first quarter.

Chubb's global scale offers a sustainable advantage vs. domestic rivals like Travelers and Hartford. AIG is the only competitor with a large non-US primary insurance operation.

Global expertise helps the Chubb access higher-growth emerging markets and a wide product offering lets it serve a broad range of clients. The composition of Chubb's business is quite unique and would be extremely difficult for another insurer to replicate or acquire.

Approximately 30% of Chubb's overall premiums are generated by its International division, and within this segment, the Asia Pacific region contributes 29% of the revenue. The Asian market presents a particularly strong opportunity due to its aging demographic and increasing affluence.

With the successful acquisitions of Huatai and Cigna entities, Chubb has secured a solid position in the Chinese insurance sector, becoming the first foreign entity to hold a majority interest in a financial services company in the country. Swiss Re anticipates that insurance premiums in emerging markets will grow at a rate far surpassing that of other regions globally, with China projected to become the world's largest insurance market by the mid-2030s. Chubb's strategic presence places it well within the Asian life insurance market, which is forecasted to expand to $2 trillion within the next ten years—a figure that is nearly four times the current premiums generated by similar businesses in the United States.

Chubb's stock is valued slightly lower than the average for insurers on a forward price-to-earnings ratio, even with its competitive structural and cost efficiencies. The firm's superior performance in the industry has led to more consistent earnings and steadier equity returns when compared to its counterparts. Over a decade, the company has achieved an average ROE that surpasses that of many others, while maintaining lower volatility. Additionally, Chubb has demonstrated exceptional growth in book value per share over both short and long-term periods, setting a benchmark in its class.

Source: Chubb

By Moomoo North America Team Calvin