In the face of a market that has been surging for the past 18 months, finding a well-established company with a reasonable price tag has become a formidable task. This challenge is particularly daunting for someone managing a vast portfolio like Warren Buffett, the renowned investor at the helm of Berkshire Hathaway.
Recent trends in Buffett’s investment decisions reflect this challenging environment. Over the last six quarters, he has consistently sold more stock than he has purchased. However, amidst this backdrop, one particular stock caught his attention in the third quarter of last year, leading to a series of strategic acquisitions over the past three quarters. By the end of 2023, he had amassed approximately $5 billion worth of this undisclosed asset, taking advantage of a special disclosure exemption granted by the SEC.
The veil of secrecy was finally lifted with Berkshire’s most recent 13-F filing, revealing the mystery stock to be Chubb, a prominent commercial property and casualty insurance company. Buffett’s interest in Chubb aligns perfectly with his well-established expertise in the insurance sector, which has been a cornerstone of Berkshire Hathaway’s operations since the 1960s.
With over six decades of experience in the insurance industry, Buffett possesses an unparalleled understanding of the factors that make an insurance stock appealing. His deep knowledge allows him to identify undervalued insurers, and Chubb appears to exhibit several attractive qualities that may not have been fully reflected in its share price.
Like many other insurance companies, Chubb thrived in 2023 due to increased prices and interest rates. The company’s full-year net income per share experienced a remarkable 75.9% increase, fueled by a 13.5% rise in net premiums and enhanced underwriting margins. This robust performance carried into the first quarter, with a 14.1% growth in net premiums written, likely driven by higher pricing.
Chubb’s investments have also been performing admirably. The company’s portfolio, consisting mainly of long-dated fixed-income assets like mortgage-backed securities and corporate bonds, suffered initially due to the Federal Reserve’s interest rate hikes. However, this has now translated into substantial growth in investment income, with a 25.7% surge in the first quarter alone.
Chubb’s core operations exhibit considerable strength, and its investment prospects appear increasingly promising. These factors make Buffett’s interest in the stock unsurprising.
While Berkshire Hathaway’s disclosure of its Chubb acquisitions may signal a pause in further purchases, the stock remains an attractive proposition. With a forward P/E ratio of 11.6x, it firmly falls into the value category that Buffett favors. Although its price-to-book value of 1.7x exceeds its historical average, it represents a fair price considering the company’s improving investments and strong underwriting operations.
Even at its current price, Chubb aligns with several of Buffett’s key criteria. There remains potential for Berkshire to increase its investment, given its current ownership of approximately 6.4% of outstanding shares. Additionally, Chubb holds a leading position in its industry and boasts a capable management team. Furthermore, due to its current valuation and prudent financial management, Chubb presents a lower downside risk compared to the average company.
Investors seeking a reliable value stock in the financial sector would be wise to consider Chubb as a potential addition to their portfolios.
