The Berkshire Hathaway chief loves this stock. And so should you.
Through his holding company Berkshire Hathaway, Warren Buffett holds investments in dozens of iconic businesses that most investors are already aware of. But some of his investments lack name recognition, causing most investors to ignore the stocks in question. That’s the case with one of Berkshire’s recent purchases, a stock that Buffett has plowed billions of dollars into. If you want to buy into one of Buffett’s best ideas while the market remains oblivious, this looks like your chance.
Don’t be scared by this unexciting stock
Many investors have never heard of Chubb (CB -0.08%). And when they learn what business Chubb is involved in, most tune out. That’s because Chubb’s principal line of business — property and casualty insurance — simply doesn’t sound very exciting. Why research an insurance company when you can try to invest in the next big electric vehicle or AI stock?
In many ways, Chubb’s business model is similar to Berkshire Hathaway — Buffett’s holding company. At its core, the conglomerate is essentially an insurance company. It has partial or complete ownership in more than a dozen insurance entities, operating in everything from life insurance to reinsurance. Insurance businesses collect premium payments when they underwrite a policy, but only need to pay out that cash at a later date when a claim is filed. They usually hold a ton of investable cash, which the industry terms “float.”
Float can be an incredible asset for an investor looking to take advantage of market downturns. When markets crash, capital typically dries up. But due to its insurance cash flows, Berkshire always has extra cash it can put to work, especially when prices are most attractive — an advantage that few investors have.
To be sure, Chubb operates more like a traditional insurance operator than Berkshire, which operates more like a diversified investment fund. Around 84% of Chubb’s float is invested in low-risk fixed-income bonds. But Chubb has been able to maintain this conservative investment strategy given it’s been able to do something that few other insurers have managed: generate positive underwriting profit.
Due to the level of competition in the industry, many insurers have opted to write policies at cost or close to it, betting that they will be able to generate enough profit from their returns on their investable float. Chubb, meanwhile, has had the best of both worlds. Not only has its investment portfolio remained consistently profitable, but it has also generated underwriting profit margins of between 10% and 15% — two to three times wider than the industry average.
Suffice to say, this is a boring business. But it has been consistently profitable, a trait that undoubtedly helped the company attract Buffett’s attention.
2 types of investors should consider Chubb stock
Chubb stock will not be a great option for those looking for maximum growth opportunities. However, there are two types of investors who should consider getting involved.
The first is retirees. History has demonstrated that Chubb can produce respectable long-term gains. Its conservative underwriting practices, plus its conservative investment strategy, should help insulate it from the impact of market downturns. That, in turn, means its stock should be resilient during bearish periods — a trait that those on fixed incomes will particularly appreciate.
The second type of investors who should consider Chubb stock are people looking to invest in the “next Berkshire Hathaway.” In the past, Chubb’s business model has been pretty vanilla when contrasted to Berkshire’s approach. But Buffett’s involvement could change that. Because Chubb has a market cap of just $120 billion, it has a much larger investable universe than Berkshire, which is currently worth about $1 trillion. If it decides to be more active with its investment portfolio, it could unlock growth opportunities that are not yet priced into its stock.
Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.