What drew Berkshire to make a $6.72B bet on Chubb?

Berkshire Hathaway Inc.'s $6 billion bet on Chubb Ltd. is, on its face, a solid investment in a business that outperforms its peers, but it could also be the start of a strategic move to bring another wholly owned insurer into the Berkshire fold.

The Warren Buffett-led conglomerate set tongues wagging in April with the announcement that it had discreetly built up a $6.72 billion position in Chubb as of the first quarter. The move makes the property and casualty insurer Berkshire's ninth-largest investment holding and its largest ever in an insurer.

Wall Street responded to the move with enthusiasm, and Chubb shares have been in positive territory since the announcement.

Berkshire has since filed amended statements showing that its initial investment into Chubb occurred during the third quarter with a purchase of 8.1 million shares. This was followed by an additional investment in the fourth quarter of 2023 and another in the first quarter of 2024.

Berkshire has only ever had a handful of insurers in its investment portfolio and in recent years has completely divested from all of them, making its new stake in Chubb particularly striking.

The question now is what happens next.

A case for a deal

Analysts agree that Chubb and Berkshire have businesses that are very complementary to each other, which could potentially be one of the things that sparked Berkshire's interest in the property and casualty insurer.

"If for some reason Berkshire decides that they would like to acquire Chubb from a strategic perspective it makes a lot of sense because the business dovetails very nicely with their existing businesses," CFRA analyst Cathy Seifert said in an interview.

In personal lines, Berkshire — through GEICO's direct-to-consumer model — focuses on the middle-income consumer while on the flipside, Chubb specializes in high-net-worth business.

Berkshire is also sitting on a large pile of cash.

According to Berkshire's most recent 10-Q, cash and cash equivalents, short-term investments and US treasury bills in Berkshire's insurance and other operations segment totaled $182.34 billion at the end of the first quarter — an increase of roughly $19 billion from the end of 2023.

An insurance powerhouse

It is no secret that Buffett is big fan of the insurance business. In Berkshire's 2023 annual report, the legendary CEO called its property and casualty business the "engine propelling Berkshire's growth since 1967," the year in which the company used $8.6 million to buy National Indemnity and its partner company National Fire & Marine.

Berkshire has since grown its presence in the US insurance market and now has many insurers including superstar GEICO and reinsurer General Re under its control.

Ajit Jain is vice chairman of Berkshire's insurance operations and reports directly to Buffett, who in turn has credited Jain with much of the insurance segment's success.

"Berkshire has now operated at an underwriting profit for 18 of the last 20 years, the exceptions being 2017 and 2022," Buffett wrote in the 2023 annual report.

Most recently, Berkshire moved to acquire a property and casualty reinsurer, Alleghany Corp., for about $11.6 billion in 2022.

Any full takeover of Chubb would require approval from state insurance regulators as well as the US Justice Department Antitrust Division.

Chubb did not respond to a request for comment. Berkshire did not immediately respond to a request for comment.

Underwriting discipline

Regardless of what Berkshire's ultimate plans may be, Chubb fits the Berkshire template of pursuing underwriting profitability through what Buffett called "disciplined risk evaluation" in the 2023 annual report.

In a time where Chubb's property and casualty (P&C) peers have struggled to be profitable, the insurer has kept its combined ratio, a key profitability metric, under 100% every year since 2014 with the exception of 2020. Chubb has also outperformed the property and casualty industry's combined ratio since 2014 as well, again with the exception of its results in 2020.

TD Cowen analyst Andrew Kligerman said in an interview that Berkshire Hathaway is an expert on P&C insurance, making its bet on Chubb seem more of a "pure investment" in their equity portfolio — a company they think will perform well just like any other it has added to its portfolio.

"Given their highly extensive knowledge around P&C, I would take it as a positive view of Chubb and Chubb's loss reserving," Kligerman said. "There's been a lot of talk about reserve adequacy so you can argue it's a really positive endorsement."

Chubb's recent history

Buffett often emphasizes the importance of having a solid management team in place when deciding to invest in a business. Chubb CEO Evan Greenberg is known for making colorful comments during earnings calls, but he has a long history in the industry and is the son of former American International Group Inc. CEO Maurice Greenberg.

Chubb has also been involved with high-profile claims in the past several years including an agreement with the Boy Scouts of America in 2021 for an $800 million settlement to cover its share of financial responsibility for sexual abuse claims made against the youth-focused organization.

The insurer also issued a $91.6 million bond to former President Donald Trump which allowed him to appeal the $83.3 million judgment that was awarded to writer E. Jean Carroll in his sexual abuse and defamation trial which wrapped up in February.

The P&C insurer was also reportedly the lead insurer on the Francis Scott Key Bridge, which fell into the water after being struck by a container ship leaving the Port of Baltimore. During Chubb's first-quarter earnings call, Greenberg said the company's exposure to losses from the collapsed bridge were not "outsized."

Chubb became what it is today when Ace Ltd. bought Chubb Corp. in 2016 and the two insurers merged, choosing to carry on under the Chubb name. Whether its future includes an exclusive seat at the Berkshire table, only the Sage of Omaha knows for sure.