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Throughout history, there has almost never been a bad time to buy stocks Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B). The company, led by legendary investor Warren Buffett, has simply been one of the best investments of all time.
However, Berkshire is now valued at almost $1 trillion and is not the same company it used to be. The future still looks very bright, but there are other similar options that investors should strongly consider. Even Buffett agrees. Over the past 12 months, he has poured billions of dollars into a company that has many similarities to Berkshire.
Buffett is betting billions on this insurance company
At the heart of Berkshire’s empire is a portfolio of insurance companies. These companies have been the basis of Buffett’s investment strategy for decades. The value of running an insurance company is that you have investable cash available on a regular basis. That’s because insurers collect cash when a policy premium is paid, but only have to pay out that money when a claim is made. In the meantime, they can keep the capital interest-free. Industry experts call this interest-free capital ‘float’.
Float is available to insurance companies regardless of economic or market conditions. It gives the owner of that float the opportunity to invest capital when supply is tight. In other words, it gives Buffett a huge capital advantage if prices fall and outside capital dries up. Suffice it to say, Buffett understands the insurance industry incredibly well, and this has been key to Berkshire’s long-term success. It should come as no surprise that Berkshire has invested billions in one of the largest and highest-quality insurance companies in the world: Chubb Ltd (NYSE:CB).
What makes Chubb better than Berkshire?
Over the long term, Chubb and Berkshire have had very similar performances, although a recent rise in Berkshire’s value has pushed it over the top so far this year. Where Chubb really shines, however, is in times of turmoil. For example, from 2008 through 2009 – the worst years of the financial crisis – Chubb outperformed Berkshire by 12%.
However, it was not a perfect performance. Berkshire’s diversified business model helped it weather the 2020 crisis more easily. But over the past five years, Chubb has beta of 0.67 versus Berkshire’s beta of 0.87. As a measure of volatility, these numbers suggest that Chubb stock is likely a safer place to be if markets suddenly plummet.
Still, the long-term performance and volatility of Berkshire and Chubb are very similar, even though Chubb has proven to be a somewhat superior option during bear markets. In reality, valuation may be the best reason to buy Chubb over Berkshire right now. Chubb’s shares trade at just 1.8 times book value, while the industry average for non-life insurers is above 2 times book value. The average return on equity for the sector is also around 10% – lower than Chubb’s last result of 14.7%. The valuation becomes even more attractive when you consider that Chubb is buying back vast sums of stock, an act that creates shareholder value but tends to depress its accounting book value. More than $3 billion remains under the current share repurchase program.
Want proof that Chubb’s current valuation is too good to pass up? Currently, Berkshire’s cash stock of $277 billion is at an all-time high. This comes as Buffett continues to buy back Berkshire shares, which trade at a slight discount to Chubb on a price-to-book basis. But instead of buying back more Berkshire shares or keeping the capital in cash, Buffett opted to build a $7 billion stake in Chubb. Last quarter, Berkshire invested just $2.6 billion in share buybacks, suggesting that Buffett views Chubb as a superior investment at the moment.
Will Chubb be a far superior investment than Berkshire in the coming years? Probably not. But Buffett is clearly a fan, and the company’s reasonable valuation, strong return on equity, and long-term performance make it easy to see why. If you’re a fan of Berkshire, strongly consider adding Chubb to your portfolio.
Should you invest $1,000 in Chubb now?
Consider the following before purchasing shares in Chubb:
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Berkshire Hathaway. The Motley Fool has one disclosure policy.
Forget Berkshire Hathaway, buy these great insurance stocks instead was originally published by The Motley Fool