Berkshire Hathaway now owns 27 million shares of this stock. Should You Follow Warren Buffett’s Lead?

Berkshire Hathaway (BRK.A 0.94%) (BRK.B 0.97%) sold more stock positions during the second quarter, but Chubb (CB 1.19%) it was one of the few stocks that Warren Buffett and his team continued to accumulate, adding another 1.1 million shares in the second quarter.

This marks the fourth consecutive quarter that Berkshire has added shares of the global insurer to its portfolio. The conglomerate now owns 27 million shares, or $7.4 billion in Chubb stock. Here’s why investors might be wise to follow Buffett’s lead today.

Image source: The Motley Fool.

Why Buffett Likes Investing in Insurance Businesses

The insurance business has many attributes that appeal to long-term investors like Warren Buffett. First, these companies enjoy a constant demand for their products. Chubb, for example, is one of the world’s largest property and casualty insurers, covering risk categories that include personal motor, homeowners, casualty and health, agriculture and reinsurance.

Another attractive aspect of the business is the cash flow it can generate. Insurers operate differently from traditional businesses by collecting revenue (premiums) upfront and paying claim costs later. Because it doesn’t pay out until a customer makes a claim, insurers sit on a pile of money they can hold and invest but don’t own, called “float.”

For Buffett, insurance companies and the cash flow they generate are a sizeable part of Berkshire’s value, in part because, as he said in Berkshire Hathaway’s 2021 letter to shareholders, insurance products “will never be obsolete , and sales volume will generally increase along with both. economic growth and inflation’.

Berkshire Hathaway owns several insurance companies under its umbrella, including GEICO, General Re, Berkshire Hathaway Reinsurance and Alleghany, which it acquired two years ago for $11.6 billion.

Chubb has delivered excellent returns for investors

Chubb’s business has several advantages. It is one of the world’s largest property and casualty insurers covering various risks. He has demonstrated excellent underwriting discipline in the highly competitive insurance industry and consistently beats his peers when it comes to writing profitable policies.

Due to strong underwriting and steady demand, Chubb has consistently increased its top and bottom lines. Over the past decade, Chubb’s revenue and net income have grown by about 11% compounded annually. Over the past year, the insurer has delivered a record $15.2 billion in free cash flow, representing capital it can reinvest in the business, pay dividends or use to buy back its stock.

With disciplined underwriting and steady demand, it’s no surprise that Chubb has delivered excellent returns for long-term investors. The company has consistently increased its dividend over the past 31 years. During the same period, Chubb’s total compound annual return (including reinvested dividends) of 12.9% exceeded S&P 500its yield of 10.4%.

CB Total Return Level data by YCharts

Here’s why Chubb can keep delivering

JPMorgan Chase CEO Jamie Dimon recently warned that “there are more inflationary forces ahead” from fiscal deficits, rising interest rates and stubbornly high inflation. If Dimon is right, Chubb can continue to deliver for investors for several reasons.

First, the company enjoys steady demand and the industry context favors insurers. Insurers have faced rising claim costs over the past few years due to weather-related events, economic and social inflation, and less availability of reinsurance coverage.

This is known as a “tough market” in insurance, and risks related to geopolitical conflict, cyber security, climate-related catastrophes and unrest are likely to remain. As a result, insurers can raise premiums and be more selective about the policies they’re willing to cover — which can help investors stay ahead of any inflationary pressures should they resurface.

Not only that, but Chubb has an investment portfolio of $113 billion, invested primarily in fixed income securities. Last year, the insurer earned $4.9 billion in investment income, up 32 percent year over year. In the first six months of 2024, net investment income increased by another 27% compared to last year.

Chubb has a proven track record of growth in an expanding economy. However, if inflationary pressures persist, it has the pricing power to adjust to rising costs and the investment portfolio to take advantage of higher interest rates — giving it excellent potential for the next decade and beyond.