Forget Berkshire Hathaway, buy this magnificent insurance stock instead

Throughout history, there has almost never been a bad time to buy stocks Berkshire Hathaway (BRK.A 1.85%) (BRK.B 1.61%). The company, led by legendary investor Warren Buffett, was simply one of the best investments of all time.

However, now valued at nearly $1 trillion, Berkshire is no longer the company it once was. The future is still very bright, but there are other similar options that investors should strongly consider. Even Buffett agrees. In the past 12 months, he has invested billions of dollars in a company with many similarities to Berkshire.

Buffett is betting billions on this insurance company

At the heart of the Berkshire empire is a portfolio of insurance companies. These businesses have been the foundation of Buffett’s investment strategy for decades. The value of running an insurance company is that you regularly have cash available for investment. This is because insurance providers collect cash whenever a policy premium is paid, but they only have to pay out that money when a claim is made. Meanwhile, they get to 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 ability to invest capital when it is in limited supply. In other words, it gives Buffett a huge capital advantage when prices fall and outside capital dries up. Suffice it to say that Buffett understands the insurance industry incredibly well and has been key to Berkshire’s long-term success. It should come as no surprise, then, that Berkshire has invested billions in one of the world’s largest and highest quality insurance carriers: Chubb Ltd (CB 0.78%).

What makes Chubb better than Berkshire?

Over the long term, Chubb and Berkshire have performed very similarly, although a recent surge in Berkshire’s value has pushed it over the top so far this year. Where Chubb really shines, though, is in the downs. From 2008 to 2009, for example — the worst years of the financial crisis — Chubb outperformed Berkshire by 12 percent.

It wasn’t a perfect performance, though. Berkshire’s diversified business model has allowed it to ride through the precipitous crash of 2020 more easily. But over the past five years, Chubb has generated a beta of 0.67 versus Berkshire’s beta of 0.87. As a measure of volatility, these numbers suggest that Chubb stock is probably a safer place to be in the event that markets suddenly crash.

BRK.B data by YCharts

Still, the long-term performance and volatility of Berkshire and Chubb are very similar, even though Chubb has proven to be a slightly superior option during bear markets. In reality, perhaps the best reason to buy Chubb over Berkshire right now is valuation. Chubb stock trades at just 1.8 times book value, while the industry average for property and casualty insurers is more than 2 times book value. The average return on equity for the industry is also around 10% — lower than Chubb’s most recent result of 14.7%. The valuation becomes even more attractive when you consider that Chubb buys back huge amounts of stock, an act that creates value for shareholders but tends to depress book value. More than $3 billion remains under its current share buyback program.

Want proof that Chubb’s current valuation is too good to pass up? Right now, Berkshire’s cash hoard 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 book basis. However, instead of buying back more Berkshire stock or keeping the capital as 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 right now.

Will Chubb be a far superior investment in the coming years than Berkshire? Probably not. But Buffett is clearly a fan, and the company’s reasonable valuation, strong returns on equity and long-term performance make it easy to see why. If you’re a Berkshire fan, strongly consider adding Chubb to your portfolio.