Why is Warren Buffett buying shares of this company?

of Warren Buffett Berkshire Hathaway (BRK.A -0.99%) (BRK.B -1.18%) has made headlines lately for selling shares, including cutting its large stakes Apple and Bank of America.

But Berkshire Hathaway, known for its patient investment approach, has been acquiring shares of other companies. That includes the insurer Chubb (CB 0.06%). Having initially bought 8.1 million shares last year, he now owns more than 27 million shares. In the second quarter, Berkshire added 1.1 million shares.

While you shouldn’t blindly follow anyone’s investments, no matter how successful, it’s useful to look at Buffett’s investment philosophy to see what attracted him to Chubb. After that, you can determine if the stock fits your portfolio.

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Industry knowledge

Buffett believes in investing in what he understands. And Buffett and Berkshire Hathaway certainly understand the insurance industry.

He had an in-depth conversation with a GEICO executive in 1951, when he first bought the stock while in graduate school. Berkshire Hathaway eventually acquired the entire company in 1996.

Insurance remains a significant part of Berkshire’s holdings and operations. It held $95 billion in equity securities of banking, insurance and financial companies as of June 30. Berkshire also owns insurance and reinsurance companies besides GEICO. In the first half of the year, insurance operations had revenues of $50.7 billion, or 28% of the top line of the operating business.

Given Buffett’s extensive history as an investor, running insurance companies, and the importance of those companies to Berkshire Hathaway’s bottom line, it’s safe to say he knows the industry extremely well. So his aggressive buying of Chubb stock means he sees something special.

Subscription profit

Buffett likes the industry for some very good reasons. To begin with, the company collects premiums up front, but doesn’t have to make a payment unless an event (such as a car accident) occurs. The further into the future, the more time the insurance company has to invest the premiums paid.

Chubb offers commercial, personal property and casualty insurance. With property and casualty insurance, long periods can pass before claims are submitted and paid. Its real estate business represented more than 88% of net premiums written in the second quarter, the balance being life insurance.

Buffett also likes companies to write a lot of insurance, but only at premiums that make sense for the risk they’re taking. And Chubb fits the bill. One way to measure the profitability of insurance underwriting is by examining the combined ratio. Industry value is calculated by adding the amount paid for claims and expenses, then dividing by the premiums earned. Anything below 100% indicates an underwriting profit.

Fortunately, Chubb has profitable property and casualty insurance operations. Even better, the unit’s combined ratio fell from 89.1% in 2021 to 86.5% in 2023. Last quarter, it had a combined ratio of 86.8% versus 85.4% a year ago follow.

Should you follow Berkshire’s lead?

Some have speculated that Berkshire Hathaway will buy Chubb’s remaining equity. It may have to pay a premium over the current market price, and shareholders could make a quick profit. However, this is speculation. It is better to examine the long-term investment thesis than to hope for certain events.

You will likely never have the same level of insurance industry knowledge that Buffett has amassed over more than seven decades as an investor. But you don’t have to have the same experience to understand Chubb.

While other insurers might try to bring in lots of insurance business in hopes of investing premiums, Chubb took a more cautious, long-term approach. By purchasing shares, you will own an insurance company that clearly understands its underwriting risks and has done a good job of managing them.