What if Buffett Bought Chubb Outright? It Makes a Lot of Sense.

For more than a decade, Warren Buffett has sought in vain for what he calls an elephant-sized acquisition that could absorb a big chunk of Berkshire Hathaway’s cash hoard that totaled a record $182 billion at the end of the first quarter.

Berkshire’s purchase of a 6% stake in Chubb worth almost $7 billion has generated some speculation that Berkshire might seek to purchase all of the big global property and casualty insurer.

Such a transaction would make strategic and financial sense for Berkshire.

The news of Berkshire’s stake in Chubb, accumulated from the third quarter of 2023 through the first quarter of this year and revealed in a filing after the close of trading Wednesday, prompted a 4.7% gain in Chubb shares Thursday to $264.88. The stock had hit a record $270 earlier in the session Thursday. Berkshire had kept the Chubb holding confidential for two quarters.

Berkshire’s Class A stock rose 0.7% at $627,000.

Chubb, one of the largest and best-run P&C insurers in the world, could be a perfect fit for Berkshire, which has a huge P&C business, led by Geico, the No. 3 auto insurer, as well as large reinsurance operations and a growing primary P&C business.

“Although we have no indication that this transaction is part of a larger Berkshire plan to acquire Chubb, we do note that Chubb’s business mix of primarily commercial lines property-casualty coverage and high-end homeowners’ coverage dovetails well with Berkshire’s existing mix of business,” wrote CFRA analyst Cathy Seifert in a client note. Berkshire had no immediate comment.

Berkshire CEO Buffett, 93, knows Chubb well, having participated or invested in the P&C insurance business since the 1950s.

There’s also a personal element. Buffett admires Maurice “Hank” Greenberg, 99, the former CEO of American International Group and the current chairman and CEO of Starr Insurance, a private insurance and investment firm. Evan Greenberg, Hank’s son, is Chubb’s CEO and is a formidable empire builder like his father. Evan engineered a merger of Ace, which he had headed, and Chubb, in 2016 that created the current company.

Chubb is digestible for Berkshire given a current market value of $107 billion. Buffett has a value bent, preferring not to pay more than 15 times forward earnings for investments.

Chubb fits that bill, now trading reasonably at about 12 times projected 2024 earnings. If Berkshire were to offer $325 a share, a premium of over 20%, that would be a $130 billion deal and value Chubb at 15 times earnings. Such a deal would be accretive to Berkshire’s earnings given that the company’s cash is now earning a 5%-plus yield in Treasury bills. A P/E of 15 equates to an earnings “yield” of about 7%.

Chubb has the best brand name in P&C insurance and has a record of strong underwriting results that outpaces peers—something that Buffett undoubtedly knows. Chubb’s underwriting profit margin was about 14% last year and 10% during the past five and 10 years, against about 4% for peers over all those periods. One issue for Chubb and other insurers is whether the strong P&C cycle is nearing a peak.

Chubb is the No. 1 commercial P&C insurer in North America. It is best known to consumers for its high-end Masterpiece homeowners insurance popular with wealthy Americans.

Chubb’s overall homeowners market share in the U.S. and Canada is under 3%. However, the company puts its market share at 60% in the high net-worth personal lines market in North America (personal lines includes homeowners, auto and coverage for art and other valuables).

Chubb has a reputation for being fair with claims payments. Like other insurers, Chubb has been raising personal lines premiums to offset rising loss costs.

If Berkshire were to make a run at Chubb, it might follow a similar playbook to its purchase of insurer Alleghany for $12 billion in 2022.

Buffett does deals his own way. He believes in making take-it-or-leave it offers. Berkshire doesn’t participate in corporate auctions and has rarely boosted a bid.

With Alleghany, Buffett personally made an offer to the CEO of Alleghany at $850 a share in cash, then reduced it slightly to about $848 when Alleghany said it needed to hire investment bankers (Buffett cut the deal price by the amount of the fees). Berkshire didn’t use an investment banker in that transaction and Buffett feels bankers usually provide little value.

Buffett stood firm when Alleghany pushed for a higher price or a stock component and Berkshire ultimately prevailed. Alleghany accepted the deal with the provision for a go-shop period meaning other bidders could come forward in a defined period. None did.

Berkshire’s unwillingness to participate in corporate auctions is an impediment to getting deals done since corporate boards want to see if there are higher bidders.

That may be one reason that Berkshire has made only one large deal since its purchase of Burlington Northern Santa Fe in 2010. That deal, a $33 billion purchase of Precision Castparts by Berkshire in 2016, hasn’t gone well.

In Chubb, Buffett would be dealing with a tough CEO in Greenberg. The Chubb leader is 69 and shows no signs of wanting to give up the top job. His model could be his father and Buffett, who both have been active in running companies in their 90s. Chubb had no immediate comment.

If Berkshire were to buy Chubb, it would get a $140 billion investment portfolio mostly in bonds and if the Alleghany model were to hold, Berkshire probably would liquidate a good chunk of it. Buffett favors equity investments over bonds with Berkshire holding a tiny bond portfolio of under $20 billion relative to stocks of about $370 billion.

Berkshire has sufficient capital that it can hold a riskier asset mix. Berkshire’s insurance operations hold around $300 billion of capital, the most of any global insurer.

There doesn’t appear to be much overlap between Berkshire and Chubb. Berkshire, for instance, is a leader in auto insurance where Chubb is tiny.

While the P&C market is fragmented, a Berkshire/Chubb combination likely would invite antitrust scrutiny from the Biden administration, which has often been hostile to big deals.

A Berkshire/Chubb deal may not be likely but it’s a deal that makes strategic and financial sense.

It would absorb a big chunk of Berkshire cash and thus ease the burden on Buffett’s likely successor, Greg Abel, to do something with the cash which could hit $200 billion on June 30. Buffett might have found his elusive elephant.

Write to Andrew Bary at [email protected]