Is It Too Late to Buy Chubb Stock?

Last month, investors finally learned the identity of the mystery stock Berkshire Hathaway had been accumulating for months: Chubb (CB -0.70%). Over three quarters, Berkshire added 26 million shares of the insurance company, stirring up interest from everyday investors.

Chubb checks many boxes for investors looking to invest in a well-run company that consistently delivers. However, after getting a boost from Berkshire, the stock has increased 36% over the past year. Is it too late for investors to add the insurer today? To learn more, let’s dive into its business, valuation, and outlook.

A standout in a highly competitive industry

Investing in insurance companies isn’t going to deliver huge returns quickly. Instead, they are solid companies that consistently grow over time. In fact, insurance investments are a “very large chunk of Berkshire’s value,” according to Warren Buffett, because of the steady demand for the product and the cash flow they generate.

Owning insurance policies is crucial to helping individuals and businesses protect themselves from huge losses due to unforeseen catastrophes. Companies in the industry compete based on pricing and knowledge of risk, which makes it hard for any single company to stand out. However, Chubb does just that.

Chubb writes policies covering commercial property and casualty, personal lines like automotive or homeowners insurance, accident and health, agriculture, and reinsurance. The company is one of the top insurance underwriters in the U.S. and has a track record of success in pricing risk and consistently turning an underwriting profit.

One measure that gets to the core of the insurance business is the combined ratio. This ratio takes the total claims costs plus expenses associated with writing policies and divides them by the total premiums collected.

On a broad scale, the average combined ratio across the industry is 100%, showing that insurers, on average, break even on the policies they write. To stand out, companies must balance risks with premiums collected and consistently collect more than they pay in claims and expenses. Chubb has achieved that goal.

Chart by author.

Over the past two decades, Chubb’s average annual combined ratio is 91%. This shows that, on average, the insurer consistently makes $9 in profit for every $100 in premiums written, an excellent return in the highly competitive industry.

It was a challenging year for the industry

Insurers have battled with inflation over the past few years as rising costs of repairs and replacements have increased claims costs, which have impacted underwriting profitability. For example, in the first quarter of last year, property and casualty insurers posted their worst underwriting loss in 12 years.

The industry’s combined ratio of 104% was the worst reading in six years. Despite this result, Chubb’s combined ratio was a stellar 87%, 17% better than the industry average. This solid performance is likely one reason why Buffett and his team loaded up on the stock last year.

This solid underwriting ability helps Chubb produce stellar cash flows and earnings growth, leading to solid performance for long-term investors. Over the past year, Chubb brought in $13.6 billion in free cash flow on total revenue of $51.8 billion. The company’s cash-flow growth has taken off in the past few years, displaying its ability to grow alongside the economy and inflation.

CB Revenue (TTM) data by YCharts

Another advantage of investing in insurers in today’s environment is that they benefit from higher interest rates. That’s because insurers have a large pile of cash to invest in Treasuries and other assets to earn interest income. Last year, Chubb earned $4.9 billion in net investment income, an increase of 32% from the prior year.

Is it too late to buy?

Chubb stock has risen 36% over the past year, so you’ll also want to consider its valuation. The stock is priced at 11.7 times its earnings from last year and 11 times next year’s. This is slightly below its 20-year average of 12.6 and suggests the stock is reasonably valued despite its recent run-up.

Longer-term trends are favorable for the insurer, too. According to a report published by Grand View Research, the property and casualty insurance market is expected to grow to nearly $3.7 trillion by 2030, or nearly 8% compounded annually.

Chubb offers investors a blend of growth and income (its dividend is around 1.3% and has grown for 30 consecutive years) and is positioned to grow alongside the economy and if inflationary pressures were to reemerge. Its ability to adapt to rising costs and its large investment portfolio make Chubb a solid long-term investment investors can confidently add today.