Is It Worth Buying This Baby Berkshire?

Chubb (NYSE:CB) is one of the world’s largest insurers and one of the best.

I’ll get into what the business does later, but first I want to cover the incredible amount of value that has been created here.

Since 2007 Chubb’s book value per share has expanded from $50.6 to $103.8 for the year ending December 2016 – a compound annual growth rate of 8.3%. For some comparison, the book value per A share of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) has expanded by 8.6% per annum over the same period.

With this book value growth and earnings expansion, Chubb has produced a total return for investors of 11.2% per annum over the past decade. Over the past 15 years, the stock has returned 11.7%. According to data from Morningstar, Berkshire has only returned 9.4% per year over the past 15 years.

It’s all in the management

Chubb’s business is insurance and this year the company overtook American International Group (NYSE:AIG) as the biggest U.S. nonlife insurer by market capitalization. The business is run by Evan Greenberg, the son of Maurice “Hank” Greenberg, who famously turned AIG into a financial powerhouse over four decades in charge. The business is best known for its high-end Masterpiece homeowners insurance, reputation for excellent underwriting and conservative reserving.

Evan Greenberg has been in control of Chubb since 2015 when he merged Ace, the Zurich-based insurer he joined in 2001, with its New York-listed peer. The megadeal stood out not just because of its size but because of the reputation of Ace’s CEO. Evan Greenberg has a knack for M&A, acquiring 14 smaller insurance companies from Mexico to Malaysia while in control of Ace. In an interview with the Financial Times, Greenberg stated that he and his team “planned in every geography, every product line, every business, every functional area – including culture. We planned in great detail what would happen on day one through to day 365 and, in many cases, through day 730” ahead of the Chubb merger, which is why they’ve been able to pull off the deal so far without a hitch.

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Keeping costs low is an important part of the insurance machine and savings from the deal are on track to hit $875 million next year, supporting further earnings growth and compounding.

Before Ace swooped on its New York rival, it was widely speculated that Berkshire Hathaway was running its rule over the business. As Barron’s reported at the time of the merger:

“Barron’s has speculated in the past that Berkshire Hathaway might be interested in Chubb and that may have been the case. It could be that Warren Buffett (TradesPortfolio) wouldn’t pay the price that Ace was willing to do in order to buy Chubb. Berkshire, faced with fewer opportunities in reinsurance, has been getting more involved in specialty insurance. It’s also interesting that Ace moved in competition with Chubb in the high-end homeowners business by purchasing Fireman’s Fund’s personal lines business. The Chubb deal will make Ace the dominant player in high-end U.S. homeowners insurance.”

Time to buy?

The question is, will Chubb’s historic returns continue and is the stock priced attractively enough to buy today? Well, on traditional metrics the company is not cheap. The shares are trading at a forward price-earnings (P/E) of 15.4 and price-book (P/B) value of 1.4. If management can continue to produce results, then this valuation is not overly demanding. Buying this company is more of a bet on Greenberg and his ability to create wealth for investors. Based on his past record, I wouldn’t bet against him, although a nicer entry price would be good.

Just some thoughts on what is one of the best insurance opportunities trading in New York today.

Disclosure: The author owns no stock mentioned.

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