Late last year, Warren Buffett's holding company, Berkshire Hathaway, started buying up shares of a mysterious company. No one knew the company in question because Berkshire had requested an exemption from the SEC that allowed it to skirt disclosure rules. But in early 2024, the mystery stock was revealed as Chubb(NYSE: CB).
Here's the strange part: Chubb runs a business model very similar to Berkshire's. It was strange that Buffett would opt to buy shares of a close competitor instead of simply repurchasing Berkshire stock directly. Might Buffett believe that Chubb could become the next Berkshire -- signaling a huge growth runway ahead?
The companies have a lot in common
Over the decades, Buffett has turned Berkshire into a behemoth organization now valued at nearly $1 trillion. While his exact tactics have varied over the years, the overarching strategy has remained consistent. At the core of Berkshire's operations sits a litany of insurance businesses. These companies produce investable cash flow whenever they write policy premiums. And because this money doesn't need to be paid out until a claim is filed, Berkshire essentially can invest this cash in the meantime free of interest. Berkshire now has holdings in dozens of companies spanning nearly every industry.
In many ways, Chubb is a miniature Berkshire. At its core also sits a portfolio of insurance companies that provide everything from property and casualty insurance to personal accident and supplemental health insurance. The firm even operates in the reinsurance market -- essentially providing insurance policies to insurers themselves. And like Berkshire, Chubb invests its "float" -- the term for the excess cash that insurance operators generate -- in securities that earn it a return on top of any underwriting profit it may also accrue.
Berkshire and Chubb not only have similar business models, but also similar long-term track records. Over the past decade, the total returns for each stock have been nearly identical. However, there are two major differences to be aware of here. One suggests Chubb could very well be the next Berkshire, although the other creates a level of caution.
BRK.B Total Return Level data by YCharts
Two reasons Chubb remains different from Berkshire
The biggest difference between Chubb and Berkshire is obviously size. After all, this is what makes it possible for Chubb to become the next Berkshire. Right now, Berkshire's market cap is around $1 trillion, yet Chubb's is only around $115 billion. If Chubb became the next Berkshire, it would signal roughly 900% in potential long-term upside.
This size difference should get investors excited. But there's a problem when you look under the hood. Over the past decade, Chubb has slightly underperformed Berkshire despite its small size. In theory, it should be much easier for it to generate higher growth rates as a small company. Yet over the last decade, Berkshire has generated an average return on equity of 10.6%, while Chubb has only managed an average return on equity of 9.9%.
This brings us to the major difference between Berkshire and Chubb: Berkshire has the direct benefit of Warren Buffett investing its capital. It's no small advantage to have one of the best investors in history on your side, plus all of his handpicked lieutenants who help manage the portfolio. Buffett's investing success has propelled Berkshire into a gigantic conglomerate, while Chubb remains mostly a pure-play insurance operator with a relatively smaller portfolio of investments.
Will Chubb become the next Berkshire? It certainly has all of the core pieces in place. Yet, at the end of the day, it wasn't just the business strategy that made Berkshire what it is today. It was also the benefit of Buffett's investing acumen. Buffett clearly likes what he sees, given that Berkshire now owns nearly $7 billion of Chubb shares. But there's a reason why Berkshire was able to beat Chubb's total stock return over the past decade: It operates more like a hedge fund, while Chubb is closer to a classic insurer.
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
