Checking Out Chubb (The Berkshire Beat #71)
Checking Out Chubb (The Berkshire Beat #71)
All of the latest Warren Buffett and Berkshire Hathaway news!
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The latest news and notes out of Omaha…
CHECKING OUT CHUBB: Berkshire Hathaway has purchased 25.9 million shares of Chubb Ltd. over the past three quarters. So what does Warren Buffett and co. see in the Zurich-based insurer?
In this year’s annual report, Buffett reprinted a one-page explainer of Berkshire’s insurance operations — in which he pledged that disciplined underwriting will always come first. “All insurers give that message lip service,” he wrote. “At Berkshire, it is a religion — Old Testament style.” And Chubb certainly seems to be singing off that same hymn sheet. In 2023, Chubb achieved an impressive 86.5% combined ratio in P&C (Property & Casualty) underwriting. Granted, this isn’t exactly the most challenging time for the insurance biz, but a mid-80s combined ratio is pretty stellar no matter the season.
MORE CHUBB: While researching the newest addition to Berkshire’s portfolio, I came across a few facts and figures about the insurance giant that might be of interest:
As a result of Chubb’s disciplined underwriting, the company’s net income rocketed up 72% last year. (Though that was also boosted by a large, one-time tax benefit in Bermuda.)
Chubb’s stock price is up 16.4% so far this year and 26.4% since the start of Q4 2023. Berkshire started buying sometime in the third quarter and amassed 77.5% of its current stake by year end — so it has gotten to ride that wave.
Another nugget from Contessa Brewer: “More than three-quarters of Chubb’s business is in the U.S. and Asia, which the company says it expects to grow about 40% faster than the rest of the global insurance market over the next decade.”
Chubb is also a Dividend Aristocrat. Last week, the insurer raised its quarterly dividend by 5.8% to $0.91 — making this the 31st consecutive year that it has grown its payout.
TALKIN’ BERKSHIRE: Adam Mead wrote The Complete Financial History of Berkshire Hathaway and understands the Buffett-and-Munger-built conglomerate as well as anybody. He recently appeared on the Excess Returns podcast and shared his thoughts on this year’s AGM and other pressing topics for Berkshire shareholders.
Mead interpreted Buffett’s remark about Greg Abel being in charge of the stock portfolio much as I did. Not as a slam against Todd Combs and Ted Weschler, but rather as an acknowledgement of Abel’s capital allocation acumen and his role as CEO. “I think Todd and Ted will continue to invest tens of billions for Berkshire the way they’ve always done,” he said. “They are involved in looking at acquisitions … They are involved in a way that I don’t think is fully appreciated [by Berkshire shareholders].”
“Berkshire’s cash position is interesting,” said Mead. “If you look at Berkshire’s history, in every decade the largest acquisition has been no less than 15% of their equity capital. To make an acquisition at 15% of equity capital today would require a purchase price of $90 billion.” Opportunities like that, of course, don’t exactly grow on trees. “The universe of companies just shrinks dramatically [in that price range]. At some point, they’re going to be so big that they just really can’t move the needle.”
And, even if Buffett can find such an elephant, Berkshire’s cash position “will be replenished pretty quickly” with strong operating earnings each year. “At some point,” said Mead, “they will need a release valve. We’ve been kind of lucky that they’ve been able to repurchase shares and retire a pretty good amount of shares over the last five years.”
Does that mean a dividend might be on the way? “I think probably within five years — but certainly within ten years — they’ll have to start at least some sort of regular dividend to kind of bleed off that cash.”
“[A dividend] really will happen eventually,” he added. “That’s what happens when you retain all of your earnings for 65 years.”
CATCHING UP ON DIVIDENDS: Last week, I devoted the entire top section of the newsletter to Berkshire’s investment activity from Q1 2024. So, now, we’ve got two weeks worth of dividends to catch up on. Here’s the full list of dividend checks that rolled into Omaha since last we spoke: $197.3 million from Apple, $29.3 million from Citigroup, $8.7 million from Ally Financial, $7.5 million from Capital One Financial, and $2.8 million from Aon. (That Apple number may be lower if Berkshire sold any more shares during the second quarter. Time will tell on that.)
⭐️ UP NEXT: On Wednesday, this month’s paid subscriber “bonus” — an annotated transcript of a Warren Buffett interview from 2016 — will be released. It’s actually one of the best Buffett interviews that I’ve transcribed so far — a fast-paced Q&A with several stories that I hadn’t heard before.
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In the Spotlight: Berkshire Hathaway Subsidiaries at the AGM
✨ Shortly before tens of thousands of Berkshire Hathaway shareholders descended on Omaha for annual meeting weekend, local news outlet KETV caught up with NFM CEO Tony Boldt to talk all things Buffett.
“[Warren] has basically been a guide and a mentor,” he said, “and he’s just an unbelievable business partner. He’s just so inquisitive. He always wants to know what’s going on with the business — how do we think about this and how do we think about that. You can just tell that he’s a wealth of knowledge and has such an interesting perspective on the whole world and how it’s operating.”
“He’s one of a kind,” said Boldt. “He buys businesses that he trusts and he lets them operate their business [as they see fit] — but he’s always there for intellectual capital. He’s the consummate business partner.”
✨ During this year’s annual shareholders meeting, Warren Buffett gave a special shoutout to Pilot CEO Adam Wright. His first year at the helm has not been an easy one — with the trucking industry in the doldrums and that little legal tussle between Berkshire Hathaway and the Haslam family over Pilot’s valuation.
“This is a tough time for truckers,” he told CNBC’s Becky Quick in Omaha. “We’re in a down cycle right now — mostly because of freight rates. There is too much capacity from a trucking standpoint for the freight that needs to be moved and that depresses rates … That has to work its way out and then things will start to level out.”
Nevertheless, Pilot continues to upgrade its travel centers with better food, wider aisles, up-to-date showers, and other aesthetic flourishes to attract more business.
“It’s important for us to be fuel agnostic and guest-focused,” he said when asked about electric vehicles. Pilot will continue to supply “old energy” like gasoline and diesel — while also planning for the EV future.
“We see a 40-50% increase in [EV] charging sessions and energy dispensed on weekends and holidays,” said Wright. “That says that EV owners want to take their EVs from urban settings and take them cross country.” To meet this demand, Pilot hopes to build out 2,000 EV chargers at 500 locations by 2026.
✨ BNSF Railway CEO Katie Farmer echoed Wright’s concerns about the glut of trucking capacity — and its negative impact on her railroad’s domestic business. “International intermodal has been fairly strong for us,” she told Becky Quick, “but domestic intermodal is a little bit more challenged because of the excess truck capacity that exists in the market.”
BNSF’s industrial segment also has its fair share of stragglers — including “anything related to homebuilding” and coal.
“We need to be more efficient and productive,” said Farmer.
On the plus side, though, she noted that volumes continued to increase in Q1 2024 and the railroad also achieved record market-share in intermodal.
Speaking of intermodal, Farmer also talked up the Barstow International Gateway project in California, which she hopes will improve efficiency at West Coast ports. But, as I’ve mentioned before, the California Air Resources Board might still throw a monkey wrench into these plans with its new regulation that requires zero-emissions locomotives by 2030.
“Certainly within the timeframe that CARB is proposing, there will not be zero- or near-zero-emissions locomotives,” said Farmer. “Not only is the technology not there, but the costs that the American consumer would bear because of this would be really devastating to the economy.”
She also fears that if the EPA allows this regulation to go forward, other states will adopt similar standards — “which would significantly affect the American consumer”.
Farmer ended on an ominous note. “If this does go into effect, we would seriously have to look at our investment in our Barstow International Gateway project.”
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The Must List
Other awesome things that I read this week…
Touring Omaha with a Warren Buffett Author || CNBC
“We passed National Indemnity — one of Berkshire’s flagship insurance companies — which I was told has looked the same for decades. ‘Same building, same sign,” [David] Clark said. Next, we drove by Buffett’s former elementary school, which had been renovated. Rumor has it that virtually every school in Omaha has received generous grants for renovation from the famous investor.”
“Buying all of a company removes its stock price from the ticker tape and leaves the investor (rightly) looking to the business to assess its performance. There is one decision, one outlay of capital, and no market quotation or ‘exit price’. You earn a return from the business based on what it can earn and distribute to you.”
Chubb: Why You Shouldn’t Follow Buffett? ||
“Buffett and Ajit Jain had previously praised Chubb’s prudent management of balance sheet, operational excellence, and customer relationship. When you apply those practices for more than 35 years, you come up with a global insurer that hardly loses existing customers and gains new ones regularly.”
“Put the customer first. What made Amazon so successful is its customer obsession. When your customers are happy, your business will thrive.”
Thomas Jefferson’s Advice to His Nephew ||
“While possession of knowledge will be essential for Peter [Carr] to live up to his potential, the most important thing is to act with integrity and honor, which must be the first priority. Honorable conduct is important even when no one else is looking. In times of trouble, Peter is urged to avoid trying to extricate himself through dishonorable means. While acting with integrity might not seem to be a path toward a solution, Jefferson instructs Peter to trust that doing what is right will eventually lead to a solution.”
A Masterclass with Bill Miller ||
“If you allocate capital at a return above the cost of capital, you create value. If you allocate it at a return below the cost of capital, you destroy value. Conclusion: how a management allocates capital is critically important.”