Over the past two quarters, Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) has been buying a “secret stock” — secret in the sense that a major investment fund can request the SEC withhold the name of a new buy in a fund’s 13F quarterly report, since disclosing the position could reveal an ongoing buying program, and therefore influence the price. But this week, it was finally disclosed Berkshire’s “secret” buy over the past few quarters was Chubb Limited (NYSE: CB).

Why would Berkshire be buying Chubb? The heralded insurance franchise is actually a perfect fit with Buffett’s philosophy and Berkshire’s business mix. But not only that; Buffett’s buy may be reason to add the insurance giant to your portfolio, too.

A prime environment for insurers

The first reason to consider Chubb would apply to virtually all property & casualty and reinsurance companies today. Over the past five years, most insurance companies, and specifically property & casualty insurance companies, have been able to raise their premium rates substantially as the market “hardened” for multiple years in a row. The story really starts back in 2017, a year that experienced three major hurricanes, jolting the insurance industry out of multi-year complacence. Unfortunately, that year marked the beginning of multiple consecutive years of more severe weather, including hurricanes, convective storms, wildfires, and unusual winter freezes.

Insurers also faced increasing social and economic inflation, especially after the pandemic in 2021. “Social inflation” is the trend of increasing lawsuits against insurers and more expensive judgments, which continues to be a trend. Then when the economic inflation of 2021-2022 hit, insurers began realizing the “replacement cost” of their insured property was actually more expensive than thought.

These factors have all compounded to make many segments of the insurance market very “tight,” with insurers being able to raise rates aggressively and improve terms. Rate increases have now outpaced loss inflation, leading to increasing profits and returns on capital for most companies.

Chubb, like its peers, has benefited handsomely. Last quarter, net profits surged 20.3% as the company improved its property & casualty combined ratio to 86%, an impressive margin for an insurer. Core operating return on tangible equity also improved to 21.9%, up from 19.4% in the year-ago quarter. Insurer valuation multiples are low, with Chubb trading at just 12 times earnings, post-Buffett news surge included.

The insurance industry is witnessing favorable pricing with little end in sight.

Chubb aligns with Buffett’s affinity for premium brands

The purchase of Chubb specifically fits Berkshire’s penchant for quality companies catering to wealthier customers. Similar to Buffett’s investments in premium brands like See’s Candies, Coca-Cola, American Express, and Apple, Chubb is a differentiated insurance company with pricing power. Chubb is known for being fair and lenient with claims, promptly compensating customers without hassles. The company’s “Masterpiece” homeowners insurance product is popular with wealthy Americans, commanding higher premiums and historically earning higher-than-normal margins.

Chubb has the best homeowner’s insurance brand for affluent homeowners.

Another rationale: Buffett may acquire the entire company

Berkshire Hathaway’s core business is its insurance empire, spanning Geico auto insurance, multiple reinsurance companies, and other specialty insurers. With Berkshire’s cash hoard at $189 billion at the end of the first quarter, Buffett has the capital for a substantial acquisition. The commercial and personal property & casualty franchises of Chubb would synergize well with Berkshire’s existing franchises, making Chubb an ideal addition.