Furthermore, he’s instituted a new policy of share repurchases. Should Berkshire Hathaway trade at less than 1.2 times book value, it’ll repurchase shares. All of these investments and policies create some certainty about capital allocation, but they don’t instill much confidence in Buffett’s new successor. Buffett’s effectively taking many of the capital allocation decisions away from the next head of the greatest investment company in the world.
I believe Buffett will make one final hurrah — one big move to show the markets that Ted and Todd are just as capable as the Oracle of Ohama. And he’ll do it in a big way by making an acquisition to reload the elephant gun. There’s no better way to show confidence in an asset manager than to give them more money to manage.
Doubling down on Berkshire Hathaway Inc. (NYSE:BRK-A) (NYSE:BRK-B)’s future
My short-list pick for an elephant gun reload is The Chubb Corporation (NYSE:CB), a leading property and casualty insurance company. It’s a perfect Buffett-style stock: boring, float-generating, and incredibly profitable.
The Chubb Corporation (NYSE:CB)’s attributes make it an exceptional company to join the Berkshire club. Like GEICO, it always seeks to make an underwriting profit on insurance lines, never relying completely on investment performance to boost profitability. It’s also an incredible capital allocator; when underwriting margins are squeezed, the management team delivers with share repurchases.
If you aren’t familiar with how The Chubb Corporation (NYSE:CB) manages its business, you’d likely find its 10-year compounded premium revenue growth rate of 1.5% a signal to run away. But because The Chubb Corporation (NYSE:CB) has an unmatched focus on writing insurance only when it is profitable, investors who bought 10 years ago and held today would have turned each $10,000 invested into more than $40,000. Underscoring those gains is a share count that has dwindled by nearly 27%.
If Buffett were to acquire The Chubb Corporation (NYSE:CB) Insurance, it would be a pure bet on the skill of his portfolio managers since The Chubb Corporation (NYSE:CB)’s underwriting is fantastic. The only way to improve the business is to improve the performance of its $40+ billion investment portfolio.
Buying one more massive and profitable insurance company is a way to tell the markets that Buffett and Munger have the utmost faith in Berkshire’s future managers. It’s a contrarian move, which is why I think it’s a perfect match for Buffett’s last hurrah.
The article How Warren Buffett Could Give a Nod to His Successors originally appeared on Fool.com is written by Jordan Wathen.
Fool contributor Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Bank of America, Berkshire Hathaway, and Goldman Sachs. The Motley Fool owns shares of Bank of America and Berkshire Hathaway.
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