Insurance stocks may not capture a lot of attention, but they will definitely make headlines when Warren Buffett invests in one. That's what happened when it was revealed Buffett took a $6.7 billion stake in insurance company Chubb (CB). In the latest edition of Good Buy or Goodbye, Barron's Associate Editor Al Root makes the case for skipping Chubb and investing in a different insurance stock instead.

Root says American International Group, better known as AIG, is worth consideration. There are a few reasons why. First, it has an attractive valuation, he says. Root also argues the business's fundamentals are improving and that CEO Peter Zaffino is in a "sweet spot" given where he is in his tenure at the company.

Root is less enthusiastic about Chubb. The stock isn't cheap following the "Buffett bump," he says, also noting that Buffett operates on a different time horizon than most. He also argues there isn't a lot of expected profit improvement. What could change his thesis on Chubb? The company's execution is better than expected, causing profit to grow or it gets bought by Buffett's Berkshire Hathaway (BRK-B, BRK-A).

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Stephanie Mikulich.

Video Transcript

It's a big, noisy, universal stocks out there.

Welcome to goodbye or goodbye.

Our goal.

To help cut through that noise to navigate the best moves for your portfolio.

Today we're dialling in on the narrative divergence of two property and casualty insurers, joining me here to discuss bar and senior writer I out.

Good to see you.

Thanks for being here.

So let's get to the stock you like, first of all in this property and casualty universe and it's a IG an international group.

So let's go through why you like it.

The stocks done pretty well over the past year, but despite that, you say it still looks cheap on a PE basis.

Yeah, a couple of things.

One is, uh, performance is improving.

So on 2025 numbers, it's trading at about seven times uh, operating profit, which is a very attractive level relative to the group.

It's also trading for about 1.2 times book value, also relatively attractive to the group.

All of these are are good things if you're looking for a good buy and this at a time when we are seeing some of the underlying profit metrics improve, yeah, Now we're gonna do the, uh, we'll we'll unveil its challenger in a second here.

But, uh, the overall trends for property and casualty insurance, right?

Insuring you and me and all of our stuff, they're fairly, uh, positive.

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Um uh, profitability improving return on equity is improving.

Um, rates are going up.

We all know we're paying more for our insurance.

That's that tends to benefit these players.

And I still think to a certain extent, people when we were just talking lump a IG they have this flashback to the great financial crisis.

It's a totally different, uh, company with different leadership.

And it's really poised.

I think, to, uh, start to close the gap, uh, versus some of the leaders, which we'll talk about.

I mean effectively.

It's back to being a boring old insurance business, which, sometimes as we learn from the financial crisis, is not a bad thing.

Right, that you're not in these complex financial instruments.

You alluded to the leadership here.

Peter Zaffino took over a couple of years ago.

And you think he's in a good place.

We It's interesting, right?

Value investors and investors all the time like to go to the management transition.

Oh, what's the and?

And we sort of jump right in.

But actually, the data shows that about two years in is a really good time to sort of revisit, uh, management cha changes.

Takes about a year to, uh, get all the people you want at the first level of management another year to implement all of your processes and lay out your vision to everybody else.

Uh, Zaffino has been there for a couple of years.

He sold, uh, some of the life insurance business in the UK.

He's exited the reinsurance business and it, you know, based on that theory, uh, it's it's really good time.

Um, we're chatting with Bill Nygren of Oakmark Funds and he is a big fan of Z zaffino and, uh, thinks that right now is a good time for, uh, him and we, you know, see his vision and expanding profitability in the next couple of years.

Interesting.

OK, so what could go wrong here?

Big picture economic risks.

Well, big picture.

It's an insurer, and it's a financial.

So, uh, you know, Jamie Dimond retiring, Could knock, can knock, uh, multiple for all financial stocks down as we see today, however, it pretty much is, uh, a PNC cycle issue.

Right?

So I don't see to put it this way.

I don't see the big risk being execution, right?

You know, looking back over the last 16 quarters just before a new CEO got there, they haven't missed estimates.

It's become a much more leaner, stable business.

So it's much more about the PNC cycle turning right now.

Things are fine, but, uh, you know, if if, uh, curves get inverted and things like that happen, it'll it'll it'll knock this one down.

Quick question for you on the phenomenon we've seen of insurers pulling out of certain states or certain regions that they are finding more difficult to insure.

Is that something that affects a IG?

This is much more traditional, uh, property and personal lines business.

Right.

So, um, to the extent that you're just insuring your house or you're just insuring, uh, contents and things like that, it's It's not as big a deal.

Reinsurers these are.

These are questions for the Warren Buffetts of the world more than a IG in these days.

All right, so speaking of Warren Buffett, let's move to the stock that you don't like as much because it's one that Warren likes, which is surprising.

So it's chub.

The stock obviously got a big leg up after it was revealed that this was one he was investing in.

But it's near all time highs.

Now, this is the problem.

We, uh, love to, uh, follow Warren.

We love his investment logic and reasoning.

The problem is, he was buying this much lower.

The the Buffett bump sent it to all time highs.

Uh, it has a pristine track record.

Um, but the bottom line is, there's less.

I am a big fan of the rate of improvement.

There's sort of no improvement.

It's already a top insurer, as evidenced by Warren's By so Wall Street doesn't expect much operating improvement over the next, uh, two years in terms of, uh, profit margins and absolute, uh, dollar of of profit generated.

So that leaves it trading at about, uh, 12 times operating profit on 25 numbers versus that seven times we have for a IG, uh, Evan Greenberg.

He's great.

He's a legend.

It's already has, you know, 20% 21% return on equity.

You don't see that improving much from here.

So that whole combination says Warren knows what he's doing, but I'll avoid it.

Yeah, and so kind of what you were saying.

No, I mean, they've already gotten that profit.

They've already squeezed the profit out of the business is what you're saying.

Yeah, and it's the same sort of trends, right?

The PNC business is performing well, and you know, they're beating estimate and doing things like this.

It's just a question of, um how much do you want to pay for it?

Right.

If you just look at Wall Street target prices, which I, which I like to do just as a as a guide.

You know, Buffett's bump took it to beyond where analysts the average target price was a two was 270.

The stock was trading at 274.

So it's sort of, you know, all of the good news got reflected.

You know, the reverse is true.

You know, there's still some upside based on price targets for a IG.

So, uh, while I to venerate Warren, I'm gonna throw that one over the top.

And one more thing to consider.

You talked about that?

He was buying lower than when he revealed it.

Obviously, the other thing is he's probably gonna hold it longer than most people do.

Yeah, Now I come from barons, right?

And we tend to do things our stock picks on a one year, uh, basis, right?

One or two years is our typical time horizon.

And and I think that I think Warren will be happy owning this for a decade or 20 years, and he'll revisit it, Um or, you know, whoever it will be, Berkshire behi will revisit it in 10 years, and and they have a longer term time horizon.

They're folding it into their other insurance operations and looking for synergies.

I just think that the outlook for I over the next 12 to 24 months is much stronger.

All right, let's talk about what could go right for Chubb, though that would make you know that would make it do better.

It's just that it does better than expected.

It's always, uh, an execution story, right To some extent, I'm saying that a I can can catch Chubb, but, you know, strong execution from Chubb and smart moves from Mr Greenberg will continue to help that.

What are the chances Berkshire would outright buy a chub?

We That that's the risk, right?

So I'm saying throw it over.

Uh, you know, our Andrew Berry predicted.

Well, maybe, you know, Warren is interested in it.

Maybe he could pay 3.

20.

He was doing some math.

That's about 20% above recent levels.

Right?

So the risk is Berkshire says, You know what?

I'm going to take over the whole thing.

That hasn't happened in a while.

There's no guarantee he owns about 6% now.

That was what was disclosed that sent that stock up so much.

So I can't tell you it won't happen.

But, uh, the the biggest risk would be that he does something that he does something like that.

Hopefully that would revalue the entire sector.

And a I would get a bump.

But that's that's a bit of wishful thinking.

Yes, well, OK, let's summarise what we're telling people.

By the way, we wanna remind folks, um, any of the people who come to talk with us from barons do not own the underlying stocks we do not talk about.

And neither do we, for that matter.

If you don't know that here at Young Finance, it's a policy among most journalists.

In fact, let's tell people what Al, let's sum up what Al is saying here by American International Group.

It's cheaper than Chubb.

Business is improving.

It's at that point where it's in a place to outperform the CEO S in a sort of sweet spot on the other side, you say, Avoid chub.

It has now become expensive after Warren Buffett pushed the stock to all time highs.

And there's not much more upside in the next 12 months, either in the stock price or maybe much more profit improvement.

Thanks so much for being here.

Good to see you.

And thank you so much for watching goodbye or goodbye.

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