Warren Buffett’s $US6.7 billion move into the smaller insurer Chubb, controlled by a long-time family friend, dominated this week’s final quarterly data drop from the world’s most followed investor. Safe to say, the new investment is what investors focused on.
It wasn’t as dramatic as some investors had wanted, nor was it a ‘control’ plunge into a new stock. Buffett has made it clear he sees little value in stock prices at the moment.
But there is value for Buffett’s main game: getting hold of cash.
The Chubb revelation came 11 days after he revealed at the annual meeting in Omaha, as well as in the March quarterly report, that Berkshire had cut its huge Apple stake by around $US20 billion and sold out of its holding in the struggling US media group Paramount.
The news on Wednesday of the move to pick up a stake in Chubb filled out the news flow from Buffett.
And yet, it hid the real story of what Buffett’s current investment strategy is—it's there, buried in the quarterly report.
It’s one which we have written about several times in the past couple of years—the accumulation and direction of cash into US bonds that are returning, each quarter, billions of dollars in interest payments which are more than most Wall Street companies can produce in a year’s revenue.
While an army of investors, analysts, brokers, bankers, and business media have been decrying the cash pile at Berkshire and claiming that Buffett has ‘run out of ideas’ and can ‘no longer find the big deal’ to use that cash, he has been doing just that.
For more than the past year, Buffett's biggest deal hasn’t been squaring away deals like taking control of the huge roadside services company, Flying J, nor buying stakes in Chevron, Occidental, and the failures like Paramount and HP—it's been short-dated US Treasury bonds.
Berkshire Hathaway uses short-term Treasury bills as a place to store cash. Buffett has long preferred short-duration bonds over long-duration bonds, as they provide more flexibility and less interest rate risk.
And with high short-term rates in the current environment, he's getting a great return to just sit on cash—billions of dollars a year which is now cash earning more cash, earning more cash.
He added over $US21 billion in cash and short-term Treasuries to Berkshire's balance sheet in the March quarter. Contrast that to the $US2.6 billion share buyback (always done for shareholders on a case-by-case basis) and around $US3 billion bought to top up the Chubb buy.
"I don't mind at all under current conditions building the cash position," he told shareholders at the May 4 annual meeting. "When I look at the alternative of what's available in the equity markets… we find it quite attractive.”
“We’d love to spend it (the cash pile), but we won’t spend it unless we think we’re doing something that has very little risk and can make us a lot of money.”
Buying bonds and paring billions of dollars isn’t spending Berkshire’s cash pile; it's making the company “a lot of money” and investment income of more than $US2 billion in the first quarter has become a major earnings area for the group.
Beats losing your shirt on a play in Paramount, which Buffett blamed on himself for the near $US1 billion loss.
Berkshire ended the March quarter with $US189.0 billion in cash and cash equivalents, up from $US167.6 billion at the end of last year (as free cash flow reached $US6.2 billion in the quarter and the company sold on a net basis $US17.3 billion of its stock holdings, while repurchasing $US2.6 billion of its own shares).
Berkshire had $US129.6 billion in Treasuries and equivalents at the end of 2023, which jumped to $US153.44 billion by March 31. Over the year to March, Berkshire bought, sold, or allowed to mature around $US190 billion in bonds, against $US81 billion in the year-ago period.
Berkshire and Buffett are the ‘whales" of the US bond market, the second largest and most liquid in the world after the US dollar forex market.
Berkshire’s insurance float declined slightly to $US168 billion compared with the fourth quarter of 2023 ($US167 billion) but was up from the year-ago period ($US165 billion).
And for the rest of this quarter?
Look to Buffett to continue buying Treasuries. He told the audience the total cash and equivalents position could exceed $US200 billion this quarter.
Add that to a share portfolio worth around $US350 billion at the moment and nearly $US200 billion in bonds and the float, 60% of the company’s market value of $US890 billion (Berkshire is the 7th most valuable company in the US) is in cash or equivalents.
Chubb had $US140 billion in investments at March 31 and total assets of around $US234 billion—and a market value of $US103 billion. Chubb earned around $US2.14 billion in the March quarter, so it is a strongly placed insurer.
Will Buffett launch a bid for Chubb as he did two years ago with the much cheaper and smaller Alleghany (which was run by a former employee)?
Hard to say, but Buffett and the Greenberg family are close. In 1996, Buffett wrote in a book by Ace Greenberg entitled Memos from the Chairman:
"Ace Greenberg (The father of Chubb current boss) does almost everything better than I do: bridge, magic tricks, dog training, arbitrage—all of the important things in life."
The Chubb buy is a nod to Buffett’s past and shared history with the Greenberg family, but with a gimlet eye on the cash value in the Swiss-based insurer—that’s the main game, as always.
