Source: Barron's Chinese Author: Nicholas Jaskinski Evan Greenberg, CEO of Chubb Ltd, has a highly influential fan - Warren Buffet, CEO of Berkshire Hathaway. Berkshire Hathaway disclosed last month that it held 6% of the shares in Chubb, one of the world's largest insurance companies, by the end of 2023. Berkshire itself is a major participant in the insurance industry, but it is not the only buyer. In the past year, Chubb's stock return, including dividends, was about 40%, surpassing the S&P 500 index's total return of 25%, and making the company's market capitalization reach $110 billion. This increase in market capitalization reflects Chubb's outstanding performance, which is attributed to its prudent underwriting practices and conservative management of its investment portfolio of about $140 billion. The company's earnings per share increased by 48% in 2023 and its book value per share increased by 21%. Greenberg is the son of Maurice "Hank" Greenberg, the former CEO of American International Group (AIG). Greenberg worked at AIG for 25 years, rising through the ranks. He left the insurance company in 2000 and took over Ace Limited in 2004. The company merged with Chubb in 2016, the largest M&A in the property and casualty insurance industry at the time. Today, Chubb is the largest commercial insurance provider in the United States, and the company is also known for its high-end homeowner insurance for the wealthy. However, about half of the company's premiums last year came from outside the United States. Asia has always been a growth area where the company is bullish: Although Asia accounts for 40% of global GDP, the insurance industry accounts for only 26% of the global insurance market share. This gap is expected to narrow over time. Greenberg sits on the board of several nonprofits that focus on international and Asian affairs. Barron's recently interviewed Greenberg about his underwriting philosophy, the challenges of dealing with increasingly frequent climate disasters, and US-China relations. Following are the edited excerpts of the conversation.

Author: Randall W. Forsyth

This world has gone crazy. Last week, a banana taped to a wall with duct tape sold for $6.2 million, and the buyer of this so-called artwork happened to be a cryptos operator.$Bitcoin (BTC.CC)$Given the price close to $0.1 million, this operator definitely made a lot of money.

If this event represents the most irrational part of the 'irrational prosperity,' then,$MicroStrategy (MSTR.US)$ MicroStrategy is nominally a software company, but the main reason for the company's fame and wealth is the accumulation of Bitcoin, which has caused the company's stock price to increase 16 times in a little over two years. MicroStrategy used its own stock as currency to buy more Bitcoin, but there are some intriguing aspects to this.

MicroStrategy further implemented its cryptocurrency strategy through some clever financial engineering. Last week, the company issued $3 billion in five-year convertible bonds with a 0% interest rate. These bonds can be converted into stocks at a price of $672 per share, about 55% higher than the stock price at the time of the bond issuance. In other words, MicroStrategy buys its own high-priced common stock through the sale of high-priced (low-yield) bonds and adding high-priced call options to the bonds. These stocks will be used to invest in Bitcoin, with the price of Bitcoin highly correlated with MicroStrategy's stock price.

As a comparison,$S&P 500 Index (.SPX.US)$its P/E ratio is 22 times, which seems not too unreasonable. However, the Chief Strategist at BCA pointed out in a research report that this is 31% higher than the average P/E ratio from 2015 to 2019. Furthermore, back then the 10-year US Treasury yield was usually much lower, between 2% and 3%, compared to the current 4.4%.

Albert Edwards, an analyst at Société Générale, believes that in the current high P/E ratio environment, a sharp rise in yields can sometimes cause serious issues. In a report, he wrote: 'The rubber band has been stretched to its limit, the 1987 US stock market crash is a good example.' Edwards admits his long-term bearishness on the stock market. Those with good memory may recall that by 1987, the 30-year US Treasury yield reached 10%, leading to a single-day drop of 22.6% in the Dow Jones Industrial Average on October 19, 1987, known as 'Black Monday'.

Edwards also gave an example from 2018 when the US stock market first defied the impact of rising bond yields, then the P/E ratio withstood the pressure from rising bond yields, rising until the P/E ratio could no longer bear this pressure. The S&P 500 index fell by close to 20% on the eve of Christmas that year (defining a bear market).

Edwards said: 'High profits can justify high P/E ratios, but the current expectations far exceed the reality reflected in historical EPS. However, like all the bubble events I have witnessed in this industry over the past 42 years, there is always a seemingly reasonable and convincing narrative to explain investors' enthusiasm.'

This narrative focuses on the prospects of artificial intelligence, especially driven by ai.$NVIDIA (NVDA.US)$Nvidia has become the world's most valuable company, with a market cap higher than the entire stock market of the United Kingdom.

Furthermore, since the US presidential election, many market analysts have started mentioning 'Trump put options.' During his first term as president, Trump touted the performance of the US stock market as a sign of his success. Bulls predict that the new administration's policies will continue to drive the stock market higher.

Macquarie global strategist Viktor Shvets and Kyle Liu stated in a report: 'Capital markets can be seen as the most robust barrier against disruptive or irrational policies. If risk premiums and mortgage rates spike significantly, or if the US stock market plunges, the US government is likely to quickly retreat. This is also true for business and corporate interests, as well as their lobbying power on immigration issues.'

Edwards from Industrial Bank of France further pointed out that excessive liquidity is a reason for overvaluation, not limited to stocks but also including crediting. Currently, yield spreads (the additional yield of corporate bonds over risk-free government bonds) are approaching historical lows, while the prices of cryptos and so-called 'artworks' (like a banana stuck on a wall) are skyrocketing.

BCA's Beresin pointed out that their clients consider this trend as their 'friend'. Meanwhile, former Citigroup CEO Chuck Prince once said, 'As long as the music is playing, you've got to get up and dance.' This was in 2007, just before the financial crisis erupted. Beresin asks, 'Do you remember what happened at the end?'

Editor/Rocky