Geico is one of Warren Buffett’s favorite companies in
But the big auto insurer has struggled in recent quarters and there doesn’t seem to be an improvement in sight.
A senior Berkshire official acknowledges that Geico has been hurt by its failure to embrace information technologies, the use of devices in cars that tell insurance companies how to drive customers.
Until the last few years, Geico was one of the top companies within Berkshire Hathaway (Ticker BRK/A, BRK/B) and is the jewel of its extensive insurance operations. Buffett has a soft spot for Geico because it was one of his original – and most successful – investments dating back to 1951, when he was just 21.
Berkshire bought out the general shareholders who owned 50% of the company in 1995. Buffett suggested in his annual letter to shareholders in 2019 that Geico is worth about $50 billion.
Geico exited a rocky second quarter when it incurred an underwriting loss of nearly $500 million, while its rival
It works in black. Geico has suffered underwriting losses for four consecutive quarters.
Like other auto insurers, Geico has been affected by higher claims costs, as a result of the rise in prices for used cars, auto parts, labor and a rise in driving activity since the pandemic. But some of Geico’s wounds are self-inflicted because the auto insurance company has been slow to integrate information technologies, or use real-time driving data, to price auto policies.
Geico declined to comment.
Progressive and Geico have been the auto insurance superstars for most of the past two decades as they have grown rapidly by selling insurance policies directly to consumers, a low-cost method popular with young drivers who feel they don’t need agents.
Geico, in particular, has benefited from strict cost controls even though it has long been one of television’s largest advertisers. Gekko the gecko is one of the best known businessmen.
But Progressive in recent years has overtaken Geico in its use of technology in pricing policies.
Progressive is a leading telematics company, which can help auto insurers improve rate insurance policies for customers by predicting future accident risk through factors such as acceleration, braking and time of day – driving late at night tends to be more Danger. Remote connections also help insurers with regulators who are dissatisfied with more controversial factors used in pricing policies such as credit scores.
Geico is the nation’s No. 2 auto insurance company based on premium revenue behind State Farm, while Progressive comes in at number three. Geico’s market share is around 14%.
Given that Berkshire has a market capitalization of $630 billion and an annual net income of over $30 billion, Geico’s problems don’t matter to the company in general. Most of the major companies are active in Berkshire, including the Burlington Northern Santa Fe Railway and the large utility business, Berkshire Hathaway Energy.
Berkshire stock has outperformed the market as a whole this year. Its Class A shares, at about $433,000, are down 4.5% this year, before
Standard & Poor’s 500
Which returned about negative 12% including dividends. Berkshire’s most liquid Class B shares are up 1% Monday to $288.51 and have similar year-to-date performance as A shares.
But one Wall Street analyst, KBW’s Meyer Shields, cited Geico when he put Underweight on Berkshire on a trading call for the rest of the year. He referred to “GEICO’s sustainable subscriber ratio pressure,” referring to Geico’s underwriting profit margin.
“While used car and rental car costs have stabilized, rising labor and auto parts inflation and the lagging effect between reported, written and earned price increases mean limited earnings growth and underwriting margin pressure, which is likely to be exacerbated subsequently by increased marketing spending,” Shields wrote. It has a Berkshire market performance rating with a price target for Class A shares of $535,000.
Geico’s problems surfaced at Berkshire Hathaway’s (BRK/A, BRK/B) annual meeting in April when a shareholder asked the head of the entire Berkshire insurance business, Ajit Jain, about Geico’s poor performance relative to Progressive.
Jane, a longtime Berkshire insurance executive, replied that “Progressive has done a much better job than GEICO, as you point out, in terms of margins and growth rate. There are a number of reasons for that, but I think the biggest reason is in terms of GEICO, and once Another I rightly pointed out, is IT. Progressive has been on the IT bandwagon for over 10 years, maybe closer to 20, I don’t know. GEICO, until recently, wasn’t involved in IT.”
One sign of Geico’s troubles is that Berkshire’s investment manager Todd Combs, who was named Geico’s CEO in late 2019, is still in the job, despite Buffett’s comment in early 2020 that Combs’ role was likely temporary.
Buffett told CNBC in early 2020: “Todd is there and I hope it won’t be too long. We always intend to promote from the inside. We hope to pick the right guy at Geico.” Buffett, Berkshire’s longtime CEO, turned 92 in late August.
He wrote: “We believe that Geico’s poor underwriting results were a large part of the reason why Todd Combs was appointed to oversee the business in December 2019,”
Analyst Greg Warren Aug. “Unfortunately, it came right on board as the pandemic would have catapulted the entire US auto insurance industry into uncharted territory. The company is also now dealing with the dynamic that its low-cost sales model is not responding as quickly to rising claims costs as we see in the current market.”
Geico’s problems may highlight one flaw in Buffett’s management style. Outside of the annual meeting, when a limited number of shareholders can ask him questions, there may be little or no opportunity for shareholders or analysts to inquire about him or his management team.
If Berkshire had quarterly conference calls, Buffett would likely have been asked about Geico’s status, and the changes at Geico might have happened sooner.
One of the challenges for Geico is that Progressive has built a massive database of real-time driving information, which can be difficult for Geico to catch up with.
Jain expressed optimism at the annual meeting about Geico, but noted that it will take some time.
“It’s a long journey, but the journey has begun and the initial results are promising. It will take some time, but I hope and expect that in the next year or two, GEICO will be in a position to catch up with the progressive in terms of IT. Hopefully that will then translate into growth rate and margins. .”
Write to Andrew Bary at firstname.lastname@example.org
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