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Berkshire Hathaway Subsidiary, GEICO Enters Massachusetts Market

March 24, 2009 | About:
Berkshire Hathaway's primary P&C insurance subsidiary, GEICO has announced plans to begin selling auto insurance in Massachusetts following the implementation of reforms that eliminate price regulation by the state and permit companies to set their own rates. With GEICO’s entry into the Massachusetts market, the company will now offer auto insurance in all fifty states. 

The auto insurance reform introduced by Governor Deval Patrick one year ago has encouraged several other insurers including Progressive, to enter the state. When Progressive entered the Massachusetts market in May 2008, it rapidly attracted customers and it seems likely that GEICO’s entry will interest a significant number of customers as well. While GEICO has not offered insurance in Massachusetts, it has run advertisements in the state and the well known GEICO gecko has built up brand awareness. 

One additional benefit for GEICO and other entrants into the Massachusetts market is that the reform law exempts new insurers from participating in the assigned risk pool for two years. Under assigned risk pools, drivers who have poor driving track records are “assigned” by the state to the insurers operating in the state. These higher risk policies are generally undesirable compared to policies voluntarily written by the insurers.

Market Size

According to the Federal Highway Administration, Massachusetts had approximately 4.7 million drivers in 2007 which is roughly 2.3% of all licensed drivers in the United States. This market is slightly smaller than the New Jersey market which GEICO entered in 2004 following similar market based reforms in that state. Following entry into the New Jersey market, GEICO quickly built market share and reached 12.7% of the market by 2006 according to the Insurance Advocate:

During 2006, GEICO enjoyed a great year across New Jersey. A written premium increase of $192,447,000 was an eye-popper. In 2006, the written premium increased to a total of $725,754,000. That was up from 2005, which was $560,307,000.

That’s a three-point increase in overall market share. GEICO now has 12.7 percent of the New Jersey personal auto insurance industry.

This is certainly an impressive record for GEICO given that overall market share in the United States was 7.7% in 2008. Given that both New Jersey and Massachusetts had strict regulatory regimes in place along with very high average premiums, I anticipate that GEICO should enjoy a great deal of pent up demand for lower cost alternatives and will rapidly gain market share. 

Since Progressive entered Massachusetts nearly a year ago, it is possible that GEICO may have to be more aggressive with premium rates in order to attract business. However, it seems plausible that GEICO should eventually achieve a market share in Massachusetts that is at least on par with the nationwide market share and perhaps closer to the share achieved after entry into New Jersey. Since there is already widespread awareness of the GEICO brand in Massachusetts, market share gains could be rapid.

GEICO’s Track Record

Obviously market share is only a means to and end and it is important to write policies that will produce underwriting profits over time. GEICO has displayed a great deal of underwriting discipline in the past as one can see from the data presented below. GEICO has been able to grow the overall level of float while not significantly sacrificing underwriting standards. 

Source: BRK Annual Reports: 2004 to 2008

Source: BRK Annual Reports: 2004 to 200820082007200620052004Figures in MillionsYear End Float8,454 7,768 7,171 6,692 5,960 Premiums Written12,741 11,931 11,303 10,285 9,212 Premiums Earned12,479 11,806 11,055 10,101 8,915 Losses and Loss Expenses9,332 8,523 7,749 7,128 6,360 Underwriting Expenses2,231 2,170 1,992 1,752 1,585 Total Losses and Expenses11,563 10,693 9,741 8,880 7,945 Underwriting Gain/Loss916 1,113 1,314 1,221 970 Cost of Float-10.8%-14.3%-18.3%-18.2%-16.3%


While I anticipate that GEICO will be very aggressive in Massachusetts, the company track record indicates that underwriting discipline will be maintained and that the business should be profitable over time. While adding a relatively small state may not significantly “move the needle” when measuring GEICO’s overall results, it is very likely that the incremental business will be solidly profitable particularly since GEICO’s nationwide “gecko” advertising campaign has already built so much brand equity and name recognition. This should result in a large number of new customers with a low marginal cost of advertising given pre-existing brand equity.

Ravi Nagarajan

www.rationalwalk.com


About the author:

Ravi Nagarajan
Ravi Nagarajan is a private investor and Editor of The Rational Walk website. Ravi focuses on applying value investing techniques to find securities trading well below intrinsic business value. Ravi has over 15 years of experience in the financial markets and started investing on a full time basis in 2009. From 1996 to 2009, Ravi held a number of technical and executive level positions in the commercial software industry. Ravi graduated Summa Cum Laude from Santa Clara University with a degree in finance. Visit his website The Rational Walk

Visit Ravi Nagarajan's Website


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Comments

fk
Fk - 5 years ago
Geico is really well run. Out of curiosity, I looked at Progressive's 10 yr financial: http://www.gurufocus.com/financials.php?symbol=PGR

You can see their underwriting profit fluctuates wildly compared to Geico, and their total assets & equity also seems to be unsteady and decreasing the past few years unlike Geico which seems to only build up higher.

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