Barclays states the following regarding GEICO’s combined ratio:
GEICO’s combined ratio rose over the past several years reflecting an increasingly competitive auto insurance market. We expect this result to deteriorate further from 95% in 2009 to 98% in 2010 and 100% in 2011 as loss cost inflation rises. (Page 17)GEICO has demonstrated a consistent ability to deliver combined ratios well under 100 over the past decade. We presented the ten year history of GEICO through 2008 in a post in June 2009 and included much more detail regarding performance in our Berkshire Hathaway Briefing Book which includes 2009 data. While it is true that GEICO’s combined ratio has been rising in recent years, there is no reason to believe that underwriting profitability will disappear by 2011.
One clue regarding early 2010 performance can be found in Progressive’s first quarter results which were released today. Progressive reported a combined ratio of 90.9 for the first quarter demonstrating continued underwriting profitability. Over the past decade, there has been a strong correlation between combined ratios at Progressive and GEICO which we also discuss in the Berkshire Hathaway Briefing Book. While Progressive generated a more favorable combined ratio in 2009 at 91.6 compared to GEICO’s 95.2, there is little reason to believe that GEICO’s combined ratio will rise to 98 in 2010 if Progressive’s Q1 performance is any indication.
Disclosure: The author owns shares of Berkshire Hathaway. No position in Progressive.
About the author:
My name is Ben C. and I am 2nd year MBA candidate at the Anderson School of Business at the University of California- Los Angeles. I have a BS in Economics from the Wharton School of Business at the University of Pennsylvania. Before coming to Anderson I worked as a generalist equity research analyst for Right Wall Capital, a long-short equity hedge fund located in New York City. Prior to working at Right Wall I worked as an analyst at Blue Ram Capital, another long-short equity hedge fund located in Rye Brook, NY. This past summer, I worked for West Coast Asset Management as a research analyst. West Coast, which was co-founded by Kinko’s founder Paul Orfalea, is run by well-known value investors Lance Helfert and Atticus Lowe.