10-Year Anniversary Promotion (20% off)

Join GuruFocus Premium Membership Now for Only $279/Year

The largest discount in the last 10 years

Save up to $500 on Global Membership.

Don't Miss It !

Free 7-day Trial
All Articles and Columns »

Barclays Capital’s Bearish Forecast for GEICO is Unwarranted

April 14, 2010 | About:
Inoculated Investor

Ravi Nagarajan

Berkshire Hathaway has been attracting more analyst coverage in recent weeks due to the company’s inclusion in the Standard & Poor’s 500 and expanded institutional interest related to factors such as the Burlington Northern Santa Fe acquisition. Earlier this week, Barclays Capital initiated coverage on Berkshire with a price target of $88 on the Class B shares. The report makes predictions regarding all aspects of Berkshire’s businesses including forecasts for GEICO’s combined ratio in 2010 and 2011. The projections specific to GEICO seem excessively negative.

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.

Ravi Nagarajan


About the author:

Ravi Nagarajan

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.

Rating: 4.4/5 (8 votes)


Please leave your comment:

Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial