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Rupert Hargreaves
Rupert Hargreaves
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Berkshire Hathaway's GEICO Sees Customer Numbers Surge in 2020

A look at Berkshire's fastest-growing business

August 11, 2020 | About:

Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) second-quarter earnings release contained some good news and some bad news.

The pandemic has hurt some sections of the group more than others, and large gains from the equity portfolio covered up losses from write-downs as well as retail and transportation losses. However, there was one stand-out part of the business, and that was the GEICO insurance business.

GEICO's customer numbers surge

According to Berkshire's second-quarter report, GEICO's voluntary auto policies-in-force increased approximately 930,000 during the first six months of 2020, an increase of 8.3%.

This impressive growth isn't expected to last. The report went on to note that "In response to the COVID-19 pandemic, GEICO paused cancellations of insurance policies for non-payment, which contributed to the increase in policies-in-force in the first half of 2020."

It went on to add that as a result of this policy, when cancellations for non-payment resume, "growth is expected to slow considerably."

This isn't the first time a harsh economic environment has been beneficial to the insurance group. GEICO's customer numbers also rose after the financial crisis.Warren Buffett (Trades, Portfolio) explained why this scenario unfolded at the group's 2009 annual meeting of shareholders:

"Our price advantage, relative to other companies, didn't change that much. But all of a sudden, just - it was remarkable. Thousands and thousands and thousands of more people came to our website or phoned us every week. So, it - all of a sudden, saving $100 or $150 or whatever it might be, became important. Not only the people who were watching our ads that day, but just with the people that it was lurking in the back of their minds. They went to geico.com...

It's the behavioral changes. And that franchise, that competitive advantage, has been built up over decades... we are the low-cost producer among big auto insurance companies. That means we can offer the best value. And now people are value-conscious."

The financial crisis turbo-charged GEICO's growth. Once customers found they could get a better deal with the business, they stuck with it and became lifetime customers.

Between 2002 and 2007, the number of GEICO's policies in force expanded at a rate of around 600,000 per annum. In 2009 and 2010, the group added one million new policyholders each year.

So, while the company's growth might slow towards the end of the year, based on this past trend, it seems likely that GEICO will benefit in the long run from the pandemic. Customers who've moved to the group seeking a better deal will likely stay, even though some existing customers might leave. This will give the business more capital to reinvest in marketing and growth. Additional marketing may help the group capture more market share, which will produce more capital, and so on.

Buffett has never produced an exact lifetime value of each GEICO customer. However, in 2009, he did say that each customer was worth "real" money. The lack of financial disclosure does make it challenging to place an exact value on the insurance company, although that hasn't stopped analysts from trying to do just that. An article in the Motley Fool in 2017 pegged the value of the business, as determined by the value of its regulatory capital and multiple on premium income, at $52.3 billion. That was more than double the value of its regulatory capital.

GEICO is just one division of Berkshire, but it's one of the group's biggest, and its recent growth will have a positive impact on the conglomerate's intrinsic value.

Disclosure: The author owns shares in Berkshire Hathaway.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

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