GEICO has long been a cornerstone of Berkshire Hathaway Inc (BRK.A, Financial) (BRK.B, Financial). What's more, Warren Buffett (Trades, Portfolio) and the company have a relationship going back decades.
It first came across his radar when his mentor, Benjamin Graham, joined the management team as part of his shift away from deep-value investing toward investing in quality at a reasonable price. Decades later, Buffett was instrumental in bringing the business back from the brink of collapse after it grew too fast and understated insurance liabilities. Berkshire bought the share of GEICO it did not already own in 1996, bringing the business into the conglomerate.
The auto insurer has climbed to the top of the industry by offering consumers something they cannot ignore: a low price.
GEICO’s low-cost offering would help it conquer the U.S. auto insurance market, Buffett believed and was saying as much a decade ago. However, the business has fallen behind its main peer, Progressive Corp. (PGR, Financial), in recent years.
Losing the advantage
According to Berkshire’s head of insurance, Ajit Jain, GEICO has fallen behind Progressive for one obvious reason: it has not invested enough in telematics technology. Telematics monitors drivers’ actions, allowing insurance providers to adjust premiums to drive activity. For example, if a driver travels a lot at high speeds, the insurer might hike their premium as, statistically, they have a higher chance of having an accident.
The advantage this technology can provide should not be understated. According to Jain, Progressive’s loss ratio – the ratio of insurance losses to premiums earned – is 12 percentage points better than GEICO’s. That’s a huge margin in an industry where the difference between a 99% and 100% loss margin can separate a good insurer from a struggling one.
“There’s no question that recently Progressive has done a much better job than GEICO …both in terms of margins and in terms of growth,” Jain said at Berkshire's annual meeting on April 30. “There are a number of causes for that, but I think the biggest culprit is as far as GEICO is concerned …is telematics."
Progressive was the first U.S. insurer to use telematics 10 years ago, giving it a huge edge over other providers.
Jain also said, "GEICO had clearly missed the business, and were late in terms of appreciating the value of telematics. They have woken up to the fact that telematics plays a big role in matching rate to risk. They have a number of initiatives, and, hopefully, they will see the light of day before, not too long, and that’ll allow them to catch up with their competitors, in terms of the issue of matching rate to risk."
GEICO is taking a hit from its lack of progress in this area. The division incurred a loss of $178 million during the first quarter of 2022 due to “increases in claims severities.” Part of this was due to the fact that drivers are back on the roads after the pandemic, but if the business had deployed telematics sooner, it might have been able to project some of these losses and offset the risks with higher premiums.
The insurance company is still a giant for Berkshire, but this is a great case study of how even a good business can fall on hard times if it does not invest enough to stay ahead of the curve. Jain has realized where the group is going wrong, and he is working to correct the issue. If this were an individual business, the market might have punished the stock and its CEO for not looking to the future.
GEICO’s challenges show both the difficulty of picking stocks and the benefits of owning stocks in a diversified portfolio.
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