Global Courant 2023-05-05 04:08:34
Gecko character display for GEICO Insurance at Berkshire Hathaway’s Annual Shareholder Meeting in Omaha, Nebraska.
Yun-Li | CNBC
Berkshire Hathaway Shareholders attending this year’s meeting will want to know more about the company that Warren Buffett once called his “favorite kid” — the auto insurer Geico.
With tens of thousands of shareholders in attendance, Berkshire’s annual “Woodstock for Capitalists” will be held Saturday in Omaha, Nebraska, its second in-person meeting since 2019. (CNBC’s exclusive coverage of the event begins at 10 a.m. ET that day.)
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Considered the crown jewel of Berkshire’s insurance empire, Geico has recently run into trouble after losing market share to its closest rival, Progressive, in 2022, with an ever-widening gap in insurance margins and growth, according to an analysis by UBS. Geico suffered a $1.9 billion pre-tax underwriting loss last year.
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“I think Geico is the biggest problem right now,” said Bill Stone, chief investment officer at Glenview Trust and shareholder of Berkshire. “They lost out to Progressive, which has implemented telematics better… I’m definitely interested in a major update on that.”
Telematics programs allow insurers to collect customers’ driving data, including their mileage and speed.
Geico, headquartered in Chevy Chase, Maryland with more than 38,000 employees, also experienced a decline of 1.7 million active policies in 2022, following stagnant growth in the prior year.
Ajit Jain, Berkshire’s vice president of insurance operations, said the biggest culprit for Geico’s underperformance is telematics.
“Progressive has been on the telematics bandwagon for…probably closer to 20 years. Geico wasn’t involved in telematics until recently,” said Jain on Berkshire’s 2022 meeting. “It’s only in the last two years that they’ve made a very serious effort, in terms of using telematics for segmentation and trying to balance speed and risk.”
Geico represents a weakness for Berkshire, which has generally beaten the broader market. Berkshire Class A shares hit a 52-week high on Monday, hitting another brief high of $500,000. The stock is up nearly 5% over the past month, while the S&P 500 is down about 1% during the banking crisis.
The conglomerate tends to shine in a bear market, as many use it for downside protection given its diverse business and unparalleled balance sheet strength.
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First love
While Geico is only a relatively small percentage of Berkshire’s sprawling empire, Buffett has a soft spot for the underwriter, as it is one of the “Oracle of Omaha’s” earliest investments, and arguably one of its most successful.
Buffett learned about Geico from his professor and mentor Ben Graham, who was chairman of the insurer’s board of directors. In 1976, Buffett invested $2 a share in Geico when it was in financial trouble, and Berkshire acquired the rest of the company in 1995.
“It was kind of Buffett’s first love,” says David Kass, a finance professor at the University of Maryland’s Robert H. Smith School of Business. “I think he has a strong emotional and sentimental connection to it.”
Kass recalled Buffett calling Geico his “favorite kid” when meeting with his students in 2005.
Claims cost inflation
In addition to closing the gap in usage-based technology, investors also want to know if Geico is taking steps to offset loss-cost inflation caused by an increase in used car, new car and parts prices.
Personal auto insurers have been plagued by high inflation in claims costs, with many reporting increases in claims costs of more than 20% in the first quarter of 2023, said Catherine Seifert, Berkshire analyst at CFRA Research.
To be sure, Berkshire expects Geico to return to an underwriting profit in 2023 after getting approvals for premium increases from a few states, Buffett said in his Annual letter 2022.
(TagsToTranslate)Warren Buffett
