Geico, Berkshire’s auto insurer, shunned the technology. It is paying the price.

Geico is one of Warren Buffett’s favorite companies to

Berkshire Hathaway
,

but the major auto insurer has struggled in recent quarters and there doesn’t appear to be a recovery in sight.

A senior Berkshire official acknowledges Geico has been hurt by its failure to embrace telematics, the use of devices on automobiles that tell insurers how customers are driving.

Until recent years, Geico was one of Berkshire Hathaway’s top companies (Ticker BRK/A, BRK/B) and the crown jewel of its vast insurance operations. Buffett has a soft spot for Geico because it was one of his original — and most successful — investments dating back to 1951, when he was just 21.

Berkshire bought out the public shareholders who owned 50% of the company in 1995. Buffett suggested in his annual letter to shareholders in 2019 that Geico was worth around $50 billion.

Geico is coming off a tough second quarter with an underwriting loss of nearly $500 million, while rival

progressive

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) operated in the dark. Geico has suffered underwriting losses for four consecutive quarters.

Like other auto insurers, Geico has been stung by higher claims costs, due to soaring prices for used cars, auto parts, labor and a recovery in l driving activity since the pandemic. But some of Geico’s injuries are self-inflicted because the auto insurer has been slow to incorporate telematics, or the use of real-time driving data, to price auto policies.

Geico declined to comment.

Progressive and Geico have been the two stars of the auto insurance industry for much of the past two decades as they have grown rapidly selling policies directly to consumers, an inexpensive method popular with young drivers who consider do not need agents.

Geico, in particular, has benefited from tight cost control, despite having long been one of television’s biggest advertisers. The Geico gecko is one of the best known business launchers.

But Progressive in recent years has eclipsed Geico in its use of technology for pricing policies.

Progressive is a leader in telematics, which can help car insurers better price insurance policies for customers by predicting the risk of future crashes through factors such as acceleration, braking and time of day – night driving tends to be more dangerous. Telematics is also helping insurers whose regulators are unhappy with the more controversial factors used to price policies such as credit scores.

Geico is the nation’s second-largest auto insurer by premium income behind State Farm, while Progressive is third. Geico’s market share is around 14%.

Given that Berkshire has a market value of $630 billion and an annual net income of more than $30 billion, Geico’s troubles don’t matter much to the company as a whole. And most of Berkshire’s big business is buzzing, including the Burlington Northern Santa Fe Railroad and its major utility company, Berkshire Hathaway Energy.

Berkshire stock is outperforming the broader market this year. Its Class A shares, at around $433,000, are down 4.5% this year, ahead of the

S&P500
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which generated a negative return of approximately 12% including dividends. Berkshire’s more liquid Class B shares rose 1% on Monday to $288.51 and have performed similarly year-to-date to A shares.

But Wall Street analyst KBW’s Meyer Shields quoted Geico when he placed an underweight in Berkshire on a trade call for the rest of the year. He cited “Sustained GEICO Combined Ratio Pressure,” a reference to Geico’s underwriting profit margin.

“Notwithstanding the stabilization of used vehicle and rental car costs, ever-increasing inflation in labor and auto parts costs, and the lagged impact between increases in rates filed, underwritten and earned imply limited revenue growth and pressure on underwriting margins, likely further exacerbated by higher marketing spend. “, wrote Shields. It has a Market Perform rating on Berkshire with a Class A share price target of $535,000.

Geico’s problems surfaced at Berkshire Hathaway’s (BRK/A, BRK/B) annual meeting in April, when head of Berkshire’s overall insurance business, Ajit Jain, was questioned by a shareholder on the weakness of Geico compared to Progressive.

A longtime Berkshire insurance executive, Jain responded that “Progressive has done a much better job than GEICO, as you point out, both in terms of margins and in terms of growth rate. There are a number of causes for this, but I think the biggest culprit when it comes to GEICO, and again you rightly pointed this out, is telematics. Progressive has been on the telematics bandwagon for, I don’t know, over 10 years, probably closer to 20 years. GEICO, until recently, was not involved in telematics.

A sign of Geico’s woes is that Berkshire investment manager Todd Combs, who was named CEO of Geico in late 2019, is still on the job, despite Buffett’s comment in early 2020 that Combs’ role would be probably temporary.

“Todd is here and I really hope he won’t be here very long,” Buffett told CNBC in early 2020. “Our intention is always to promote from within. We hope to pick the right person at Geico Buffett, Berkshire’s longtime CEO, turned 92 at the end of August.

“We believe Geico’s poor underwriting results were a large part of the reason Todd Combs was brought in to oversee the business in December 2019,” wrote

the morning star

analyst Greg Warren in August. “Unfortunately, he came on board just as the pandemic was about to throw the entire American auto insurance industry into uncharted territory. The company also faces the dynamic that its low cost sales model is not responding as quickly to rising claims costs as we are seeing in today’s market. »

Geico’s troubles may highlight one of the pitfalls of Buffett’s management style. Outside of the annual meeting, when a limited number of shareholders can ask him questions, there may be little or no opportunity for shareholders or analysts to question him or his management team.

Had Berkshire had quarterly conference calls, Buffett likely would have been asked about Geico’s situation, and changes at Geico could have happened sooner.

A challenge for Geico is that Progressive has built such a huge database of real-time driving information that it can be difficult for Geico to catch up.

Jain expressed optimism at the annual meeting about Geico, but suggested it would take time.

“It’s a long journey, but the journey has begun and the first results are promising. It will take a while, but hopefully and hopefully within a year or two, GEICO will be able to catch up with Progressive in terms of telematics. And hopefully that will then translate to both the growth rate and the margins.

Write to Andrew Bary at [email protected]

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