Geico has had subscription losses for four consecutive quarters. Like other auto insurers, Geico has been affected by rising claim costs, as a result of the rise in the price of used cars, auto parts and labor and the uptick in driving activity since the pandemic. The reactivation of Geico comes after a difficult period for the insurance business, as inflation took its toll on the cost of materials and labor. Buffett learned about Geico thanks to his professor and mentor Ben Graham, who was the chairman of the board of directors of the insurance company.
At the 1996 Berkshire Hathaway shareholder meeting, Warren Buffett and Charlie Munger were asked about GEICO (at the time, the seventh largest U.). While Jain was commenting on GEICO's need for technological reform, Buffett, in human form, seized the opportunity to collect Jain's statements by taking a look at InsurTech startups. Jain revealed that GEICO is talking to several original equipment manufacturers to see if the auto insurer can work with car manufacturers to also offer coverage at the point of sale. When GEICO was a public company, even if they knew that the next cohort of customers would offer an attractive long-term economy, this was a limitation given its short-term impact on earnings (EPS).
As a subsidiary of Berkshire, GEICO was no longer limited by this short-term financial consideration. In addition to closing the gap in usage-based technology, investors also want to know if Geico is taking steps to offset cost-loss inflation, caused by rising prices for new and used cars and parts. Buffett's reference to the smartest group in GEICO this year represented a subtle change from comments from previous events, in which Jain and Buffett put Progressive ahead of GEICO in the ability to match rate to risk. He went on to say that, although GEICO is making progress in telematics, “we haven't yet begun to realize the real benefit and the real culprit, or the obstacle, is the technology.
Geico represents an area of weakness for Berkshire, which has generally been outperforming the overall market. While Geico is only a relatively small percentage of Berkshire's sprawling empire, Buffett has a soft spot for the insurance company, as it's one of the Oracle of Omaha's first investments and perhaps one of the most successful. Ajit Jain, Berkshire's vice president of insurance operations, said the main culprit behind Geico's poor performance is telematics. In addition to highlighting Eastwood, Buffett praised Todd Combs, an investment manager that Buffett and Jain chose to lead GEICO a few months before a global pandemic changed the landscape of car insurance.
While Geico's increase comes from a variety of sources (including higher car prices that lead to higher premiums), the most important factor is the sharp decline in its advertising budget. It took longer than Buffett's 2- to 3-year time horizon, but that day finally arrived; Progressive has overtaken GEICO by a wide margin in the past five years.
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