Berkshire Hathaway is transitioning into turmoil, but Geico is in trouble

Berkshire Hathaway shareholders attending this year’s meeting will want to know more about the company Warren Buffett once called his “favorite child” — auto insurer Geico.

With tens of thousands of shareholders in attendance, Berkshire’s annual “Woodstock for Capitalists” will be held in Omaha, Nebraska, on Saturday, the second in-person gathering since 2019. (CNBC’s exclusive coverage of the event begins that day at 10 a.m. ET.)

Geico, seen as the crown jewel of Berkshire’s insurance empire, has run into some trouble recently after losing market share to its top competitor, Progressive, in 2022 with a widening gap in insurance margins and growth, according to an analysis by UBS. Geico suffered a pretax loss of $1.9 billion last year.

“I think the biggest problem out there right now is really Geico,” said Bill Stone, chief investment officer at Glenview Trust and a Berkshire shareholder. “They’ve lost to Progressive, who did a better job of implementing telematics … I’m certainly interested in a big update on that.”

Telematics programs allow insurance companies to collect customers’ driving data, including mileage and speed.

Headquartered in Chevy Chase, Maryland, with more than 38,000 employees, Geico also saw a decline of 1.7 million in active policies in 2022, after seeing stagnant growth the year before.

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 close to 20 years. Geico, until recently, was not involved in telematics,” Jain said at Berkshire’s 2022 meeting. “It’s only been in the last two years that they’ve made a very serious effort, in terms of using telematics for segmentation and trying to match rate and risk.”

Geico represents an area of ​​weakness for Berkshire, which overall has beaten the broader market. Berkshire A stock hit a 52-week high Monday, briefly touching $500,000 again. The stock has risen nearly 5% in the past month, while the S&P 500 has fallen about 0.6% amid the regional banking crisis.

The conglomerate tends to shine in a down market as many use it for downside protection given its diverse businesses and unmatched balance sheet strength.

First love

While Geico is only a relatively small percentage of Berkshire’s sprawling empire, Buffett has a soft spot for the insurer since it was one of the “Oracle of Omaha’s” first investments, and perhaps among his most successful.

Buffett learned about Geico from his professor and mentor Ben Graham, who was the insurance company’s chairman. In 1976, Buffett invested $2 per share in Geico when it was in financial trouble, and Berkshire bought the rest of the company in 1995.

“It was kind of Buffett’s first love,” said David Kass, a finance professor at the Robert H. Smith School of Business at the University of Maryland. “I think he has a strong emotional and sentimental attachment to it.”

Kass recalled Buffett referring to Geico as his “favorite child” during a meeting with his students in 2005.

Damage costs inflation

Aside from closing the utility-based technology gap, investors also want to know if Geico is taking steps to offset loss-cost inflation, triggered by an increase in the prices of used cars, new cars and parts.

Personal auto insurers have been plagued by a high rate of claims cost inflation, with many recording loss cost increases in the first quarter of 2023 of more than 20%, said Catherine Seifert, Berkshire analyst at CFRA Research.

To be sure, Berkshire expects Geico to return to a guaranteed profit in 2023 after securing premium increase approvals from a few states, Buffett said in his 2022 annual letter.