No. of Recommendations: 16
A year or two ago, on the Fool Berkshire board, we talked about how Progressive seemed to be eating GEICO's lunch, perhaps because of their early and aggressive use of telematics for more accurately setting premiums. At an annual meeting, Munger sent a question Ajit Jain's way, and Jain seemed to acknowledge quite frankly that, while GEICO and Progressive enjoyed major cost advantages over State Farm and other traditional auto insurers, GEICO had a much higher loss ratio than Progressive, which had done a better job in evaluating risk. I made a fairly significant investment in Progressive, which I ended up selling after about 50% in gains, but it has continue a fair bit higher.
Anyways, with the new, awful Fool board interface, I can't find any of that discussion now. But the question remains, how is GEICO doing, in its attempt to pull even with Progressive?
Here are 3 paragraphs from this year's Bloomstram letter, talking about this dynamic:
GEICO and Progressive are both taking market share from State Farm, who not long ago had 25% of the auto market in the U.S. Both companies are likely to pass State Farm's 15.9% share in the next three or four years. GEICO operates largely with no agents or brokers involved in distribution. Paying a gecko is cheaper than paying commissions, thus GEICO's underwriting expenses are at a far lower portion of premiums earned than the competition. For this cost advantage, they tend to incur higher losses. Losses have been too high; thus, Berkshire shook management, placing Todd Combs temporarily in the CEO role, also retaining management responsibilities for a matching portion of Berkshire's equity portfolio managed by Ted Weschler. Tony Nicely had run GEICO for 25 years before retiring in 2018.
GEICO is severely behind Progressive in using technology in underwriting and claims management. Progressive leads in telematics, or the use of GPS in monitoring cars and driving habits to help properly rate risk and in setting premium. While the gap can be closed, Progressive has been more profitably gobbling up market share and may pass GEICO over the next couple years. GEICO maintains a huge cost advantage over the field but needs to solve losses that are running too high. I don't think Todd Combs is the answer in the current role as CEO.
GEICO's will likely see an underwriting loss exceeding 5% in 2022. The good news about auto insurance is it's very short-tail in nature. Premiums are reset every six or twelve months and losses develop quickly. Roughly 60% of losses are settled in the first year subsequent to a claim being filed. Nearly 100% of losses are developed and paid by five years. Inflation in auto parts, vehicle replacement, medical costs and litigation expenses are running at very high levels. GEICO and its competitors will see several rounds of price increases granted by most state insurance commissioners during 2022. Price tends to fix problems quickly, but it will take great ongoing effort to regain its low-cost provider position versus Progressive. Progressive tends to lead when filing for rate increases. There exists a natural lag in profitability between the two. It will take more than a bunch of rate hikes to fix GEICO's loss of competitive advantage.
Looking at recent earnings results and share prices, Progressive is killing Berkshire, not just in terms of taking market share, but also in terms of earnings and share price. It is puzzling to me that Berkshire, which can afford to take the long view and invest heavily if it improves the moat, doesn't seem to be doing much to up its risk assessment game. Does anyone have any informed thoughts on whether my impression is correct and, if it is, on what might explain Berkshire's failure to address this challenge thus far?
dtb
