Berkshire Hathaway’s Geico has ‘long way to go’ to sustainable profits

Berkshire Hathaway’s automotive insurance unit Geico remains “a long way” from a position of sustainable on-target profits, in part as it has discovered major shortcomings in its technology infrastructure, blocking the path to improved risk pricing, including through telematic options, a top official has confessed.

“Even though we have made improvements in terms of bridging the gap on telematics, we still haven't started to realise the true benefit and the real culprit or bottleneck is technology,” Berkshire Hathaway’s deputy chairman for insurance, Ajit Jain (pictured), told the group’s annual shareholder soiree.

“Geico technology needs a lot more work than I thought it did,” Jain said.

Jain cites a legacy systems count in excess of 600, none of which communicate with one another, in need of a massive consolidation to a mere 15 to 16 with full communication along all lines. “That is a monumental challenge.”

“Because of that and because of the whole issue more broadly in terms of matching rate to risk, Geico is still a work in progress,” Jain said.

The recent swing to underwriting profits in the first quarter of 2023 may not be sustainable, Jain suggested. The Q1 underwriting profit is “very good, but it is not something we can take to the bank,” Jain said, citing the seasonality of the improvement and the reliance on favourable adjustments to prior period reserves.

“My guess is that by the end of the year Geico will end up with a combined ratio just south of 100 as opposed to the target which should be 96%,” Jain said.

“I hope they reach the target of 96% by the end of next year,” Jain said. That eventual victory will be bittersweet, he admitted, given it will have come at the expense of client counts and market share. “There is a trade-off between profitability and growth and clearly we are going to emphasise profitability and not growth, and that will come at the expense of policyholders.”

Group CEO Warren Buffett sounded sceptical on the value of technology in insurance, using his podium time to play down the value of insurtechs to the industry. “You still have to properly match rate to risk,” Buffett said. “They invariably have reported huge losses, they've eaten up capital.”

Likewise, embedded insurance is no obvious path to easy wins, Buffett claimed. “It’s hard to improve on the present system,” Buffett said. Embedded insurance is “not a new idea.”

Geico is nonetheless in talks with “some” unspecified automotive manufacturers in pursuit of point-of-sale insurance offers, Jain noted. Competition for the channel looks tight.

“They’re all hot to trot,” Jain said. “I think somebody will find then secret sauce before not too long and we ourselves are in that race.”

In the first quarter just reported, Geico swung to a pre-tax underwriting profit of $703 million after having racked up $1.9 billion in losses during four quarters of rising losses in 2022.

Total loss expense fell 6.5% and total underwriting expense fell 21.6%. That took 6.4 pps off the loss ratio and 2.8 pps off the expense ratio to push the unit back into the green with a 92.7% combined ratio.

The turnaround appeared sudden. Geico had ended the year with $456 million in losses in the fourth quarter alone with no visible improvement loss ratios despite finally starting to show some acceleration on rates. The unit's combined ratio had ended the year at 104.8%, suggesting virtually no Q4 improvement from the 104.9% recorded for the first nine months.

Newfound profits didn't come through growth: Geico written premiums fell 2% even as management claimed higher average premiums per policy. Premiums earned grew a fractional 0.8%.

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