Tags: GEICO / earnings
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Introduction - Berkshire Hathaway and GEICO
GEICO is one of the largest auto insurance companies in the United States. It is wholly owned by Berkshire Hathaway as of 1996, see also history of GEICO. GEICO has been one of Berkshire Hathaway's most important subsidiaries since the mid-1970s, providing a significant source of revenue and profits for the conglomerate's insurance business.
For Buffett, GEICO holds a special place in his heart. In fact, he wrote his Master's thesis at Columbia University on the company back in 1951. He was so impressed by GEICO's business model that he decided to invest in the company in the mid-1970s. Since then, GEICO has been a cornerstone of Berkshire Hathaway's insurance business, leveraging its direct-to-consumer business model and technological prowess to offer lower rates and streamline operations.
In this article, we will examine the state of GEICO's business model, competitive advantages, and financial performance, as well as its prospects for growth and the potential risks it faces.
As a shareholder of Berkshire Hathaway, understanding GEICO's role in the conglomerate's overall strategy is crucial.
We have conducted an analysis of GEICO’s financial performance for the year 2022, focusing on the developments in revenues and expenses. In this article, we will provide a summary of GEICO’s underwriting results and discuss the factors that influenced its financial performance in 2022. We will also provide an outlook on GEICO’s prospects for the future.
The analysis is based on the information in Berkshire's 2022 Annual Report. All readers are encouraged to read the annual report and conduct their own analysis. Our outlines might act as a short unsophisticated summary or starting point.
Finances
Revenues
GEICO’s premiums written in 2022 increased by $712 million (1.9%) compared to 2021. This was primarily due to an increase in average premiums per auto policy, which was partially offset by a decrease in policies-in-force. The voluntary auto policies-in-force decreased by 8.9% in 2022 compared to 2021 while average premiums per voluntary auto policy increased by 11.3%.
GEICO’s premiums earned also increased by $1.3 billion (3.4%) in 2022 compared to 2021. This increase was partially attributable to a reduction in 2021 of approximately $475 million from the remaining impact of the GEICO Giveback program.
Expenses
GEICO’s losses and loss adjustment expenses increased by $5.3 billion (17.1%) in 2022 compared to 2021. The loss ratio was 93.1% in 2022, an increase of 10.9 percentage points over 2021. The increase was primarily due to higher claims frequencies and severities, as well as lower reductions of ultimate loss estimates for prior years’ events. Claims frequencies in 2022 were higher for all coverages, and average claims severities in 2022 were higher for all coverages as well.
GEICO’s underwriting expenses decreased by $881 million (16.2%) in 2022 compared to 2021, primarily due to significant reductions in advertising costs and lower employee-related costs. GEICO’s expense ratio (underwriting expense to premiums earned) was 11.7% in 2022, a decrease of 2.8 percentage points compared to 2021, attributable to both the decrease in expenses as well as the increase in earned premiums.
Prospects for the future:
Despite the challenges faced by GEICO in 2022, it has successfully obtained premium rate increase approvals from certain states in response to the significant claims cost increases it has experienced in recent years. As the COVID-19 pandemic continues to impact driving patterns, GEICO will need to continue to monitor and adjust its underwriting results to reflect changes in claims frequencies and severities.
The company will also need to remain vigilant about cost inflation in property and physical damage claims and shortages of car parts, which could contribute to elevated claims severities on partial losses. Additionally, GEICO may need to consider implementing more sophisticated technology and data analytics to improve its risk management processes and better predict and mitigate potential losses.
Conclusion
In conclusion, GEICO’s financial performance in 2022 was impacted by several factors, including changes in claims frequencies and severities, reductions in ultimate loss estimates for prior years’ events, and significant cost inflation in property and physical damage claims. While these challenges may persist in the near term, GEICO’s successful rate increase approvals and expense reductions demonstrate the company’s ability to adapt and respond to changing market conditions.
As such, GEICO remains well-positioned to continue to deliver value to Berkshire Hathaway in the years to come.
Appendix: GEICO Underwriting results 2020 - 2022
| 2022 | 2021 | 2020 | |
|---|---|---|---|
| Premiums written | $ 39,107 | $ 38,395 | $ 34,928 |
| Premiums earned | $ 38,984 | $ 37,706 | $ 35,093 |
| Losses and loss adjustment expenses | $ 36,297 | $ 30,999 | $ 26,018 |
| Underwriting expenses | $ 4,567 | $ 5,448 | $ 5,647 |
| Total losses and expenses | $ 40,864 | $ 36,447 | $ 31,665 |
| Pre-tax underwriting earnings (loss) | $ (1,880) | $ 1,259 | $ 3,428 |
Results are in million dollars.
