GEICO Prioritizes Profits Over Market Share
Berkshire Hathaway's auto insurer has returned to consistent profitability in 2023 but at the price of ceding market share that will be costly to regain in the future.
You glance at your phone on the commute to work one day and notice an email from your auto insurer. Your semi-annual premium has increased again, but this time it is a shocker. For the first time ever, the premium has a comma in it! As the thought of a six month premium over $1,000 sinks in, you start to consider whether the insurer that you’ve been with for many years is still offering the best deal.
Auto insurance is typically a “sticky” product. Once enrolled in a policy, most people rarely think about their coverage or the premium as long as there are no dramatic changes. If your semi-annual premium increases from $925 to $940, are you really going to spend an hour or two researching other options to possibly save the cost of having lunch at Chipotle? Probably not, but if the premium increases from $925 to $1,015, that’s a different story, especially since there’s a comma in the new premium! People tend to psychologically anchor on large round numbers.
As the average annual auto premium rocketed above $2,000 recently, consumers have been willing to consider alternatives. Auto insurers have been in a position where they must figure out how to retain customers while covering rapidly escalating costs. Since customer acquisition costs are significant, insurers do not want to risk losing profitable customers over rate increases. However, this has to be balanced against the need to avoid a flood of red ink as the cost of repairs to vehicles and humans escalate.
GEICO posted dramatically improved results for the third quarter of 2023. If we compare third quarter and year-to-date results to last year, there is no doubt that management has succeeded in stopping the flow of red ink that was brought about by higher than anticipated inflation. The following exhibit from Berkshire Hathaway’s third quarter report is a good summary of the year-over-year comparison:
While premiums earned were essentially flat for the third quarter and the first nine months of the year, GEICO swung from an underwriting loss to a profit. This was driven by improvements in both the loss ratio and the expense ratio resulting in a combined ratio of 89.3% for the third quarter of 2023 compared to 107.7% for the third quarter of 2022. The same trend is apparent for the first nine months of the year.
Taking a longer view, we can see that GEICO has posted underwriting profits for three consecutive quarters. This follows underwriting losses over six consecutive quarters. As a point of trivia, the underwriting profits from Q1 2023 to Q3 2023 exactly offset the underwriting losses from Q3 2021 to Q4 2022.
The following exhibit shows GEICO’s quarterly results since Q1 2020: