No. of Recommendations: 6
" Some lessons:
Berkshire’s own subsidiaries are not immune to the risk of complacency. GEICO fell victim to, as Buffett calls it, the “institutional imperative.” Despite a history of leaning into technology to achieve cost advantages in distribution, they lagged in embracing technology to control the main cost of any insurer, claims.
The same can be said about BNSF, which has dragged its feet in implementing precision railroading policies and headcount rationalization (the topic of that prior piece linked at the top). In the case of GEICO, however, profitability has been restored quickly, and the path forward has been embraced fully by management.
Insurance suffers from adverse selection, and certain technological advantages amplify the problem. As Progressive identified the riskier cohort, they adjusted their premiums quicker. These drivers then became the first to shop around for insurance, and GEICO - relying only on traditional classification - took them on.
For Berkshire owners, I would point out two things. First, the appointment of Todd Combs, who worked in the industry decades ago (at Progressive!), was the right call. Second, and to put the "problem" in perspective, GEICO earned $7 Billion pre-tax last year and is on track to surpass that in 2025.
That means GEICO is very near earning—pre-tax—what Buffett paid for it in 1995 every six months. Yes, these are nominal dollars, but the numbers also exclude income related to the investment of GEICO's float. We are talking about underwriting profits only.
More generally, if the insurance fiefdom presided over so skillfully by Ajit has some large-scale opportunities for improvement, imagine what could be done in many other areas of Berkshire. That would require a focus on operations and efficiency to be balanced with the traditional hands-off approach - not an easy thing, for sure - but potentially very impactful, nevertheless."
https://seekingalpha.com/article/4824583-berkshire... 