Always treat others with respect and kindness, even if you disagree with them. Avoid making personal attacks or insulting others, and try to maintain a civil and constructive tone in your discussions.
- Manlobbi
Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A) ❤
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
No. of Recommendations: 1
"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?"
Technology aversion? Or at least slow to consider.
No. of Recommendations: 7
...what might explain Berkshire's failure to address this challenge thus far?"
=====
Technology aversion? Or at least slow to consider.
Yes, and rightly so, when it first started being heavily used by Progressive, what, 10-15 years ago? But it seems more and more likely that any company not going the tech route for knowing more about driving habits is going to end up getting the high risk clients refused by tech-aware insurers, or, just as bad, to lose low-risk clients attracted by the lower premiums that a tech-aware company like Progressive can offer them.
To modify one of Buffett's favourite aphorisms, if you've been playing poker at the auto insurer's table for a half a decade and you still don't know who the patsy is, YOU'RE the patsy.
d
No. of Recommendations: 0
No. of Recommendations: 7
By the way, for those not familiar with this GEICO/Progressive/State Farm and the rest situation, Bloomstram expresses some of their differences a bit awkwardly, for instance when he say:
"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."
and
that GEICO will need "great ongoing effort to regain its low-cost provider position versus Progressive."
As Bloomstram says, GEICO is a low-cost provider because it doesn't have agents and offices like the other insurers; but this is also true of Progressive. So both of them start out with the advantage of low cost. And contrary to the second Bloomstram quote, this has not been lost by GEICO, and doesn't have to be regained.
The problem is having low cost is just one side of the equation; the ideal, to obtain really good combined ratios, is to have low cost AND low losses. It is in the loss category that Progressive really shines, and where GEICO has been lagging. And the most likely explanation for this, is that Progressive obtains better risk information about its clients, allowing them to underbid their competitors when the risk is low, and too set adequately high premiums when the risk is high, often losing the business of high risk clients to other insurers (like GEICO) who are less able to ascertain the high risk. If your competitor is taking your low-risk clients on whom you made lots of money (because you were charging them too much), and dumping the high risk clients on whom you lose lots of money (because you're not charging them enough), you end up with high losses, even if your costs are low.
The only way to fix this is to find ways to do better at assessing risk, and despite knowing about the problem for years now, GEICO doesn't seem to be catching up.
No. of Recommendations: 7
Was this the thread?
http://www.datahelper.com/mi/search.phtml?thread=3...
Yes! Exactly. I sshould have thought of datahelper.
That was from not even 2 years ago, I thought it was longer. Money quotes:
"Ajit Jain also answered the same shareholder's question about this rivalry, explaining that underwriting profit is a function of 2 major variables: the expense ratio and the loss ratio. He said that GEICO is better at controlling expenses, with a 7-point advantage, whereas Progressive does what Jain called 'a much better job' on the loss ratio side, with about a 12 point advantage. He also said 'sometimes GEICO is ahead of Progressive, and right now, Progressive is ahead of GEICO', but he hoped that could be fixed with a variety of projects underway. Buffett added that 'To some extent, it's a 2 horse race, and we have a very good horse - but they have a very good horse as well.' And Munger added that it's in the nature of things that 'every once in a while, there's someone who's better at things than we are.' Buffett's response: 'yeah, I'd settle for second place in a lot of businesses.' "
and
"... as Buffett says, being #2 is still pretty good, but if there's a clear frontrunner, maybe that could be a pretty good investment?
Progressive has turned in spectacular results in the last few years, with net earnings going from $1.6b in 2017, $2.6b in 2018, $3.9b in 2019, and $5.7b last year, and $1.5b just last quarter. Market cap is currently $58b, so they are at under 10 times their most recent earnings. Clearly some of that may not be sustainable, with COVID having provided a windfall, but they are only about 14 times pre-COVID 2019 earnings. They are growing more quickly than GEICO. They have tripled their share price in the last 5 years, but their earnings are up more than 5 times. They have low debt, and pay out most of their earnings every year with a special dividend."
Reading all that again, and the helpful replies in the same thread, I can't believe I ever sold my stake. Sitting on one's ass is not as easy for me as it is for Munger and Buffett, it seems, and is something I definitely have to learn to do better with great companies like Progressive. (Great according to Buffett, Munger and Jain, so who am I to disagree?)
dtb
No. of Recommendations: 15
I did some work on Progressive last year and, of course, I couldn't avoid the comparison with GEICO. There are some extended Buffett and Jain quotes in there as well. My general sense is that Buffett underestimated the importance of telematics and just missed on this one, which has basically been admitted. I am hoping that Jain and Abel get more time to speak during the annual meeting and that we get some insight into who is going to be running GEICO in the long run. If that's Combs, we also need to understand how he is splitting his time between GEICO and the portfolio work. There was a podcast or an appearance a while back (cannot remember which one) where Combs described an unbelievably intense schedule. Nothing against Combs, but that type of thing isn't sustainable forever and GEICO is clearly not doing well.
https://rationalwalk.com/the-progressive-corporati...(links to pdf and excel files in the post. PGR/GEICO section starts on page 24 of the PDF).
No. of Recommendations: 0
I'm not interested in BRK management outlook calendars. The simple question that THE CEO needs to answer is: how well is management addressing the recent poor results at GEICO?
jk
No. of Recommendations: 9
I think Todd Combs' appearance referenced by Rationalwalk (in Post 1118) was likely his guest appearance on Nov. 4, 2022 at Columbia Business School's "Graham & Dodd Annual Breakfast 2022." I have not found a video of it but it is reported in some detail at "investmentmanagementinsights.substack.com/p/graham-and-dodd-annual-breakfast".
It is an interesting read and touches on numerous issues of interest, including Combs' earlier employment by Progressive and the current Geico/Progressive competition. He apparently describes his current workload as 100-110% Geico CEO with 16-hour days, 25% BRK investments and 25% JP Morgan Bd. and "other" duties, on nights and weekends.
Philmordun
