Berkshire Hathaway is outperforming during turmoil, but Warren Buffett’s favorite child Geico is in trouble

Berkshire Hathaway shareholders attending this year’s meeting will want to know more about the company Warren Buffett once called his “favorite child” – the auto insurer Geico.

With tens of thousands of shareholders in attendance, Berkshire’s annual “Woodstock for Capitalists” will be held in Omaha, Nebraska, on Saturday, the second in-person gathering since 2019. (CNBC’s exclusive coverage of the event starts that day at 10 a.m. ET.)

Geico, viewed as the crown jewel of Berkshire’s insurance empire, has found itself in a bit of a trouble recently after losing market share to its best competitor, Progressive, in 2022 with a widening gap in underwriting margins and growth, according to an analysis from UBS. Geico suffered a $1.9 billion pretax underwriting loss last year.

“I think it’s the biggest issue out there at the moment is really Geico,” said Bill Stone, chief investment officer at Glenview Trust and a Berkshire shareholder. “They’ve lost out to Progressive, who did a better job of implementing telematics … I’m certainly interested in a big update on that.”

Telematics programs allow insurers to collect clients’ driving data, including their mileage and speed.

Headquartered in Chevy Chase, Maryland, with more than 38,000 employees, Geico also experienced a 1.7 million decrease in active policies in 2022, after seeing stagnant growth in the previous year.

Ajit Jain, Berkshire’s vice chairman of insurance operations, said the biggest culprit for Geico’s underperformance is telematics.

“Progressive has been on the telematics bandwagon for … probably closer to 20 years. Geico, until recently, wasn’t involved in telematics,” Jain said at Berkshire’s 2022 meeting. “It’s been only the last two years that they’ve made a very serious effort, in terms of using telematics for segmentation and for trying to match rate and risk.”

Geico represents one area of weakness for Berkshire, which overall has been beating the broader market. Berkshire Class A shares hit a 52-week high Monday, briefly topping $500,000 again. The stock is up nearly 5% over the past month, while the S&P 500 has fallen roughly 1% amid the banking crisis.

The conglomerate tends to shine in a down market as many use it for downside protection given its diverse businesses and unmatched balance sheet strength.

First love

While Geico is only a relatively small percentage of Berkshire’s sprawling empire, Buffett does have a soft spot for the insurer as it’s one of the “Oracle of Omaha’s” first investments, and perhaps among the most successful.

Buffett learned about Geico from his professor and mentor Ben Graham, who was the chairman of the board at the insurer. In 1976, Buffett invested at $2 per share in Geico when it was in financial trouble, and Berkshire acquired the rest of the company in 1995.

“It was sort of Buffett’s first love,” said David Kass, a finance professor at the University of Maryland’s Robert H. Smith School of Business. “I think he has a strong emotional and sentimental attachment to it.”

Kass recalled Buffett referring to Geico as his “favorite child” during a meeting with his students in 2005.

Claims cost Inflation

Other than closing the gap in usage-based technology, investors also want to know if Geico is taking steps to offset loss cost inflation, triggered by a surge in prices of used cars, new cars and parts.

Personal auto insurers have been plagued by a high degree of claims cost inflation, with many having posted first-quarter 2023 loss cost increases of more than 20%, said Catherine Seifert, Berkshire analyst at CFRA Research.

To be sure, Berkshire does expect Geico to return to an underwriting profit in 2023 after obtaining premium rate increase approvals from a few states, Buffett said in his 2022 annual letter.