There wasn’t plenty of speak about auto insurance coverage at this 12 months’s annual assembly of Berkshire Hathaway, however when the topic got here up, Warren Buffett acknowledged the continued dominance of 1 competitor—a mutual insurer.
“The biggest auto insurance coverage firm in the USA was began over in Illinois by a man who didn’t know something about insurance coverage significantly. And it’s a mutual firm. It’s not supposed to achieve capitalism,” mentioned Berkshire Hathaway’s chair and chief government officer, referring to State Farm.
Saturday’s six-hour occasion wasn’t the primary one which featured Buffett referring to State Farm’s dominance when requested to touch upon the competitors between Berkshire’s GEICO and Progressive Insurance coverage. “We’ll see five years from now or 10 years from now which one of us passes State Farm first,” he mentioned as just lately because the 2019 annual assembly. (Associated article, “‘I Worry Much More About Progressive’ Than Tesla, Buffett Says“)
This time round, nevertheless, when CNBC Journalist Becky Fast learn a query from a shareholder who wished to know why GEICO is lagging Progressive by way of top-line progress and underwriting profitability, Buffett didn’t speak about ever transferring forward of State Farm. To his thoughts, the auto insurance coverage trade and the success of State Farm needs to be studied in enterprise colleges.
“For those who go to enterprise college, they train you that solely as a result of you have got incentives and compensation, every kind of issues, can firms succeed. [But] no person’s actually gotten wealthy off State Farm. They’ve sat there, and they’re the biggest insurance coverage firm,” he asserted. “When Leo Goodwin started GEICO 80 some years ago, he most likely wished to get wealthy,” he mentioned, referring to GEICO’s founder. “And doubtless at Progressive, I do know folks wished to get wealthy. And at Vacationers and Aetna. You possibly can identify them off, dozens and dozens of firms.” (See associated article, “Scoop, There It Is: GEICO Drives Up Berkshire 2020 Underwriting Profit” for extra about Goodwin.)
“And who wins? A mutual firm,” Buffett concluded.
“When it comes to presence, of dimension, they nonetheless are the biggest firm. For those who omit Berkshire, they’ve the biggest internet price by far. They’ve acquired $140 billion or one thing like that in internet price,” Buffett mentioned, speculating that Progressive’s internet price is roughly one-sixth of State Farm’s.
“We spend $2 billion a 12 months telling folks the identical factor we’ve been telling them for 70 or 80 years.” However when all is claimed and carried out, “State Farm remains to be doing extra enterprise than anyone, and it shouldn’t exist beneath capitalism.”
“For those who [had] a plan to begin a State Farm in the present day and needed to compete with Progressive, who would put up the capital [for] a mutual firm that you simply’re not going get the earnings from? It doesn’t make any sense in any respect,” he mentioned.
Progressive Nonetheless Crushing It
Ajit Jain, who chairs Berkshire’s insurance coverage operations, spoke earlier than Buffett to offer a direct response to the unique query of Progressive’s outperformance of GEICO, conceding as he did eventually 12 months’s assembly that GEICO must catch as much as Progressive on telematics. (Associated article: “Progressive ‘Crushing It’ on Profit: Berkshire’s Jain and Buffett,” Might 6, 2021)
“There’s no query that private vehicle insurance coverage enterprise may be very aggressive enterprise. Having mentioned that, each GEICO and Progressive are two very profitable rivals. Every one in every of them have their pluses and minuses,” Jain mentioned.
“There’s no query that extra just lately, Progressive has carried out a significantly better job than GEICO…by way of margin and by way of progress charge. There are a variety of causes for that, however I feel the largest offender so far as GEICO is worried…is telematics.
“Progressive has been on the telematics bandwagon for, I don’t know, greater than 10 years, 20 years. GEICO till just lately wasn’t concerned in telematics. It’s been solely the final two years that we made a really critical effort by way of utilizing telematics for segmentation and attempting to match charge and threat.”
“It’s an extended journey, however the journey has began, and the preliminary outcomes are promising. It can take some time, however my hope and expectation is that hopefully within the subsequent 12 months or two, GEICO might be able to meet up with Progressive by way of telematics, and hopefully that may then translate into each progress charge and margin,” Jain mentioned, drawing applause from shareholders who attended the Omaha assembly in particular person.
A Blind Spot?
At an early level within the assembly, Buffett briefly reviewed first-quarter 2022 outcomes for all of Berkshire’s operations, noting that $7.0 billion in working revenue was basically unchanged from first-quarter 2021. Web revenue, which incorporates the affect of unrealized losses on funding holdings and realized losses on gross sales of investments, fell to $5.5 billion in comparison with $11.7 billion for the comparable quarter in 2021.
For simply the insurance coverage and reinsurance operations, after-tax working revenue fell 38.3 p.c to $1.2 billion. Whereas funding revenue dropped lower than 4 p.c to $1.4 billion, Berkshire Hathaway’s main insurance coverage operations suffered on the underwriting aspect.
Underwriting revenue fell 55 p.c to $92 million for the industrial main insurance coverage operations. GEICO did worse, reporting $178 million in pretax underwriting losses, translating right into a 101.9 mixed ratio.
Progressive once more outdistanced GEICO on progress and profitability measures within the first quarter. Whereas Progressive reported a 12 p.c soar in written premiums and a mixed ratio of 94.5—up 5.2 factors from first-quarter 2021—GEICO’s mixed ratio deteriorated greater than 13 factors with premiums rising lower than 3 p.c.
“They’re very, very, very disciplined in underwriting,” Buffett mentioned of Progressive, following Jain’s evaluation of the auto insurance coverage competitor. “In fact, on the funding aspect, their internet price dropped within the first quarter as a result of they personal plenty of bonds,” he added, suggesting that Progressive and “most likely all people within the insurance coverage enterprise would say that nicely, we personal bonds as a result of that’s what folks do.”
“There’s half of the enterprise the place you do what folks do, and the opposite half of the enterprise you spend every kind of time attempting to research in each county and each single means [how] you possibly can segregate, correctly charge enterprise and all of that,” Buffett mentioned.
Progressive, which studies earnings publicly every month, reported March and first-quarter 2022 outcomes on April 14. The figures proven in that report embrace $388.6 million of losses on securities held and $54.5 million of realized losses on gross sales, which fueled a 79 p.c drop in internet revenue to $313.9 million in comparison with practically $1.5 billion in first-quarter 2021.
The earnings assertion didn’t present any commentary on the drivers of revenue modifications. An Investor Relations name is scheduled for Tuesday, Might 3.
Stated Buffett, “Ajit is liable for including extra worth to Berkshire than the entire internet price of Progressive. That’s to not knock Progressive. I’m simply saying, [it’s] one man,” he mentioned, drawing applause from the group in attendance.
At Progressive, shareholders fairness stood at $17.1 billion on the finish of the quarter, in accordance with Progressive’s March 31, 2022 steadiness sheet, and $18.2 billion at year-end 2021.
Shareholders fairness for the conglomerate of insurance coverage and non-insurance companies of Berkshire Hathaway exceeds $500 billion, in accordance with the annual report.
Buffett spent a couple of minutes of his remarks recalling his first assembly 40 years in the past with Peter Lewis, one of many legendary previous CEOs of Progressive. “He was sensible as hell, and also you knew this man was clearly going to be a serious competitor of Berkshire’s. He knew insurance coverage backwards and forwards—very shiny and all the pieces. However he simply ignored the funding aspect and that was as necessary the underwriting aspect.”
Additionally praising subsequent leaders of Progressive for his or her underwriting expertise, Buffett remarked, “It’s attention-grabbing how organizations perform after which have what I’d say are to some extent blind spots. Charlie and I do know we’ve acquired every kind of blind spots ourselves,” he mentioned, referring to Vice Chair Charlie Munger. “So, now we have to be sort of cautious criticizing different folks for having them,” he mentioned.
At a later level within the assembly, simply earlier than the lunch break, after Buffett supplied some philosophical ideas about “apperceptive plenty” and life classes about how the human mind can out of the blue understand one thing it’s been for years otherwise (like an optical phantasm), he mused with Munger in regards to the pair’s personal blind spots all through the years.
“A part of the trick is to get so that you right your individual errors, and we’ve carried out plenty of that—incessantly means too late,” Munger mentioned, with out providing particular examples.
“Is it sensible to criticize folks in any respect?” Buffett requested.
“Most likely not. However I can’t assist it,” Munger mentioned, having supplied a number of biting feedback through the assembly about bitcoin traders and the Robinhood buying and selling platform.
Whereas neither Elon Musk nor Tesla Insurance coverage got here up for criticism at this 12 months’s assembly—in distinction to years previous—Buffett did supply some common criticism of expertise firms working as insurance coverage firms throughout his personal dialogue of bitcoin.
Proper after he defined that U.S. {dollars} are the one actual forex in the USA in his personal dialogue of the issues of cryptocurrency, Buffett noticed that folks connect “magic to a number of issues” on Wall Avenue.
“We’re not an insurance coverage firm. We’re a tech firm,” he mentioned, seemingly paraphrasing the remarks of an unnamed InsurTech government. “Effectively, they’re an insurance coverage firm…A dozen folks or so have raised some huge cash. They only don’t pay any consideration to the truth that [they] promote insurance coverage… In the long run, they wrote insurance coverage and overwhelmingly misplaced some huge cash since then,” he mentioned.
Extra highlights captured by Provider Administration from the Berkshire annual assembly, together with particulars for Berkshire’s $11.6B deal for Alleghany, Buffett and Jain’s ideas on nuclear struggle threat and Buffett’s feedback on tribalism, might be included within the associated article, “Dealmaking 101: When Alternative Comes, You Transfer, Buffett Says,” publishing April 3.
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