Comments from Berkshire Hathaway Inc. officials during the company's annual shareholders meeting focused on GEICO Corp.'s longer-term competitive positioning in the personal auto business, but recent underwriting results suggest more pressing near-term concerns.
GEICO's first underwriting loss in a first quarter in 21 years to begin 2022 reinforces the urgency of the numerous rate increases the company has implemented and continues to pursue in multiple jurisdictions against a difficult inflationary backdrop. Year-over-year increases in used vehicle valuations may have peaked in the first quarter, but they remain near historically high levels and will continue to place upward pressure on auto insurers' loss costs.
These cost pressures are not exclusive to any one carrier or geography, but GEICO's pursuit of large rate increases relatively early in the inflationary cycle could bode well for its ability to resume growth in policy counts. Measures that carriers are or are not taking today to address rate adequacy could have lasting competitive implications.
Seeing red
Underwriting losses have been a rarity for GEICO over time, and they have been particularly infrequent in the first quarter. From 2002 through 2021, GEICO never reported a first-quarter underwriting profit of less than $105 million. Its cumulative first-quarter underwriting profit total of $27.81 billion during that 20-year timeframe ranks only behind the second quarter's cumulative gain of $28.71 billion, a figure that was inflated by the company's outsized second-quarter 2020 result amid the depths of the pandemic. Since GEICO opted to provide 15% discounts to new and renewing customers in response to the effects of the pandemic as opposed to up-front credits, the financial impact on earned premiums and, in turn, underwriting profitability was largely deferred into the third and fourth quarters of 2020.
GEICO reported underwriting losses of $86 million and $21 million in a challenging market environment in the first quarters of 2000 and 2001, respectively.
The first-quarter 2022 loss was the fourth-largest reported by GEICO in any reporting period in at least the last 22 years, surpassed only by the fourth quarter of 2017 and the third quarters of 2017 and 2021. Its loss and loss-adjustment-expense, or LAE, ratio of 89.4% in the first quarter was the second-highest during that stretch, behind the third quarter of 2017's 91.9%. GEICO suffered $500 million in catastrophe losses from hurricanes Harvey and Irma during that period, which inflated its loss and LAE ratio by approximately 6.6 percentage points.
The company's income statement absorbed a hit of a different kind in the first quarter of 2022. According to Berkshire's quarterly report for the period, higher used car prices have boosted average claims costs for scenarios in which insured vehicles are declared a total loss at the same time shortages of replacement parts have lifted average claims costs for partial losses.
The Manheim Used Vehicle Value Index, one of the key indicators watched by insurers and auto finance companies, hit an all-time high in January. And while it has retreated since then, it still remained up 14.1% year over year as of mid-April. Measures in the U.S. Consumer Price Index that are relevant to repair costs paint more of a mixed picture: prices for parts and equipment, particularly tires, as well as motor vehicle bodywork rose by double-digit percentages in March, but prices for motor vehicle repair increased by a more modest 5.5%. Lack of parts availability due to supply chain constraints tends to lengthen the amount of time claims remain open and, in some cases, creates the potential for what would typically be declared a partial loss to become a total loss.
Like rival The Progressive Corp., GEICO continued to dial back customer acquisition efforts in light of underwriting margin pressures. The company attributed a $249 million decline in first-quarter underwriting expenses to the combination of lower advertising expenditures and employee-related costs. Its expense ratio fell by 3.6 percentage points to 12.5% for the period, helping to soften the blow from higher losses and LAE.
While Berkshire did not quantify the amount GEICO spent on advertising nor the magnitude of the year-over-year reduction, Progressive President and CEO Tricia Griffith indicated in a letter to shareholders that the company's ad spend fell by 8% in the first quarter. That marked an acceleration in the rates of decline from full-year 2021 based on the data reported by the company in its applicable statutory and SEC filings.
Progressive said it increased personal auto rates in 36 states, which accounted for about 75% of its trailing-12-months written premium, representing about a 7% countrywide increase. Griffith described it as "one of the highest quarterly increases we have filed and follows a full-year increase of about 8% in 2021."
S&P Global Market Intelligence's P&C Rate and Product Filings Trend Analysis and Histogram show that GEICO had private-passenger auto filings with effective dates for renewal business between Sept. 1, 2021, and Dec. 31, 2022, approved or not disapproved with a cumulative rate increase of 8.7%. This compares to an average of 5.4% for peers that rank among the top 10 writers in the business line. The company has multiple other filings still pending with requested effective dates for renewals at some point in 2022 and a cumulative rate change of 4.1%. This data, which excludes motorcycle, boat and recreational vehicle filings, may not fully capture the breadth of GEICO's actions due to the rate-filing statutes and disclosure protocols in effect in various states.
The effects of approved rate increases will generally take upwards of several quarters following implementation to fully earn into carriers' books. Griffith said Progressive still has nearly 7 points still to earn during the remainder of 2022 from the rate increases it put in place in the past three quarters.
Carriers are also pursuing other margin-improvement actions that include tighter underwriting guidelines and revised premium payment requirements.
Tracking telematics
Comparisons between GEICO and Progressive, the No. 2 and 3 U.S. private auto insurers, took a longer-term perspective when the topic arose at Berkshire's annual shareholders' meeting for a second straight year.
Berkshire Vice Chairman of Insurance Operations Ajit Jain, responding to a question during the April 30 shareholders' meeting, offered prospective commentary regarding GEICO's ongoing rollout of its DriveEasy telematics offering. Jain essentially reiterated comments from Berkshire's 2021 shareholders' meeting, where the executive said GEICO had been late in adopting telematics relative to Progressive. This time, Jain expressed hope that GEICO would catch up to its rival in the next "year or two" and that it would translate in the form of improved growth rates and margins.
Chairman Warren Buffett, meanwhile, offered some historical perspective on the auto insurance business, noting that State Farm, the No. 1 U.S. private auto insurer, is a mutual entity that "shouldn't exist under capitalism." If an entity like State Farm sought to launch today, Buffett asked, "Who would put up the capital?" Buffett suggested that auto insurance be taught in business school because it "refutes so many of the things they're teaching."
Ownership structure is not the only area of diverging strategies in the sector. In a much narrower sense, the magnitude of the cumulative approved rate increases implemented by leading carriers in the current environment varies widely. For filings effective for renewals from Sept. 1, 2021, to year-end 2022, according to the aforementioned S&P Global Market Intelligence template, the cumulative approved hikes for State Farm, Progressive and the industry as a whole are 2.1%, 10.9% and 5.2%, respectively.