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

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

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

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

“I think it’s the biggest issue out there at the moment is indeed Geico,” said Bill Stone, chief investment officer at Glenview Trust and a Berkshire shareholder. “They’ve buried 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 rally clients’ driving data, including their mileage and speed.

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

Ajit Jain, Berkshire’s vice chairman of insurance operations, said the hugest 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 entangled with in telematics,” Jain said at Berkshire’s 2022 meeting. “It’s been only the last two years that they’ve go-ahead a very serious effort, in terms of using telematics for segmentation and for trying to match rate and risk.”

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

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

Primary love

While Geico is only a relatively small percentage of Berkshire’s sprawling empire, Buffett does bring into the world 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 well-grounded 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 appropriate 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,” conjectured David Kass, a finance professor at the University of Maryland’s Robert H. Smith School of Business. “I think he has a strong volatile and sentimental attachment to it.”

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

Claims cost Inflation

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

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

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