In August 2023, GEICO unexpectedly closed all its physical sales locations in California. Customers were informed that all insurance policy transactions in the Golden State would be conducted digitally. Thus, it will be done through the insurance company’s website or mobile app.
There have been 38 offices closed around the state as a result of the office shutdown. This had led to many reports claiming it was followed by “hundreds” of layoffs. The business announced it was stopping its tradition of offering policies through telephone agents in California at the exact time the physical offices closed.
In 2022, Geico experienced an underwriting loss of $1.9 billion before taxes. Let us view the business in detail in the article that follows.
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Overview of GEICO
A privately owned auto insurance provider in the United States is called The Government Employees Insurance Company (GEICO). Geico is one of the biggest auto and home insurance providers in the US.
It has its headquarters in Maryland and was established in 1936. After State Farm, it is the second-largest vehicle insurer in the country. A completely owned subsidiary of Berkshire Hathaway is GEICO.
Even though the term “government” appears in its name, GEICO has never been a government organization or company owned by the government.
Along with umbrella insurance, GEICO also sells property insurance. Yet, the risk associated with these policies is assumed by third-party companies.
GEICO oversees the policies as the “insurance agent.” A distinct client service staff manages the property and umbrella policies.
Maybe, but one aspect of GEICO hasn’t altered since 1936: the company’s outlook is positive. “Whatever the future holds, GEICO will continue to uphold its founding principles of superior coverage, affordable rates, and top-notch customer support, the business claims.
GEICO Closes all California sales offices
All 38 of GEICO’s California agent offices were shut down in August 2023. The company will no longer conduct phone-based insurance sales in the state.
Auto, homeownership, and various other lines of business are said to be affected. In the Golden State, the closures have led to hundreds of layoffs too!
According to a spokesman, GEICO is still active in the state. “We remain to write policies in California. Also, we are still accessible to the more than 2.18 million California consumers who are now insured with us via our direct channels.”
“The closed GEICO Local Offices were owned by independent contractors who operate sales offices. According to the business, there is no impact on claims, and our claims teams are still available to help all clients. They did not mention how unresolved office leasing disputes for the sales office would be handled.
Additionally, the business should have mentioned cutting activities in a facility it owns in Poway, California. It is a 267,500-square-foot office that is home to the insurance company.
The closure came about so suddenly. The customers of California’s media outlets reported being puzzled. It happened when they visited GEICO locations to talk about insurance. Later, they found handwritten notes affixed to the doors informing them the business had closed.
According to a statement from the California Department of Insurance, the department is monitoring the closures of GEICO offices. This was to ensure that all customers with GEICO insurance were safeguarded.
GEICO stated in response to an inquiry from the Sacramento Bee that the company had no plans to stop operations in California. Yet, according to industry analysts, several issues force insurance companies to reevaluate their services in the Golden State.
“The state’s restrictions are making it harder and harder for insurance companies to operate there.” This is according to Steve Young, a lawyer representing Independent Insurance Agents and Brokers of California.
“A highly complex insurance rating law is currently in place. This makes it very challenging for insurers. So, they failed to feel confident they could get the rate required from an actuarial perspective to ride these risks moving ahead.” This is according to Young.
The Sacramento Bee reported that GEICO’s sales footprint in the capital region grew in 2021. It’s because leases were negotiated for new offices in Roseville and many other nearby cities.
Former California Insurance Commissioner Dave Jones said in an interview:
“The company’s measures will render it harder for customers to buy GEICO policies. It is especially for those who are computer-challenged or want to meet an agent in person”.
Why did GEICO close its offices in California?
The business “is halting phone sales of new policies here, though customers can still sign up online,” according to the Chronicle. Current laws will still be followed. GEICO has yet to answer many requests for more information from the media.
The local branch offices were informed of the decision to stop all operations in California “in a two-minute Zoom call.” According to The Epoch Times, which reported having spoken to a corporate employee.
The branch office owner added that this was an awful, rude, and cold-blooded action. How shocked can we all be given that GEICO was reported to be in an unprofitable zone by Fitch Ratings in its US Personal Lines Market Update?
GEICO reports billions in losses from auto underwriting
State Farm and GEICO both revealed enormous 2022 underwriting losses. But their 2023 business goals and outlooks are very different. Berkshire Hathaway Chairman and CEO Warren Buffett expressed hope for this year in his yearly shareholder letter.
He called 2022 a “good year” for Berkshire. Despite growing prices and supply chain delays, the company’s multiple businesses achieved $30.8 billion in profit.
Yet GEICO, a Berkshire Hathaway company, suffered over $1.2 billion in currency losses. Notably, in auto insurance, it suffered its sixth consecutive underwriting loss. It happened despite raising rates, according to Reuters.
Foreign currency losses and higher interest rates reduced earnings in the fourth quarter. But Berkshire Hathaway announced its “highest-ever” annual operational profit. It was despite setbacks from GEICO and Apple, according to Reuters.
In contrast, GEICO raised rates and laid off 7% of its 41,000-person workforce in 2022. It’s because it was “fighting with accident claims and pricing policies to reflect risk,” per Reuters. According to Berkshire, GEICO will turn a profit on underwriting in 2023.
According to Buffett, the route to 2023 will be “a bumpy road. It involves a combination of regular savings by our owners, the power of compounding, the prevention of major mistakes, and—most of all—the American Tailwind.”
What will Geico do next?
Warren Buffett famously referred to the auto insurance company Geico as his “favorite child.” It was expected to be a topic of interest to Berkshire Hathaway shareholders at this year’s annual meeting.
Geico is widely regarded as the jewel in Berkshire Hathaway’s insurance empire. According to UBS research, it would lose market share to its top rival, Progressive, in 2022 due to a widening difference in underwriting profits and growth. Last year, as mentioned earlier, Geico had an underwriting loss of $1.9 billion before taxes.
The main reason for Geico’s poor performance is telematics. This is according to Ajit Jain, vice chairman of insurance operations at Berkshire.
Progressive has likely been using telematics for nearly 20 years. According to Jain, who spoke at the Berkshire 2022 gathering, Geico was just recently active in telematics.
Only in the past two years have they made a major attempt to use telematics for segmentation and to match rate and risk.
Although Berkshire has generally outperformed the market, Geico is one area where it falls behind. In May 2023, the price of Berkshire Hathaway Class A shares reached a 52-week high, temporarily exceeding $500,000.
The stock has increased by almost 5% compared to April, while the S&P 500 has decreased by about 1% due to the banking crisis.
The conglomerate often performs well in a bear market. It results from its wide business portfolio and unrivaled balance sheet strength. Investors use it as downside protection.
Investors are also curious if Geico is taking action to fight loss-cost inflation. A rise in the cost of new and used cars and parts has brought it on.
Catherine Seifert is a Berkshire analyst at CFRA Research. According to her, personal auto insurers have experienced severe claim cost inflation. They have several reporting first-quarter 2023 loss cost hikes above 20%.
Buffett stated in his 2022 annual letter that Berkshire plans for Geico to return to an underwriting profit in 2023 after receiving permission for premium rate increases from a few states.
Conclusion
Following six consecutive quarters of losses, GEICO made an underwriting profit of $703 million. Also, it had a combined ratio of 92.7% in the first quarter of 2023. The quarter’s pre-tax
Some factors boosted underwriting profits for GEICO. They are increased average vehicle insurance premiums, lower advertising expenses, and improved prior accident year development.
Underwriting costs for the quarter totaled $931 million, down $257 million (21.6%) from 2022. Compared to 12.5% in 2022, GEICO’s expenditure ratio in the first quarter of 2023 was 9.7%. The decrease in advertising costs was the main cause of these drops.
Compared to the first quarter of 2022, premiums written fell by $205 million (2%) in the first quarter. The total number of policies held by GEICO has declined by 2.4 million (13%) since March 31, 2022.