Increasing Costs and Premiums at Berkshire Hathaway’s Geico

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Mar 242016

I am quoted in an Omaha World-Herald article on the increasing frequency and severity of automobile insurance claims and the resulting rise in premiums at Berkshire Hathaway’s Geico:

All told, both the severity and frequency of claims have been on the rise at Geico, said David Kass, a business professor at the University of Maryland and a Berkshire Hathaway shareholder.

“This resulted from lower prices for gasoline and an improving economy, which led to more miles being driven by policyholders,” Kass said. “These increases in costs to auto insurers reduces their profitability in the short run until appropriate premium increases can be implemented.”


“This float is a major source of funds for Berkshire to invest both inside the company as well as outside the company through acquisitions and investments in publicly traded companies,” Kass said. “The insurance businesses in Berkshire are the engine that drives the company. The float provides the fuel.”

But without an underwriting profit, insurance float gets eaten up, with paid-in premiums going out as fast as they come in, depriving the company of their use in the meantime. So preserving underwriting profit via rate increases is axiomatic, Kass said. Ratepayers are going to absorb it; blame the hospitals and lawyers, perhaps, but it will be absorbed one way or another.

“The premium increases are being introduced with a lag of six months, the length of an auto policy,” Kass said. “But they will be set at sufficient levels to cover the higher costs.”

 Posted by at 7:56 am

20 Highlights of Warren Buffett on CNBC February 29, 2016

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Mar 012016

Warren Buffett was interviewed on CNBC on February 29, 2016 from 6:00 a.m. – 9:00 a.m. eastern time.  These are some of the highlights:

(1) Warren Buffett does not predict stock prices in the short run, but in the long run they will be higher (10, 20, 30 years from now).  He has been buying stocks in 2016 (Phillips 66) and is a more aggressive buyer when they go down.  Real GDP in the U.S. has grown at 2% per year since the financial crisis of 2009.  He bought his first stock in April 1942 at age 11 when the U.S. was losing World War II in the Pacific.  He bought shares after 9/11 and after the crash of 1987 (Coca-Cola in March 1988).

(2) Lower oil prices result in a gasoline dividend for consumers and are good for oil importing countries such as the U.S.  This gasoline dividend feeds slowly into the economy as consumers save initially and then gradually spend more.  But, the capital value of the oil industry drops quickly with an accompanying loss of jobs.  The railroad industry had a bad year in 2015 as well as in the first quarter of 2016.  34% of rail car loads are affected by lower oil prices, coal, and fracking sand.

(3) The frequency of auto accidents and number of related deaths rose in 2015 as more miles were driven resulting  from lower gas prices and greater employment.  1/2 of deaths result from people not wearing seat belts, 1/3 from drunk driving, and 10% from distracted (smart phones) driving (about 3,000 of 36,000 deaths in 2014).  Insurance rates are increasing to match the increase in frequency and severity of claims.  But thanks to Ralph Nader and new technology, cars are a lot safer than they used to be.  Driver-less cars will succeed if they are safer.

(4) Warren Buffett does not think he is wrong by investing in IBM, but he says it could be a mistake.  He was wrong about Tesco (British retailer).  If he is wrong, he will sell and may take a big loss. Lower prices for a stock is good if he is buying more, unless the company is losing value (if it is not worth what it is selling for).  He has never sold a share of IBM.  A  good business is more important than its management.   Geico is working closely with IBM’s Watson computer (artificial intelligence),

(5) Berkshire is webcasting its annual meeting this year since they were “maxed” out in 2015 with 45,000 people.

(6) Berkshire is closing on its purchase of Duracell today (in exchange for its Procter & Gamble stock).

(7) He does not know how negative interest rates will play out.  This has not been studied before. Negative interest rates help borrowers and hurt savers.

(8) He cannot name one economist with a 160 IQ who became super wealthy from stocks.  Keynes became a value investor (buy and hold) later in life.

(9) Productivity growth is a goal of society.  3G Capital turns inefficient companies into efficient ones.  We need the best people running our companies for the 150 million Americans who work there.

(10) Warren Buffett is unlikely to own Dow Chemical common stock at conversion of its convertible preferred.  He likes the preferred stock only.

(11) Coca-Cola’s growth rate has slowed down.

(12) American Express has a terrific reputation and will do fine over time.

(13) At Wells Fargo, CEO John Stumpf has done a fabulous job.

(14) Berkshire is likely to convert its warrants into the common stock of Bank of America (by 2021).

(15) Kinder Morgan is an investment of either Todd Combs or Ted Weschler.

(16) Phillips 66 is an investment of Warren Buffett.  The current economics of oil refining is better than oil producing.

(17) Clayton Homes has not been engaging in predatory lending by charging minorities higher interest rates.  Its average interest rate is 8.8%.

(18) He hopes the United Kingdom stays in the European Union.

(19) With respect to global warming, insurance rates will rise gradually over time.  Florida is now going through the longest period without a hurricane hitting land since the late 1800’s.

(20) Students should follow their passion.  He (investing) and Bill Gates (coding) achieved early success (age 13- 18) through “focus”.

 Posted by at 12:34 am