Discussion of one of Berkshire Hathaway Inc.'s most prominent businesses was conspicuous by its virtual absence from Chairman and CEO Warren Buffett's annual letter to shareholders.
Buffett has rarely hesitated to highlight GEICO Corp.'s success in his eagerly anticipated yearly communications, frequently gushing about its enduring "moat" from a profitability perspective and ability to "gobble up" marketshare vis-à-vis the likes of State Farm Mutual Automobile Insurance Co. and Allstate Corp. But the only direct mention of the expansive auto insurer in the 2017 letter was in the context of the shareholder discount the company offers, despite GEICO's having finished one of its most interesting, if not challenging, years in recent memory.
The combination of $450 million in catastrophe losses suffered from hurricanes Harvey and Irma and losses of $517 million from the re-estimation of liabilities for prior years' claims led GEICO to post a $310 million pretax underwriting loss in 2017, compared to a pretax underwriting gain of $462 million in 2016, according to Berkshire's 10-K. The filing offered no additional detail about the reserve re-estimation, but the charge appeared to largely represent a fourth-quarter event as GEICO's adverse development through the first nine months of 2017 totaled $37 million, according to Berkshire's Sept. 30, 2017, 10-Q.
Buffett estimated in his annual letter that Berkshire's losses from the combination of hurricanes Harvey, Irma and Maria across its insurance and reinsurance businesses totaled $3 billion on a pretax basis. Those losses loomed large as the company posted a pretax underwriting loss of $3.24 billion in 2017, which, as Buffett noted, put an end to the company's 14-year run of underwriting profitability.
GEICO's reported loss and LAE ratio of 86.6% marked an increase from 82.6% in 2016. It also represented its highest annual result since Berkshire bought the remaining portion of the company it did not already own in 1996. The previous high during that stretch was 85.7% in 2000.
It was the third consecutive year in which GEICO's loss and LAE ratio equaled or exceeded 80%. Prior to 2015, GEICO's loss and LAE ratio had only reached 80% in a calendar year two times in the previous two decades: in 1995 and 2000.
At the same time, the rate of growth in GEICO's written premiums surged to 16.1% in 2017 from 12.5% in 2016. Not since 2000, when premiums written soared by nearly 16.7%, had the company's business volume grown so quickly. The earlier expansion came off of a much smaller base; GEICO's 2017 premiums written of $30.55 billion were more than 5x as much as its 2000 sum.
S&P Global Market Intelligence puts GEICO's fourth-quarter 2017 underwriting loss at $188 million with a loss and LAE ratio of 87.9%. The company's written premiums rose by 15.6% for the quarter, according to S&P Global Market Intelligence calculations, down sequentially from a 16.5% year-over-year rate of expansion in the third quarter of 2017.
GEICO's full-year underwriting expenses grew by less than 7% in 2017, and the resulting ratio of underwriting expenses to premiums written of 13.9% was by far the lowest GEICO had generated since Berkshire's 1996 buy-in. The ratio hit what had represented at least a 21-year low of 15.1% in 2016.
The GEICO combined ratio of 100.5% (calculated using losses and LAE relative to premiums earned and underwriting expenses relative to premiums written) marked an increase from 97.7% in 2016. It was the second-highest result for the company since 1996, lagging the 2000 combined ratio by nearly 3 percentage points in a gap that reflected the sharply lower expense ratio. Excluding the losses attributed to Harvey and Irma, the 2017 loss and LAE and combined ratios would have been 85.1% and 99%, respectively. They would have been 83.3% and 97.2% when also backing out the reserving action.
Excluding the gains of $150 million and $61 million from the re-estimation of liabilities for prior years' claims that GEICO recorded in 2015 and 2016, respectively, its loss and LAE ratios for those years would have been 82.7% and 82.8%, suggesting a considerably more modest rise in 2017 on an underlying basis.
GEICO said that higher average claims severities also had a negative impact on its 2017 underwriting results. For property damage and collision coverages, GEICO said that its average claims severities increased in a range from 4% to 6%. For bodily injury coverage, the increase ranged from 5% to 7%.
Claims frequency trends were more favorable. They were relatively unchanged on a year-over-year basis for bodily injury coverage, down by about 1% for property damage and collision coverages, and lower by between 2% and 3% for personal injury protection coverage.