This article misses the much bigger picture on two points:
1) Geico is forgoing efficiency in favor of growth. In the past 20 years it has roughly quadrupled its market share. It can do so safely as it is owned by Berkshire Hathaway. As many other auto insurance companies have failed, Geico has climbed to a top 4 insurer.
2) Geico is owned by Berkshire Hathaway. Unlike some of the other companies, it does not have profitability as an exclusive motivation. Even at break-even, it generates significant float for Bershire to invest. This is why growth is favored to high margins.
Unlike some of the other companies, it does not have profitability as an exclusive motivation. Even at break-even, it generates significant float for Bershire to invest.
An insurance money makes its money from the premiums people pay and spends money on claims. Once a claim is made, there is a period of time before the company must pay it.
Even at break-even, an insurance company must keep a large amount of cash on hand to pay future claims. This is called float. Even though the company does not 'own' the money, it is free to invest it while it holds it. Buffet has used Geico and other insurers primarily as vehicles to invest their float.
On the other hand, it's important to note that Berkshire's insurance companies have been unusually profitable. Their combined ratio (ratio of expenses to premiums collected) is often below 100% -- not especially common for the insurance business. However, that average incorporates more volatility, and more deviations from the norm.
Well, any insurance company that doesn't have a combined ratio (CR) less than 100 is not making money.
Example: a CR of 92 means that for every dollar of premium, the company has to spend 92 cents, leaving 8 cents of profit. A CR of 102 means that the company has to spend $1.02 for every dollar taken in.
How much spent depends, in general, on operating expenses and claims paid. Limiting how much you spend can only get you so far; hence the rest of an insurers profit comes from investments.
(And where does the money for investing come from? Collected premiums!)
An insurance company with a combined ratio of 99 has a cost of capital lower than the US treasury. So yes, it is probably making money -- even if it has its assets in T-bills.
1) Geico is forgoing efficiency in favor of growth. In the past 20 years it has roughly quadrupled its market share. It can do so safely as it is owned by Berkshire Hathaway. As many other auto insurance companies have failed, Geico has climbed to a top 4 insurer.
2) Geico is owned by Berkshire Hathaway. Unlike some of the other companies, it does not have profitability as an exclusive motivation. Even at break-even, it generates significant float for Bershire to invest. This is why growth is favored to high margins.