Berkshire Hathaway 2000 Annual Report Download - page 48

47
Insurance — Underwriting (Continued)
GEICO
GEICO provides primarily private passenger automobile coverages to insureds in 48 states and the
District of Columbia. GEICO policies are marketed mainly by direct response methods in which customers apply
for coverage directly to the company over the telephone, through the mail or via the Internet. This is a significant
element in GEICO’s strategy to be a low cost insurer and, yet, provide high value to policyholders.
GEICO's underwriting results for the past three years are summarized below.
— (dollars are in millions) —
2000 1999 1998
Amount %Amount %Amount %
Premiums written ................................................... $5,778 $4,953 $4,182
Premiums earned .................................................... $5,610 100.0 $4,757 100.0 $4,033 100.0
Losses and loss expenses......................................... 4,809 85.7 3,815 80.2 2,978 73.8
Underwriting expenses ........................................... 1,025 18.3 918 19.3 786 19.5
Total losses and expenses........................................ 5,834 104.0 4,733 99.5 3,764 93.3
Underwriting gain (loss) — pre-tax ........................ $ (224)$ 24 $ 269
Premiums earned by GEICO in 2000 totaled $5,610 million, an increase of 17.9% over 1999, which, in
turn exceeded premiums earned in 1998 by 17.9%. The growth in premiums earned in 2000 for voluntary auto
was 18.3% reflecting an 8.5% increase in policies-in-force during the past year and increased premium rates.
During 2000, in response to increased losses, GEICO implemented rate increases in many states and tightened
underwriting standards. Additional rate increases will be taken, as necessary, to align rates with pricing targets. It
takes six to twelve months for the full effect of a rate change to be reflected in premiums earned.
While policies-in-force grew over the last twelve months (8.2% in the preferred-risk auto market and
9.5% in the standard and nonstandard auto lines), total policies-in-force were relatively unchanged during the
second half of 2000. Voluntary auto new business sales in 2000 decreased 10.6% compared to 1999 due to
decreased response to advertising, increased premium rates and tightened underwriting standards. The decline in
new business sales over the last half of 2000 was significant. It is currently believed that policies-in-force in the
preferred-risk auto line will increase in 2001. However, policies-in-force may decline in the standard and
nonstandard auto lines.
Losses and loss adjustment expenses incurred increased 26.1% to $4,809 million in 2000. GEICO’s loss
ratio, which measures the portion of premiums earned that is paid or reserved for losses and related claims
handling expenses, was 85.7% in 2000 compared to 80.2% in 1999 and 73.8% in 1998. The increased ratio in
2000 reflects higher severity of losses related to personal injury protection coverages and increasing cost trends for
medical payments and automobile repair costs. The increases in severity were greater than anticipated resulting in
larger than expected underwriting losses. As mentioned previously, GEICO has filed for rate increases to reflect
the increased average severity of claims.
The levels of catastrophe losses incurred in each of the past three years were relatively minor.
Catastrophe losses added approximately one percentage point to the loss ratio in each of the past three years.
GEICO’s insurance subsidiaries are defendants in several class action lawsuits related to the use of
collision repair parts not produced by the original auto manufacturers. Management intends to vigorously defend
GEICO’s position over the use of these after-market parts. However, these lawsuits are in early stages of
development and the ultimate outcome cannot be reasonably determined.
GEICO’s underwriting expenses in 2000 increased $107 million (11.7%) over 1999, following an increase
of $132 million (16.8%) in 1999 over 1998. The increases in underwriting expenses reflect increased advertising
and costs related to new business growth. In 2000, these increases were somewhat offset by significantly lower
employee profit sharing expense. The unit cost of acquiring new business has continued to increase significantly
in 2000 reflecting higher aggregate media spending and a lower ratio of new policies generated to new policies
quoted. In response to higher unit costs, GEICO expects to reduce advertising expenditures in 2001. It is
anticipated that the reduction in advertising expenditures combined with the expected impact of the previously
noted underwriting actions will result in underwriting results slowly improving over the next twelve months.