Word: geico
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Warren Buffett, the investor and head of Berkshire Hathaway, noted some of these trends two years ago, when his Geico insurance subsidiary doubled its projected 4% profit margin because the number of claims was decreasing. Last year margins were well over the target again. Buffett warned that such stellar results would not persist because they would soon invite competition. That's what has happened, and now he expects the industry's margins to contract as insurers cut prices to battle for market share--bad news if you own the stocks but not if you're a policyholder...
...sure, GEICO is emerging from its ordeal much smaller and poorer than in 1974, when it was the nation's fifth largest auto insurer, collecting premium income of $660 million-and when its stock sold as high as $61 a share. The company had reached that eminence by doing away with agents and selling policies directly to customers at premium rates as much as 25% below those charged by other insurers. The strategy worked because for a long time GEICO restricted its customers to employees of federal, state and local governments, and later to professional people-two low-risk...
...same time, however, Wallach was acting to save GEICO. He cajoled 27 other insurers into buying about a fourth of GEICO's existing auto policies (the insurers had a self-interested motive for agreeing: if GEICO had gone bust, they would have been assessed to help pay claims against its policyholders). That provided time, and cash, for GEICO's new chairman, John J. Byrne, 45, who had been hired from Travelers Insurance Corp. in May, to begin an overhaul...
...closed 23 sales offices. Those moves have reduced expenses 20%; Byrne vows to cut them further by 10%. Byrne has also secured, state by state, permission for premium-rate increases averaging 38%. Further, the company, which once operated in 25 states, has stopped servicing unprofitable areas. GEICO pulled out of New Jersey, which once accounted for 10% of its business, when the state refused to allow a premium increase; it has also stopped writing new policies in Connecticut, Hawaii, Iowa, New Hampshire, New Mexico and Utah...
Though these steps have hauled GEICO back into the black, and the $75 million sale of preferred stock has rebuilt its depleted reserves, the company is likely to go on shrinking for a while. GEICO is still losing policyholders it wants to keep; some are failing to renew because they distrust the company's finances, others because they will not accept the stiff premium increases. GEICO sells homeowners' insurance as well as auto policies-and some mortgage lenders are demanding that householders switch to richer insurers as their GEICO policies expire. Counting the policies already taken over...