Berkshire’s Buffett admits being baffled by auto as Geico falters

Berkshire Hathaway founder and leader Warren Buffett (pictured) is baffled by the auto insurance business, claiming any industry led by a mutual "essentially refutes" standard business logic.

“The auto insurance business ought to be studied in business school,” Buffett, 91, said during the Q&A of his firm's annual general meeting. “It essentially refutes so many of the things they are presently teaching.”

State Farm has funded Buffett his befuddlement, holding on to leadership position among auto insurers as a mutual despite being chased by for-profit companies run by the best and the brightest in the industry, Buffett indicated.

Buffett can and does count off the numerous economic principles suggesting that profit-seekers win in the open market by attracting capital and then best leveraging motivations for growth and cost efficiency.

“And who wins? A mutual company!” Buffett lamented. “It shouldn't exist under capitalism.”

“It doesn't make any sense at all; except that they got a $140 billion or something of net worth,” what Buffett loosely put at some six times the value of market-listed rival Progressive.

Comments came in part as Buffett appeared to wish to play down shareholder criticism of his own auto insurance unit Geico.

One shareholder at the weekend AGM asked for insights into how Geico had fallen behind rival Progressive on both growth rates and combined ratios at the same time. Berkshire Hathaway’s deputy chairman for insurance, Ajit Jain, put the bulk of the blame on  Geico's latecomer approach to telematics.

But comments also coincided with publication of  Berkshire Hathaway's Q1 financial statements, showing profits collapse as Geico collided head-first with massive inflation and a rise in frequency.

The auto insurer Geico swung to a first quarter pre-tax underwriting loss of $178 million, down $1.2 billion from the prior year period's profit with management blaming “increased claims severity, primarily due to significant cost inflation in automobile markets.”

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