Author Topic: Intrinsic Value of GEICO  (Read 5009 times)

longterminvestor

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Intrinsic Value of GEICO
« on: May 24, 2019, 11:04:20 AM »
Quoting 2018 annual letter, page 11, "By my estimate, Tony’s management of GEICO has increased Berkshire’s intrinsic value by more than $50 billion."

Can we back into this off the cuff remark to analyze Buffet's intrinsic value of GIECO?  Does this mean GIECO is worth $50B in Buffet's eyes?  Or more than $50B?
« Last Edit: June 07, 2019, 07:44:46 AM by longterminvestor »


longinvestor

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Re: Intrinsic Value of GIECO
« Reply #1 on: May 24, 2019, 11:12:51 AM »
Interesting post.

FWIW, PGR has a mkt cap of $47B.

marazul

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Re: Intrinsic Value of GIECO
« Reply #2 on: May 24, 2019, 11:27:59 AM »
Yes, +$50bn is a reasonable estimate. It is one of the best assets in the Berkshire umbrella. Geico is larger than Progressive with 13% share of the US auto insurance market compared to 10%.

Tim Eriksen

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Re: Intrinsic Value of GEICO
« Reply #3 on: May 24, 2019, 12:55:31 PM »
$50 billion gain means the half they purchased in the 1970's for $47 million is now worth $25 billion.  WOW
Is the $50 billion realistic?  Underwriting pre-tax was $2.4 billion.  GEICO has $22 billion of float out of BRK's $123 billion.  Investment income was $5.5 billion, or about 4.5% of float.  If I attribute 1/6 of that to GEICO that is another $0.9 billion.  Total pre-tax would be $3.3 billion.   16x pre-tax or about 20x after tax for a best in class, strong grower.       

coc

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Re: Intrinsic Value of GIECO
« Reply #4 on: May 24, 2019, 01:26:32 PM »
Be careful because the cash GEICO has thrown off has also increased the value of Berkshire (as with See's). He may (though I'm not sure) be including that. He mentioned $15.5B in underwriting profits in Tony's time with GEICO - which one would argue is attributable to Tony's management - while earnings on float are not.

If you take that out from the $50 billion, perhaps he thinks GEICO is worth ~$35 billion.

If you "back into" an intrinsic value, I believe over time GEICO has underwritten to around a 3% underwriting profit margin, which would be $1 billion on current premiums. Including a 5% total return over time on its ~$30B investment portfolio (assuming float is roughly 3x equity as with PGR) would add $1.5 billion pre-tax, for a total of $2.5 billion or ~$1.9 billion after tax. At a 20x multiple (more than fair for a 25% ROE business growing at double digit rates), that's $37 billion.

To Tim's point above, Buffett mentioned in the annual report that the $47 million they paid for the first half would get you a super luxury apartment in Manhattan these days. Here's a fun exercise. Let's say that would rent out for $2 million/year net or something. Even if $47 million would have gotten you 20 luxury apartments in 1976, you'd have $40 million of earning power today.

Meanwhile half of GEICO's earning power pre-tax is $1.25 billion. Allocating capital is crazy.

bizaro86

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Re: Intrinsic Value of GIECO
« Reply #5 on: May 24, 2019, 08:25:21 PM »
Be careful because the cash GEICO has thrown off has also increased the value of Berkshire (as with See's). He may (though I'm not sure) be including that. He mentioned $15.5B in underwriting profits in Tony's time with GEICO - which one would argue is attributable to Tony's management - while earnings on float are not.

If you take that out from the $50 billion, perhaps he thinks GEICO is worth ~$35 billion.

If you "back into" an intrinsic value, I believe over time GEICO has underwritten to around a 3% underwriting profit margin, which would be $1 billion on current premiums. Including a 5% total return over time on its ~$30B investment portfolio (assuming float is roughly 3x equity as with PGR) would add $1.5 billion pre-tax, for a total of $2.5 billion or ~$1.9 billion after tax. At a 20x multiple (more than fair for a 25% ROE business growing at double digit rates), that's $37 billion.

To Tim's point above, Buffett mentioned in the annual report that the $47 million they paid for the first half would get you a super luxury apartment in Manhattan these days. Here's a fun exercise. Let's say that would rent out for $2 million/year net or something. Even if $47 million would have gotten you 20 luxury apartments in 1976, you'd have $40 million of earning power today.

Meanwhile half of GEICO's earning power pre-tax is $1.25 billion. Allocating capital is crazy.

I don't disagree with you particularly, but I would note that 20 luxury apartments isn't the right comparison. New York City nearly went bankrupt in 1975. In 1976, luxury apartments were selling for peanuts because the monthly fees were approximately equal to or even exceeded the rental value.  I think its very likely that a clever buyer could have bought more like 235 luxury apartments in New York City at the time, which closes the gap considerably.

I couldn't find a source for luxury apartment prices in 1976, but I did find a source for an average price per square foot by decade. The 1970s was $45. https://web.archive.org/web/20130509123604/http://matrix.millersamuel.com/?p=12300

That implies $47 MM would have bought just over a million square feet of NYC residential real estate. I suspect someone who had done that with their money would be pretty happy with the outcome today as well, although it may only be worth a few billion.

longinvestor

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Re: Intrinsic Value of GIECO
« Reply #6 on: May 24, 2019, 09:06:15 PM »
Good to know that GEICO is worth > Zero in IV. How about BHRG? NICO? Specialty? Other Ins? Hope they are all worth > Zero.

If this Grove is worth < Zero, it won't be fun owning Berkshire.

John Hjorth

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Re: Intrinsic Value of GIECO
« Reply #7 on: May 25, 2019, 01:52:27 AM »
Be careful because the cash GEICO has thrown off has also increased the value of Berkshire (as with See's). He may (though I'm not sure) be including that. He mentioned $15.5B in underwriting profits in Tony's time with GEICO - which one would argue is attributable to Tony's management - while earnings on float are not. ...

coc,

Are you an accountant? [ : - ) ] -I ask because you think about this exactly like I do.

- - - o 0 o - - -

Edit:

Geico - Financial Information.

There was here on CoBF a similar discussion about NICO a few years back [for NICO, similar information is available at the NICO website], with some very good elaborations and explanations provided by gfp about how to interpret the numbers - they must still be laying around here in the Berkshire forum somewhere.
« Last Edit: May 25, 2019, 05:13:08 AM by John Hjorth »
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coc

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Re: Intrinsic Value of GIECO
« Reply #8 on: May 25, 2019, 11:52:18 AM »

I don't disagree with you particularly, but I would note that 20 luxury apartments isn't the right comparison. New York City nearly went bankrupt in 1975. In 1976, luxury apartments were selling for peanuts because the monthly fees were approximately equal to or even exceeded the rental value.  I think its very likely that a clever buyer could have bought more like 235 luxury apartments in New York City at the time, which closes the gap considerably.

I couldn't find a source for luxury apartment prices in 1976, but I did find a source for an average price per square foot by decade. The 1970s was $45. https://web.archive.org/web/20130509123604/http://matrix.millersamuel.com/?p=12300

That implies $47 MM would have bought just over a million square feet of NYC residential real estate. I suspect someone who had done that with their money would be pretty happy with the outcome today as well, although it may only be worth a few billion.

Great point, but careful again here. The figures you quote are the average for NYC residential, not super luxury. For example it shows the current number (2010s) as $1,070/sq ft. That would be $3.2 million for a 3,000 sq ft apartment. The truly high end apartments (the ones that might cost $47 million) are more like $5,000 per sq ft.

So the comparable number in 1976 might have been $250/sq ft or something. That might imply closer to 50 luxury apartments - for current earning power in the area of perhaps $100 million. Regardless, I think the order of magnitude is what’s important. And that was buying during a time of near depression in NYC real estate, as you mentioned.

Be careful because the cash GEICO has thrown off has also increased the value of Berkshire (as with See's). He may (though I'm not sure) be including that. He mentioned $15.5B in underwriting profits in Tony's time with GEICO - which one would argue is attributable to Tony's management - while earnings on float are not. ...

coc,

Are you an accountant? [ : - ) ] -I ask because you think about this exactly like I do.

- - - o 0 o - - -

Edit:

Geico - Financial Information.

There was here on CoBF a similar discussion about NICO a few years back [for NICO, similar information is available at the NICO website], with some very good elaborations and explanations provided by gfp about how to interpret the numbers - they must still be laying around here in the Berkshire forum somewhere.

How dare you accuse me of being an accountant.  :D

No, no.
« Last Edit: May 25, 2019, 12:07:04 PM by coc »

coc

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Re: Intrinsic Value of GIECO
« Reply #9 on: May 25, 2019, 12:04:34 PM »
Good to know that GEICO is worth > Zero in IV. How about BHRG? NICO? Specialty? Other Ins? Hope they are all worth > Zero.

If this Grove is worth < Zero, it won't be fun owning Berkshire.

Can I ask what would lead you to believe those four, among the most powerful insurers in the world (not to mention the most profitable), might be worthless?