ALL Allstate Corporation

Yesterday, the rating agency A.M. Best took a rating action on Government Employees Insurance Company(GEICO), a wholly owned subsidiary of Omaha-based Berkshire Hathaway Inc. (BRK.A) (BRK.B), wherein it affirmed the financial strength rating (FSR) of A++ (Superior) and issuer credit ratings (ICR) of “aaa”.

A.M. Best also has affirmed the ICR of “aaa” as well as the debt rating of “aaa” on $150 million 7.35% senior unsecured debentures, due 2023. The outlook for all ratings is stable.

The rating agency A.M. Best acknowledges GEICO’s significant market presence in the automobile insurance business, continued robust operating performance coupled with a superior risk-adjusted capitalization. The rating agency also views favorably the company’s direct selling methodology wherein, other than relying on agents to sell policies, it uses a direct-to-consumer sales model and puts funds saved from not paying agent commissions toward the purchase of television advertising, with several campaigns running simultaneously in national markets. This method of selling business gives it a considerable underwriting expense advantage. In the first quarter of 2011, GEICO earned premiums of $3,675 million, an increase of 6.4% over the first quarter of 2010.

Other strong positive factor is GEICO’s affiliation with Berkshire Hathaway, a solid company, which continues to improve its balance sheet. It had $164.3 billion of  shareholders’ equity as of March 31, 2011.

Partially offsetting the positives are GEICO’s high investment to unaffiliated equities, exposing it to fluctuation in risk-adjusted capitalization driven by  market volatility. Another offsetting factor is the company’s geographic concentration, which makes it subject to legislative changes and judicial decisions.

GEICO underwrites private passenger automobile insurance, offering coverage to  insurers in all 50 states and the District of Columbia. Major competitors include The Hartford Financial Services Group (HIG), Liberty Mutual Insurance, State Farm, The Allstate Corp. (ALL), 21st Century Insurance, Progressive Corp. (PGR) and Nationwide Insurance. The October 2010 issue of Consumer Reports ranks GEICO 13th out of 22 automobile insurers on the back of a survey of more than 28,000 readers.

 
ALLSTATE CORP (ALL): Free Stock Analysis Report
 
BERKSHIRE HTH-A (BRK.A): Free Stock Analysis Report
 
BERKSHIRE HTH-B (BRK.B): Free Stock Analysis Report
 
HARTFORD FIN SV (HIG): Free Stock Analysis Report
 
PROGRESSIVE COR (PGR): Free Stock Analysis Report
 
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