Warren Buffett: Great Investor, Lousy Insurance Salesman?

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Warren Buffett
When it comes to stock market returns, Warren Buffett's Berkshire Hathaway (BRK.A) (BRK.B) has secured its place in the history books as one of the most successful stock investments ever. Over the past 44 years, this company has grown its book value per share at an incredible rate of 20.3% compounded, and rewarded shareholders richly in the process -- about twice the rate at which the S&P 500 has appreciated.

But could it be that when it comes to running an insurance business, Buffett isn't all that much smarter than the cavemen who star in his insurance commercials? A recent report on advertising spending in the insurance industry suggests this may be the case.

Are You Thriftier Than a Caveman?

According to business intelligence firm SNL Financial, Buffett's GEICO subsidiary is hands-down the most profligate spender in the entire insurance industry. In 2011, GEICO laid out $993.8 million to pay for commercials featuring various lizards, Neanderthals, and other trademarked critters. Add up the total ad outlays from three of its fellow top 10 insurance firms -- Travelers (TRV), Liberty, and Progressive (PGR) -- and you get a figure only barely bigger than that ($1 billion).

With Berkshire outspending these rivals by as much as 3-to-1, you'd probably expect the company would quickly capture the bulk of the American insurance market. (Indeed, from the saturation coverage of its ad buys on TV, you might think it already has captured the market.) But you'd be wrong.

So what has Buffett actually accomplished with all this largesse? Aside from making him Madison Avenue's BFF, not much. Since taking over GEICO in 1996, Buffett's Berkshire has steadily hiked ad spending in an effort to increase market share. The effort hasn't been entirely fruitless. Indeed, GEICO is said to be growing its customer count at an annual rate of 7% or 8%. Even so, 16 years of lavishing money on a menagerie of corporate mascots has so far won GEICO only an 8.5% share among U.S. auto insurers.

Money Can't Buy Happiness ... or Market Share

In contrast, insurance companies getting significantly less media exposure than what Buffett's paying for are running circles around his cavemen, and stomping his gecko into a puddle of green goo.

Take the aforementioned Progressive, Travelers, and Liberty Mutual, for example. Combined, these three firms command a market share nearly twice the size of GEICO's (14.3%) despite spending barely more than GEICO did on ads. Progressive alone, for that matter, despite spending a fraction of GEICO's annual ad outlay, boasts market share nearly as big as GEICO's -- 7.7%.

Meanwhile, State Farm, still the undisputed champion of auto insurance, owns 18.7% of the market. That's well over twice GEICO's share, and State Farm spends 18% less money on advertising than does GEICO!

What's It Mean to You?

All of which is interesting, of course, in the abstract sense. But what does it mean to car insurance customers? Simply this: If GEICO's outsized ad spending hasn't managed to buy the company a dominant share of the market -- despite 16 years of trying -- then perhaps there's a reason for that. Maybe, people don't take the advertising pitches they see on TV at face value. Maybe, cute commercials notwithstanding, there are other companies out there offering better service, at more reasonable prices.

In which case, maybe Buffett's right after all. It just might be worth spending 15 minutes or so researching your options, before signing on the dotted line.


Motley Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Berkshire Hathaway, and Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway.


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22 Comments

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Judi

forgot to add this below we have 2 brand new cars...jeep gran cherokee and buick regal....pay in a 4 month plan and we are very happy with geico....liberty called us recently and wanted to get our business back but their mquotye was still 110 over what geico's was....

September 20 2013 at 12:54 PM Report abuse rate up rate down Reply
Judi

I changed from liberty mutual to geico 2 yrs ago and my car insurance bill was cut in half and I had the exact same coverage with a few more items added for half the cost!!! i was with ,Liberty for 10 years and every year it got more expensive ...we had no tickets or accidents ....thank you geico!!!!

September 20 2013 at 12:50 PM Report abuse rate up rate down Reply
Bdub

Geico effectively avoids insuring people who live in chaos and drama by offering them a rate they will not accept.
The people that they offer low rates to don't crash their cars. Profitable business model.

February 07 2013 at 3:58 PM Report abuse rate up rate down Reply
David Merkel

Berkshire Hathaway has consistently made money on underwriting P&C insurance and reinsurance. Same for Progressive. For many P&C underwriters, that is not true. Ad spending is just one factor out of many in the expense equation. GEICO has relatively low distribution expenses, and is still growing market share, unlike many.

Not a great article; Buffett is a very intelligent insurance executive.

July 25 2012 at 2:09 PM Report abuse rate up rate down Reply
Jennie McMasters

Warren Buffett just doesn't understand the gold ventures business like Oswald Pelaez at ozsgold.com does.
He is just to old school, not hip like ole Mr. OZ.

July 24 2012 at 5:49 PM Report abuse rate up rate down Reply
bolten2

I would'nt bet against Warren Buffet.

July 24 2012 at 2:31 PM Report abuse rate up rate down Reply
jdmcg1

Worked for the Aetna when they were the #1 personal lines in the country, they are no longer in that business but they sold to one of the top players. All of the major players spend enormous amounts of money on agent selection, training and followthough. No one was better at training employees and agents than The Aetna, no one, but today Allstate and State Farm are absolutely at that level.That is much more important than advertising as GEICO does. Personal lines is a grass roots business and you build it from the bottom up, not the top down, through just grinding away and choosing your agents and employees carefully. Howard Bromage at The Aetna was the ultimate teacher and he taught thousands of agents how to do it right and how to be successful. There is no substirute for detail and in personal lines, more than any other line, it is that daily grinding that creates success. Despit the internet, the changes in media over the yars, there is no substitute for this attention to detail. Obviously you need to advertise but picking effective advertising and targeting your market and hiring the right people is the true measure of success and creates its own growth.

July 24 2012 at 2:03 PM Report abuse rate up rate down Reply
adamsamuel

I would appreciate it if AOL did not buy copy from this particular company which is not authorised by the FSA and frankly should be.

July 24 2012 at 1:39 PM Report abuse rate up rate down Reply
alfredschrader

That's not the problem with Geico. Buffett owns all of it and only makes $100,000 a year.
If you work there, don't expect to make more than a mop salesman.
Amazingly, Mr. Buffett lives in a $38,500 house in frozen Nebraska and drives a used led sled. He never needed the billions anyways. Indirectly, Geico buys a lot of television ad time which pays for people to see their shows. So, something that helped somebody actually came out of this.

July 24 2012 at 1:32 PM Report abuse rate up rate down Reply
1 reply to alfredschrader's comment
Taina

I think his home is worth more than that, but still modest. For year's he drove himself to work and took a sack lunch. 99% of his own money is in Berkshire. I tried to get GEICO many times but only once was the price right, then the rate creeped up and I moved once again.

July 25 2012 at 12:22 AM Report abuse rate up rate down Reply
redplastics

Warren Bufet need to retire and go play golf somewhere.....

July 24 2012 at 1:27 PM Report abuse +2 rate up rate down Reply