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Should Buffett Be Worried About GEICO?

Buffett Finds His First Love

On the week of December 6th 1951, thousands of financial professionals received in their mail that week’s issue of The Commercial and Financial Chronicle. Within the issue, an article entitled The Security I Like Best, written by an Omaha born Columbia graduate by the name of Warren E. Buffett, appeared on page 24. 

 

The article covered a small insurance company located in Washington D.C. named Government Employees Insurance Company, otherwise known as GEICO.

 

Unlike most insurance companies of the time, GEICO operated through just a few hundred representatives spread out throughout the country. Automobile owners could call or mail into in order to purchase auto insurance; or at the very least receive a competitive quote. This method awarded GEICO with not only substantial growth over the previous decades, but sizable profit margins as well. 

 

During the years between 1940 and 1950, the number of GEICO policyholders had increased from 25,514 to 143,944, a 464% increase in just a decade, with the company reporting a 27.5% underwriting profit in 1949. 

 

Despite these unique characteristics, however, GEICO, like many other underwriters, was selling at a level much lower than the broad stock market. To quote Buffett in the article:

 

“At the present price of about eight times the earnings of 1950…, it appears that no price is being paid for the tremendous growth potential of the company.”

 

A “Graham Type” Stock

Warren Buffett, then a securities salesman in his early 20s, first became interested in the insurance company by mere coincidence that his mentor, and former professor Ben Graham, had been the chairman of the board of GEICO since acquiring a large portion of the outstanding stock in the late 1940s for his investment company. 

 

Wanting to in some way follow in the footsteps of his mentor, the young securities salesman made a trip to the GEICO headquarters, where he questioned the vice president about the operations of the business for more than three hours. 

 

Brimming with his new found knowledge, Buffett returned to Omaha to immerse himself in the company’s most recent reports, eventually gathering enough information to draft his article. 

 

Since the publication of the article, the Government Employees Insurance Company has surpassed even the highest expectations that anyone could have had for it. Over the 50 years following the article, the annual premiums written by GEICO went from $8.02 million to $2.48 billion. Few corporate successes were as immense as the one GEICO enjoyed over those years. 

 

One of the few growth stories more impressive than GEICO’s was the success of that young securities salesman, whose interest in the auto insurer continued throughout the decades as he built his own financial fortress.

 

 

Buffett Buys It All 

The love affair between the two was consummated in 1996 when Warren Buffett, through his holding company Berkshire Hathaway, acquired 100% of the outstanding stock of GEICO. 

 

GEICO has since become a staple in the minds of consumers across the country, which for a product as seemingly mundane as insurance, is due to nothing short of marketing brilliance. As a subsidiary of Berkshire Hathaway, GEICO has grown from 2.5% of the auto insurance industry to more than 13%, which has come as a result of fierce competition through low cost insurance and obscene levels of money poured into an advertising budget. 

 

The corporate relationship between Warren Buffett and GEICO, which now spans over 70 years, has grown strong enough to make Buffett call GEICO his first true love. 

 

Severe Competition

Quietly moving up the competitive ranks alongside GEICO in the auto insurance industry has been another, just as innovative, underwriter consistently clawing away market share for itself. 

 

Started in 1937, Progressive started its ascendance by providing insurance to risker policyholders, whose liability most other companies weren’t willing to take on. During the course of its history, though, Progressive shifted towards becoming a discount auto insurer, putting themselves in direct competition with GEICO. 

 

Like the vast majority of insurance operations, Progressive has a distribution system of tens of thousands of agents spread out throughout the country, each designated to policy holders within a certain geographic region. To expand their reach and lower costs, however, Progressive has shifted more of their business to direct underwriting through the use of telephone and online quoting. 

 

 

Progressive’s Rise

In 2000, Progressive brought an in total premium volume of $6.1 billion, 93% of which consisted of personal autolines. By 2019 Progressive had impressively grown their annual premium volume to a boastful $37.6 billion. 

 

As their total number of policyholders surpassed competitor after competitor, Progressive drew away an increasing amount of market share. After a drop in revenue due to the impact of the financial crisis, Progressive ended 2009 with 3% of the property casualty insurance industry under their control. Ten years later, by which time they surpassed Liberty Mutual and AllState, Progressive had increased their market share to 5.6%, making them the third largest operator in the industry, according to the Insurance Information Institute

 

As with most prosperous companies over the past decade, Progressive leveraged technological innovation to improve their business and better satisfy customers. An optimization of their website and mobile app has made the usually arduous task of receiving an auto insurance quote much easier for potential policyholders. 

 

For those within the automotive insurance industry, what Progressive is commonly known for is their introduction of the “pay as you drive” program which, through a connected device or smartphone, is able to track a policyholder’s driving habits and adjust their premium rate in accordance with how safe of a driver they are. 

 

 

After first being introduced in 2008, Progressive’s pay as you drive program, aptly named Snapshot, was greeted with a wave of skepticism. However, as smartphones have become something of a necessity in our world, the adoption of the program has become more readily accepted by a vast number of drivers, and by the end of 2014 Progressive had collected over 10 billion miles of driving data. 

 

Progressive, Uber, & Lyft

As another means to keep pace with a technology focused world, Progressive has recently made a partnership with both Uber and Lyft to provide their drivers with insurance through the transportation network company (TNC). 

 

In 2019, the program was available for Uber and Uber Eats drivers in 14 states and available for Lyft drivers in 3 states. As the kinks in regulation of these shared driving services are worked out Progressive’s transportation network company segment will undoubtedly expand rapidly across the country. 

 

As these programs have been introduced, Progressive has seen the fastest growth in the company’s recent history as net premiums have grown 38.5% from $27.1 billion in 2017 to $37.6 billion in 2019. What helped the insurance giant achieve such rapid growth has been a drastic rise in advertising spending, which saw an increase of 41% in 2018 alone. 

 

Progressive has subsequently had a higher number of policy application submissions than in any other time in its history as their laughable commercials bury their brand within the minds of consumers.  

 

Along with Progressive’s sporadic increase in advertising spending has been their acknowledgement of the importance of policy renewals which the company says is one of the key drivers in its growth strategy. As a result of the typical auto insurance policy spanning a time frame of 6 months to a year, policyholders are able to quickly shift to another insurer the moment a better premium quote is available. 

 

To decrease the likelihood of policyholders switching to another insurance carrier, Progressive has introduced a number of different rewards programs for policyholders based on their length of time with Progressive, ranging from 6 months to 20 years. 

 

The Ohio based company has also pushed extensively on the bundling of auto, home, and recreational vehicle insurance. As the nation’s largest motorcycle insurer, Progressive finds itself in an optimal position to provide the best insurance quotes for RVs, ATVs, boats, and other secondary vehicles. 

 

 

Taking From the Biggest

The growth of both GEICO and Progressive within the auto insurance industry has been reliant on their ability to take market share from State Farm, which for decades has been the largest property casualty company in the country. 

 

Since its founding in 1922, State Farm strived to be solely focused on the benefit of the policyholders. With this genial attitude State Farm at one point controlled 25% of the auto insurance market in the United States. 

 

Indeed in 2019, 1 in every 5 insured cars on the road in the United States was covered by State Farm. Over the past two decades, however, State Farm has been consistently losing market share to its competitive rivals, which has dwindled its market share of the U.S. property casualty industry to 9.3%. 

 

As GEICO’s market share rose consistently since being acquired by Berkshire Hathaway, it seemed all too obvious that it would be the company to surpass State Farm. Warren Buffett in fact, once remarked that on his 100th birthday his wish is to have the managers of GEICO tell him that they have just surpassed State Farm in market share. 

 

Watch Out

Progressive’s recent growth however, brings questions as to whether GEICO will accomplish this goal before them. Over the past 3 years GEICO’s growth in market share has averaged 6.8% per year while Progressive’s market share growth has averaged 12%. 

 

Were these growth rates to continue over the coming years Progressive would surpass GEICO by 2023 and State Farm by 2024 to make them the largest property casualty insurer in the country. With the company showing no sign of slowing down this may be more plausible than most people realize. 

 

GEICO’s management perhaps, should focus less on overtaking State Farm and more on simply staying ahead of Progressive. 


William Douthat is the managing partner of Olympus Wealth Management, a Tulsa based investment fund. He’s been a licensed investment advisor since 2018 and has a bachelors in finance from the University of Oklahoma.