GEICO, In Numbers

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Earlier this year I wrote an article about Walmart (WMT) that highlighted and discussed some of the company’s financials (for example, that they’ve increased the dividend at an 18% CAGR over the prior decade); the article had a good reception by readers, so I thought I would take a similar approach for an article about another company: GEICO, Berkshire Hathaway’s (BRK.B) wholly owned auto insurer. Here, in no particular order, are a few numbers worth considering:

1995 – This is the year Berkshire Hathaway became the 100% owner of GEICO; Warren Buffett and Charlie Munger paid $2.3 billion for the 49% of the company they didn’t already own by that point.

7th – GEICO was the seventh-largest private passenger auto insurer in the United States when it was acquired by Berkshire in 1995; at the time, GEICO’s market share was ~2.5%, and had been relatively steady at ~2% in the decade before Tony Nicely became CEO (1993).

2nd – GEICO has steadily gained market share in private passenger auto over the past 15 years, crossing 10% in the past year; in that same period, State Farm and Allstate both lost market share. After recently passing Allstate (ALL), GEICO is now the second-largest auto insurer in the United States; at the rate of gains over the past three years (nearly a point a year), GEICO will be on par with State Farm within the next ten years (assuming State Farm’s share is unchanged).

9.1% – The 10-year compounded annual growth rate for GEICO’s earned premiums through 2013; through the first nine months of 2014, GEICO is on pace to post earned premiums for the full year in excess of $20 billion – an increase on par with the growth rate over the past decade.

92.2% – GEICO’s average combined ratio over the past decade; as a result, GEICO has reported a cumulative underwriting gain of $9.7 billion – nearly $1 billion a year on average.

18.1% – As a percentage of premiums earned, this has been the average cost of underwriting expenses at GEICO over the past ten years; for some comparison, the industry average has been closer to 25% over the same period, with strong competitors like Progressive's (PGR) direct business still coming in a few percentage points higher than GEICO.

Warren Buffett (Trades, Portfolio) discussed the importance of this advantage in the 2013 shareholder letter: “When I was first introduced to GEICO in January 1951, I was blown away by the huge cost advantage the company enjoyed compared to the expenses borne by the giants of the industry. That operational efficiency continues today and is an all-important asset… GEICO’s cost advantage is the factor that has enabled the company to gobble up market share year after year.”

14 – The number of years since GEICO’s last underwriting loss; this was a difficult year for the industry as a whole, with GEICO reporting a combined of 104% - compared to 118% for State Farm. As Buffett noted in the 2000 shareholder letter, “The willingness of the largest player in the industry to tolerate such a cost makes the economics difficult for other participants.”

Even then, when GEICO’s share of the market was roughly one-fifth of State Farm’s, Warren was confident that profitable, better-than-industry average growth was in GEICO's future:

“GEICO has much the better business model, one that embodies significantly lower operating costs. And, when a company is selling a product with commodity-like economic characteristics, being the low-cost producer is all-important. This enduring competitive advantage of GEICO’s… is the reason that over time it will inevitably increase its market share significantly while simultaneously achieving excellent profits.”

$935 million – This is how much GEICO spent on advertising in 2013, with the figure expected to cross $1 billion in 2014 (SNL Financial estimates that they’ve already crossed this level); the 2013 spend was ~50% more than State Farm spent in the same year, and nearly three times the average spend of the other insurers in the top ten (outspent six through ten combined).

The amount spent in 2014 will be more than twenty times greater than the amount spent on advertising in 1997 – a 17-year compounded annual growth rate of nearly 20%.

$12.5 billion – The amount of “float” attributable to GEICO at year end 2013 – up from less than $6 billion a decade ago and less than $3 billion 15 years ago. Even with his lifelong aversion to overpromising investors, Warren Buffett (Trades, Portfolio) has been openly optimistic about what lies ahead: as he noted in the 2013 letter when discussing the long-term direction of Berkshire’s insurance operations, “GEICO’s float will almost certainly grow.”

Conclusion

Next year marks the 20th anniversary of Berkshire’s purchase of GEICO as a wholly owned subsidiary; as Warren Buffett correctly predicted back in 2000, GEICO has become a material driver of Berkshire’s success – and that’s likely to continue going forward. Here’s to hoping that the next 20 years can match the last 20 – for customers, employees and shareholders alike.