Buffett spends 'whatever it takes' on Geico

Berkshire Hathaway pours more than $1 billion a year into ads for the insurance unit, and the investment is paying off.

By MSN Money Partner Aug 25, 2014 2:00PM
Credit: © GEICO via Facebook
Caption: GEICO geckoBy Anupreeta Das, The Wall Street Journal

Among the thousands of employees at Berkshire Hathaway (BRK.A), Warren Buffett says a "nice little fellow" is one of the most hardworking. He also happens to be a green lizard.


Since his debut in 2000, the Geico gecko has helped to sell millions of policies for the Berkshire-owned auto insurer and made it one of the conglomerate's most-consistent profit drivers. 


The ubiquitous ads, accounting for almost a quarter of all U.S. insurance companies' advertising spending, cost Berkshire more than $1.2 billion last year.


Mr. Buffett said he intends to keep lavishing Geico with money.


"I am perfectly willing to spend whatever it takes to get everyone in the country to check our price," Mr. Buffett said in a recent interview, adding that the company is on pace to spend even more on Geico ads in 2014.


Such splashy branding efforts don't easily jibe with Berkshire's thrifty image. But thanks largely to the gecko with a Cockney accent and Geico's cast of other anthropomorphic characters, Berkshire was the seventh-largest advertiser in the country in 2013, according to Kantar Media.


Not only is the insurer a money spinner for Berkshire -- Geico's second-quarter pretax underwriting profit jumped 17 percent to $393 million from a year earlier -- it also is one of Mr. Buffett's oldest and most-cherished holdings.


The company was one of Mr. Buffett's first investments, more than 60 years ago. It was also the first stock he sold, to his aunt, as a new stockbroker.


Mr. Buffett has called Geico his "first business love." In his 2012 annual letter to shareholders, the billionaire investor wrote, "When I count my blessings, I count Geico twice."


The architect of Geico's strategy, ironically, is a publicity-shy chief executive who rarely gives interviews. Tony Nicely, who started as a Geico clerk, initiated the ad push, with Mr. Buffett's encouragement, soon after he took the top job in 1993. Mr. Nicely has long been one of Mr. Buffett's top lieutenants, and analysts once considered him a potential successor to the billionaire investor. However, Mr. Nicely is now 71 years old.


With 83-year-old Mr. Buffett at the helm, Berkshire doesn't have a mandatory retirement age, and Mr. Buffett said he hoped Mr. Nicely wouldn't retire anytime soon. Mr. Nicely declined to comment.


Geico first won over Mr. Buffett in 1951, when the then-20-year-old traveled to Washington to visit the insurer one Saturday morning. While there, he ran into Lorimer "Davy" Davidson, a Geico executive who gave him a four-hour lesson on the insurance business. That year, Mr. Buffett put more than half of his net worth into buying 350 shares of Geico for $10,282. He sold them a year later to buy another stock, only to watch the value of the Geico stake eventually rise to $1.3 million.


In 1976, he got a chance to invest again in Geico, when the insurer sought a capital infusion to avoid bankruptcy after a period of expansion. Through additional investments and due to share buybacks, Berkshire slowly raised its stake over the years to 50 percent before buying the rest of the company for $2.3 billion in 1996.


Since then, Geico has been a cornerstone of Berkshire's huge insurance operation, which also includes a reinsurance business.


Because customers pay premiums upfront and claims are typically due years later, insurers can invest that cash in the interim -- a strategy that helped turn Berkshire from a struggling textile maker in 1965 into a diversified conglomerate whose Class A shares sell around $200,000 apiece today.


Mr. Buffett was attracted, in particular, by Geico's low-cost business model, which hasn't changed much since its 1936 founding as the Government Employees Insurance Co.

Since 1995, Geico's market share of the U.S. personal auto-insurance market has jumped to about 10 percent from 2.5 percent. Last year, Geico became the second-largest U.S. auto insurer by premiums, behind State Farm and ahead of Allstate (ALL) and Progressive (PGR). 


One reason advertising is so important to Geico is that the firm doesn't use insurance agents, which keeps its costs low. It instead offers policies directly to customers over the Web or phone.


Geico executives are "cost-conscious connoisseurs," said Lawrence Cunningham, author of a coming book on Berkshire and a professor at George Washington University. "At headquarters, they're as thrifty as can be . . . Geico is the quintessential Berkshire company."


Geico has taken market share at the expense of regional auto-insurance firms as people have become more comfortable buying online, said Nomura analyst Cliff Gallant. "They have the cheapest product, and they keep hammering you over the head" with their advertising campaigns, he said.


Geico is taking one big calculated risk: Unlike many rivals, the firm isn't investing in so-called usage-based insurance, which uses computer devices to track drivers' habits and provide discounts to safe drivers. Analysts say rivals could use the technology to siphon off some of the best drivers, potentially hurting Geico's profitability if it is left with drivers more likely to file claims.


Mr. Buffett said Geico hasn't seen evidence that usage-based pricing provides an advantage.


More from The Wall Street Journal
59Comments
Aug 25, 2014 5:58PM
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"Analysts say rivals could use the technology to siphon off some of the best drivers, potentially hurting Geico's profitability if it is left with drivers more likely to file claims". Greatest business model ever invented. The law forces you to buy the product. Most of us will never use the product. The company fights delivery of the product should you need it. The product is the promise of more money than you have but you will never fully realize (marginalized return on policy  sold) should you actually require it. It's a lot of profit- of course Buffett likes it.
Aug 25, 2014 7:28PM
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Have an accident with injuries see what happens. 
Aug 25, 2014 8:08PM
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I have never been interested in Geico insurance for one main reason.....  I know what advertising costs, and I know it is passed on to the consumer.  There are hundreds of Geico insurance commercials on every hour of the day, so you cannot be saving much money if you are the one paying for those commercials.  It is a big scam.  No wonder that man is so rich!
Aug 25, 2014 7:30PM
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GEICO has become my LEAST favorite insurance company, replacing Farmers.
Aug 25, 2014 10:09PM
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I am in favor of USAA myself....... love um.
Aug 25, 2014 11:27PM
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My stepson had Geico, and was in an accident that was clearly not his fault. The other driver had USAA. Despite the clear evidence, USAA fought for their girl driver, and Geico did nothing. We are still fighting this.


Not everyone can get USAA since you have to have a military connection. I served 8 years, and have USAA, and have been very pleased. This story is my second personal touch with someone close to me having Geico, and being screwed over.


USAA may, or may not be cheaper than Geico for all people, but you get what you pay for. Buyer beware of Geico.

Aug 25, 2014 10:38PM
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Usage based is simply Big Brother watching.
Aug 26, 2014 12:09AM
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It'd be nice if instead of spending that money on ads these insurance companies would compete by lowering their premiums.   Spending 1B on ads is obscene.  It just another example of my belief that business and people who have that much excess capital to piss away should be taxed more. 
Aug 26, 2014 9:08AM
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Who is paying for all of that advertising?  My guess is it would be the customers.  No Thanks.  I will stick with my co-op insurance.
Aug 25, 2014 9:27PM
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Switched to USAA 4 years ago for home and auto. Excellent rates and service. Had one claim with them (hit by girl texting) which they handled efficiently and professionally.  The other driver's insurance adjusters were a bunch of ****s. USAA had my car repaired then sued her insurance for the repairs and refunded my $500 deductible. Called Geico for a rate comparison and they were $300 higher for comparable coverage.
Aug 26, 2014 9:39AM
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I was with Geico  for 15 plus years and  accident free . I got into fender bender which was not really my fault they paid out $1700 and wanted to double my coverage cost. I had to jump ship went to farmers now I am paying even less then I was before accident for same coverage!!!!! The heck with Geico so much for customer loyalty!!! I think Geico will lose a lot of customers if there customer base started shopping there insurance.  
Aug 26, 2014 1:22AM
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I saved around $500 a year when I switched from Geico to Esurance.
Aug 26, 2014 9:46AM
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I had Geico for about 20 years until I did a rate quote through Progressive. It ended up that both Progressive and State Farm were 200 dollars cheaper a year for the same coverage. I guess the difference has to go to pay for all that advertising about how cheap they are. Now I get letters from Geico begging me to come back, fat chance ya slimy lizard!!
Aug 25, 2014 8:23PM
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GEICO... Government Employees Insurance CO company. Need I say More....
Aug 26, 2014 11:26AM
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...but they still don't beat esurance, for me.
Aug 25, 2014 10:41PM
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Warren could buy out Barry's last two years, put him in a gecko outfit and let him be on TV fifty times a day to keep his ego happy.
Aug 26, 2014 11:16AM
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I had a bad experience with Progressive, they are more expensive than Geico and "Flo" is so annoying and ridiculous. Love the Geico ads and so far so good with the insurance. If Buffet is involved -it is a good sign.
Aug 26, 2014 10:19AM
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he also cashes in every day the keystone pipeline isn't built.


owning the BNSF railway, the current and only way to ship Canadian crude to Texas refineries has it's benefits :D

Aug 26, 2014 7:38AM
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They have the best ads. And what other company has ever had three well known award winning commercial series running at the same time?
Aug 26, 2014 11:35AM
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   The only thing good about Geico is the humor in their ads, bring back the Caveman.
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