“Our Main Business Is Insurance” 33
when most of the insurance industry struggled with prof itability and
most investors stayed away in droves. By the time all the paperwork was
done, it was early 1996. At that point, GEICO off icially became a
wholly owned unit of Berkshire Hathaway, managed independently
from Berkshire’s other insurance holdings.
Despite a rough spot or two, Buffett’s trust in the basic concept of
GEICO has been handsomely rewarded. From 1996 to 2003, the
company increased its share of market from 2.7 to 5 percent. The
biggest rough spot was the year 2000, when many policyholders
switched to other insurers, and a very large, very expensive advertis-
ing campaign ($260 million) failed to produce as much new business
as projected.
Things began to stabilize in 2001, and by 2002, GEICO was solidly
back on track, with substantial growth in market share and in prof its.
That year, GEICO took in $6.9 billion in premiums, a huge jump from
the $2.9 billion booked in 1996, the year Berkshire took full ownership.
In April 2003, the company hit a major milestone when it added its
f ive-millionth policyholder. By year-end 2003, those f ive million policy-
holders had sent in premiums totaling $8.1 billion.
Because its prof it margins increase the longer policyholders stay with
the company, GEICO focuses on building long-term relationships with
customers. When Buffett took over the company in 1996, he put in a
new incentive system that rewards this focus. Half the bonuses and prof it
sharing are based on policies that are at least one year old, the other half
on policyholder growth.
The average GEICO customer has more than one vehicle insured,
pays premiums of approximately $1,100 year after year, but maintains
an excellent driving record. As Buffett once pointed out, the economics
of that formula are simple: “Cash is pouring in rather than going out.”^3
From the early bargain days of $2 a share in 1976, Buffett paid
close to $70 a share for the rest of the company in 1996. He makes no
apologies. He considers GEICO a unique company with unlimited po-
tential, something worth paying a hefty price for. In this perspective—
if you want the very best companies, you have to be willing to pay up
when they become available—Buffett’s partner, Charlie Munger, has
been a profound inf luence.
Knowing their close working relationship, it’s a fair bet that Munger
had a lot to say about Berkshire’s other big insurance decision.