Warren Buffett: Great Investor, Lousy Insurance Salesman?
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.
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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.
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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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