2001: Buffett praises State Farm

WARREN BUFFETT: State Farm, as a competitor, is a mutual company, and it has a huge amount of net worth.

You referred to them as a higher-cost — a high-cost operator or higher cost — but they’re really a relatively low-cost operator. But they’re not anywhere near as low-cost as GEICO. But they’re a low-cost operator compared to many people in the insurance business.

And it’s certainly true that they do not have the demands for profitability, partly because they’ve done such a great job in the past and built up so much surplus.

I have nothing but basically good things to say about what State Farm has done over the years.

They do not need — they can subsidize, to some extent, current auto policy holders with the profits that were derived from auto policy holders of the past. But that’s always true when a stock company competes with a mutual company. And, you know, we know that when we go in the business.

And that’s true of — there are a lot of other mutual companies out there that operate without the demands of earning a high return on capital. But if I were State Farm, I’d, you know, I’d probably be doing what they’re doing. I don’t criticize them at all.

Charlie?

CHARLIE MUNGER: Well, I don’t criticize State Farm, either. State Farm is one of the most interesting business stories in the United States.

The idea that it could get as big as it is and has as good a distribution system as it does, it’s a thoroughly admirable company. In fact, Berkshire has bought insurance from State Farm. Not auto insurance. (Laughter)

WARREN BUFFETT: GEICO still has a lower cost structure. I mean, it is a great business operation. And we have invested significantly to build that, because it is so attractive.

And, as I pointed out in the annual report, the incremental investment we made last year did not produce the same results as incremental investments in previous years.

So we are finding it hard to grow the business under current circumstances on a basis that we would like to.

But it’s a wonderful business, and it has, you know, it has a business model that I wouldn’t, you know, I wouldn’t trade for anything.