2019: How does GEICO plan to keep up with Progressive's market share growth?
JAY GELB: This question is on GEICO. Progressive is gaining the most market share among the major auto insurers, based on its presence in the direct and independent agency channels, as well as now bundling its auto and homeowners insurance coverage.
How does GEICO plan on responding to competitive threats so that it can retain its place as the second-largest auto insurer? I was hoping we could also hear on this topic from Ajit (Jain) or GEICO’s management. Thank you.
WARREN BUFFETT: OK. Progressive is a very well-run business. GEICO is a very well-run business. And I think they will, for a long time, be the two companies that the rest of the auto insurance industry has trouble not losing share to. But there’s, you know, I think — I’ve always thought for a long, long time, Progressive has been very well run.
They have an appetite for growth. Sometimes they copy us a little, sometimes we copy them a little. And I think that’ll be true five years from now and 10 years from now.
And we sell substantial amounts of homeowners insurance. We have an agency arrangement with that. We were in the business of writing it ourselves, until Hurricane Andrew, when a decision was made — we didn’t control it then — but the decision was made that the homeowners, essentially, you could lose as much in one year as you made in the previous 25 years. And the float isn’t as large.
So, we became a company that placed our customers’ desire for homeowners with several other large and solid organizations.
The big thing is auto insurance. And we grew in the first quarter about 340,000 policies, net, which will look quite good compared to anybody but Progressive.
And that was quite a bit more than last year, but not as good as two years ago. And the profit margin was in the nine-point area. So, I feel extremely good about GEICO, I mean, what has been built there by Tony (Nicely) and his people is perfect, but I would feel fine —
We don’t own any Progressive, but I think that Progressive is an excellent company, and we will watch what they do, and they will watch what we do. And we will see, five years from now or 10 years from now, which one of us passes State Farm first. Charlie? Oh, and Ajit, would you like?
AJIT JAIN: Well, the underwriting profit is really a function of two major variables. One is the expense ratio and the other is the loss ratio, without getting too technical.
GEICO has a significant advantage over Progressive when it comes to the expense ratio, to the extent of about seven points or so.
On the loss ratio side, Progressive does a much better job than GEICO does. They have, I think, about a 12-point advantage over GEICO. So, net-net, Progressive is ahead by about five points.
GEICO is very aware of this disadvantage on the loss ratio that they are suffering, and they’re very focused on trying to bridge that gap as quickly as they can. They have a few projects in place, and, you know, sometimes GEICO is ahead of Progressive. Right now, Progressive is ahead of GEICO. But I’m hopeful they’ll catch up on the loss ratio side and maintain the expense ratio advantage as well. Thank you.
WARREN BUFFETT: GEICO has gained market share, essentially — I’d have to look at the figures for sure — but virtually every year since Tony took over. And I would bet significant money that GEICO increases its market share in the next five years. And I think it will, for sure, this year.
So, it is a terrific business. And — but Progressive is a terrific business. And we’ll — as Ajit says, we’ve got the advantage in expenses, and we will have an advantage in expenses. And then the question is, are we —
They have a very sophisticated way of pricing business. And the question is whether we give some of that five points back — or six points back — in terms of loss ratio. We are working very hard at that, but I’m sure they’re working very hard too to improve their system.
So, it’s a — to some extent it’s a two-horse race, and we’ve got a very good horse.
CHARLIE MUNGER: But Warren, in the nature of things, every once in a while, somebody’s a little better at something than we are.
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WARREN BUFFETT: Ha. You’ve noticed. (Laughter)
CHARLIE MUNGER: Yeah. I noticed.
WARREN BUFFETT: Yeah. I’d settle for second place in a lot of the businesses.