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Warren Buffett\u2019s failure to capitalize on the economy\u2019s digital shift over the last two decades has hurt his otherwise enviable track record as an investor. His blind spot\u00a0regarding\u00a0tech didn\u2019t stop at the stock market: It bled into how he ran Berkshire Hathaway\u2019s operating companies as well. Across many of his wholly owned businesses, Buffett neglected technological upgrades, and Berkshire\u2019s business value has suffered as a result.<\/p>\n
It\u2019s important to understand this because the majority of Berkshire Hathaway\u2019s assets are invested not in publicly traded securities, but in operating subsidiaries like Burlington Northern Santa Fe Railroad, Berkshire Hathaway Energy, and Geico. While it\u2019s true that Buffett invested aggressively in wind energy, that was largely because of government tax incentives. In the main, he preferred to milk his operating subsidiaries for cash rather than reinvest in them for the digital age. Exhibit A is Geico, which thanks to a lack of IT investment has fallen behind Progressive as the nation\u2019s leading for-profit auto insurer.<\/p>\n
Buffett has called Geico his favorite child, and for good reason. Since it began in the 1930s, the auto insurer has used a direct-sales model to keep operating costs the lowest in the industry. In a commodity business like insurance, that\u2019s a major competitive advantage. In the 1990s, after he bought all of Geico, Buffett found a second moat when he began to brand Geico as a trusted, even beloved American company. The gecko, the caveman, the camel who celebrated hump day\u2014all these were marketing masterstrokes, ones directly derived from Buffett\u2019s deep understanding of the mass brand-mass media industrial complex. The mascots also highlight how, while Buffett was comfortable investing in marketing, he was deeply uncomfortable with, and therefore didn\u2019t understand, investing in tech.<\/p>\n
When Buffett took control of Geico in 1996, he octupled its marketing budget. This wiped out almost all of Geico\u2019s profits from a GAAP accounting standpoint, but Buffett was confident that increasing advertising outlays today would lead to more profitable customers tomorrow. And so it was: Under Buffett\u2019s leadership, Geico\u2019s market share grew from under 3% in 1996 to 12% in 2020, and it went from the No. 7 auto insurer to the #2 auto insurer, behind only State Farm.<\/p>\n
So far, so good\u2014but while Geico was investing in marketing, its rival Progressive was investing in technology. Founded only a year after Geico, Progressive began to upgrade its IT systems as early as the late 1970s. In the 1980s, it bought its agents computers and sent them floppy discs so they could better match price with risk. In 1996, Progressive became the first auto insurer to allow consumers to buy insurance online, and it continually streamlined its backend systems so that it could accurately quote new business. Today, Progressive brags that it has tens of billions of price points and that its tech stack allows the company to adjust its rates much faster than its competition\u2014nearly once every business day. \u201cWe are a tech company that happens to sell insurance,\u201d is one of Progressive\u2019s internal mantras.<\/p>\n
Driving the company\u2019s tech investment was an insight that was perhaps even more astute than Buffett\u2019s marketing insight. Thanks to its no-agent, no-commission model, Geico enjoyed a six-percentage-point cost advantage vs. Progressive in its operating costs. Because half of its business is through insurance agents, Progressive is unlikely ever to catch up here. But Progressive CEO Peter Lewis, who led the company from 1965 to 2000, understood that an auto insurer\u2019s biggest cost center is the claims it must pay policyholders\u2014four to five times bigger, in fact, than its administrative and advertising costs. If Progressive could manage these \u201closs costs\u201d better than the competition, Lewis reasoned, then it could become the de facto low-cost auto insurer.\u00a0<\/p>\n
The key to managing loss costs was technology in all its glorious variety. Back-end systems at headquarters that could parse price and risk for each driver were important, but so were front line innovations like Snapshot, a shoebox-sized device that in the 1990s Progressive began installing into the cars of willing customers. Snapshot, now an app on your mobile phone, tracks a customer\u2019s driving behavior; more than one in three Progressive customers buying insurance directly from the company opts in for \u201cusage-based\u201d premiums. Thanks to Snapshot and other innovations, Progressive simply knows more about its drivers than any other insurer, and this creates a virtuous circle in which the company knows which to reward with discounts, which to punish with surcharges, and which to purge altogether.\u00a0<\/p>\n
Thus, while Progressive\u2019s operating costs have historically been six points worse than Geico, its loss costs have been 11 points better, which means that Geico\u2019s low-cost moat has been breached by tech. In contrast to Progressive\u2019s streamlined system, Geico has more than 600 legacy IT systems. It didn\u2019t start working on a Snapshot-like product until 2019, twenty years after Progressive began.\u00a0<\/p>\n
Buffett liked to say that when the tide goes out, you see who\u2019s swimming naked, and COVID was the perfect storm to reveal how little Geico had paid attention to its digital wardrobe. During COVID, people suddenly stopped driving, and then, when the pandemic ended, they drove more than ever and more recklessly than ever. At the same time, the worst inflation in forty years hit all sectors of the economy, including auto-repair shops. Such rapidly changing conditions favored insurers with robust tracking tools, like Progressive, and punished insurers without them, like Geico. Since 2020, Progressive has almost doubled its personal auto policy count\u2014but Geico has lost nearly 15% of its personal insurance base. Progressive, not Geico, is now the nation\u2019s number two auto insurer.<\/p>\n
It turns out that while the branding of the gecko was important, it wasn\u2019t nearly as powerful as employing sophisticated digital tools. Geico is a good example of what happens when a company, even a powerful one, fails to reinvest in its future. Rather than a virtuous cycle\u2014tech investment leading to better pricing and better products, which drives more profits, which can then be reinvested to drive the cycle on\u2014Geico seems caught in the same vicious cycle that afflicts General Motors, Macy\u2019s and other legacy companies.\u00a0<\/p>\n<\/div>\n
#Warren #Buffetts #Geico #fell #Progressive #autoinsurance #race<\/p>\n","protected":false},"excerpt":{"rendered":"
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