As far as the stock market is concerned, and stock market returns, it’s no surprise that Berkshire Hathaway is probably the most successful stock investment firm to ever exist. For the past 44 years in a row, Berkshire Hathaway has grown its book value by a whopping 20.3% compounded, and made their shareholders quite rich along the way. This massive feat is about double what the S&P 500 was capable of doing within the same time period.
But this article is about running it’s insurance business, and we’re starting to realize that Warren Buffett might not even be smarter than the cavemen that he likes to put in his GEICO commercials. We are basing this off of a recent report that talks about the insurance industry advertising spending.
Are Cavemen Really Not That Thrifty?
SNL Financial recently released some business intelligence that says that GEICO, which is Buffett’s insurance subsidiary, is the biggest spender as far as advertising is concerned throughout the entire industry in insurance. GEICO actually spent a grand total of $993.8 million on their commercials that we all know and love during 2011. These commercials star lizards, Neanderthals and all kinds of other trademarked critters such as the money stack with googly eyes. The funny thing is that this insurance advertising layout is as big as the combined layouts of three really large insurance firms such as Liberty, Progressive and Travelers. Their combined total is only a little bit over $1 billion.
Since Berkshire Hathaway is basically outspending their rivals at a rate of 3 to 1, you would think that this would drive them to grab the bulk of the insurance market in America. The funny thing is if you look at the complete saturation of GEICO ads on TV, you probably think that GEICO already owned the majority of the market. But the real truth is that you would actually be wrong in this assessment.
So you have to wonder what has Warren Buffett actually achieved by spending all this money on insurance ads? We know that he has made the Mad Men on Madison Avenue quite happy, but their commercials really haven’t achieved all that much besides this. Since Berkshire Hathaway took over GEICO in 1996, they have steadily increased the amount they spent on ads as a way to hopefully grab more market share. Since the effort hasn’t been entirely fruitless, you could understand why they continue to go down this road. Their customer base is about a steady 7 to 8% annually based on the total US market. But the reality is that over the last 16 years, GEICO has only grown in market share by a total of 8.5%.
Can Money Truly Buy Market Share?
Unfortunately, it can’t. The truth is that there are a lot of insurance companies out there that get much less media exposure then GEICO, and yet these companies are actually running circles around the company.
Let’s take a closer look at Travelers, Liberty Mutual and Progressive. Their combined market share is actually twice the size of GEICO, even though the combined amount of advertising spend between the three companies is on the same level as GEICO’s. So each company is basically spending about a third of what GEICO spends, but they have twice the market share. Progressive actually has about the same market share as GEICO, and they only spend a fraction of what GEICO does in advertising revenue.
The undisputed champion for auto insurance is still State Farm. They actually own a grand total of 18.7% of this market, and that’s over twice what GEICOs share is. But the thing is that State Farm actually spends 18% less of the advertising costs over GEICO. So State Farm is obviously doing something right, and GEICO really might need to start rethinking their strategy.
What Does This Mean to You?
The main thing that all car insurance customers need to get out of this is that GEICO could waste a lot of money buying commercial air time, but it hasn’t made them the dominant player in the market even though they’ve been trying for the last 16 years. But what’s the reason behind this? Most people probably don’t take their ads seriously, and they really don’t believe them for what they are at face value. These cute commercials obviously aren’t selling insurance all that much, since there are other companies out there who are offering better prices and better service.
So consider doing a little bit of research before you sign on the dotted line of any insurance company, GEICO included.