Please ensure Javascript is enabled for purposes of website accessibility

What's Geico Really Worth to Berkshire Hathaway?

By Jordan Wathen - Dec 10, 2017 at 7:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The car insurer's intangible assets, including its green gecko, are worth a lot to Berkshire.

Warren Buffett often refers to Berkshire Hathaway's (BRK.A 1.66%) (BRK.B 1.71%) book value as a measuring stick for its success or failure, but even he admits it has its flaws. 

One of the biggest is that Berkshire's losing acquisitions have to be marked down, but winners can't be marked up. Therefore, Berkshire's book value captures many of its failures, but none of its biggest acquisition successes.

Few success stories are as important as Geico, which has grown by leaps and bounds since Berkshire acquired it 1996. But as Buffett wrote in his 2010 letter to shareholders, Geico has never been written up to reflect its success and is carried at a mere $1.4 billion premium to its book value. 

What would Geico be worth if Berkshire were willing to sell it? We can use a method Buffett laid out in his 2010 letter to shareholders to estimate its value.

Valuing Geico the Buffett way

Geico is a highly profitable insurance company that's truly in a league of its own. Any buyer would pay far more than liquidation value to own it, given its extraordinary underwriting record and growing earnings power. 

In his 2010 letter, Buffett shed some light on how he thought about the effective price of $4.6 billion Berkshire Hathaway paid for the company in 1996. He wrote that it valued Geico's intangibles at 97% of annual premium volume at the time of acquisition.

Using the same methodology today, Geico should be worth about $29.3 billion more than book value, based on premiums earned in the most recent quarter. That values its brand and customers at roughly 20 times the $1.4 billion figure reported on the balance sheet.

Is that too high? Possibly. Consider that Geico had far more growth ahead of it in 1996 than it does today. Autonomous cars weren't even a thought 20 years ago, but now we think about when cars might drive themselves and how much we'll save on insurance when they do. 

Furthermore, Berkshire could afford to pay a premium for the portion of Geico it didn't own in 1996, as making it a control company eliminated a layer of taxation on the dividends Geico paid to Berkshire. There are many reasons to believe the historical multiple is too high to use today. 

But before we conclude that valuing Geico's intangibles at 97% of earned premiums is wholly unrealistic, we should subject it to a sanity test. We can use Buffett's method to value a comparable insurance company, Progressive Insurance (PGR 1.09%), and see if the resulting valuation is too high or low.

Warren Buffett

Image source: Matt Koppenheffer, The Motley Fool.

Progressive is a well-run insurance company that generates most of its premiums and profit from car insurance, just like Geico. What Progressive lacks in expense control (roughly half of its business is driven by costly agents) it makes up for with low loss ratios. Geico and Progressive have been wildly profitable compared to peers, and both are growing premiums at a respectable double-digit clip. 

Interestingly, Progressive has a current market cap of approximately $31.8 billion, which is eerily close to the valuation you get when you use Buffett's method to determine its fair value.



Premiums earned (annualized from Q3 2017)

$26.2 billion

Multiple for intangibles


Value of intangibles

$25.4 billion

Tangible book value

$8.4 billion

Progressive's valuation based on Buffett's method

$33.8 billion

Data source: SEC filings. Calculations by author.

That Progressive's current market capitalization is only about $2 billion (7%) lower than the valuation Buffett's method would ascribe to it suggests that applying a high multiple to the value of customer relationships, branding, and other intangible assets isn't completely unreasonable for a high-quality insurance company. 

The $52 billion gecko

Berkshire Hathaway doesn't break out its insurance companies' balance sheets in its financial statements, but based on regulatory disclosures, we can get close to Geico's true value. Geico and its affiliates had a regulatory surplus (equity) of $23 billion at the end of 2016. Adding on $29.3 billion of value for Geico's brand and customer relationships calculated under the Buffett method, Geico could be worth $52.3 billion in all.

The hidden value of Geico's brand and customer relationships go a long way to explain why Buffett believes that Berkshire Hathaway is an attractive investment even at prices above book value. Buffett has said he'd happily repurchase shares of Berkshire at 1.2 times book value, and in the past he has done just that. 

Last quarter, Berkshire's book value stood at $311.9 billion. Buffett thinks fair value is at least $62.4 billion higher, based on his belief that shares are a good buy at any price less than 1.2 times book.

If Geico is truly worth $27.9 billion more than its carrying value ($29.3 billion valuation per Buffett's method, minus $1.4 billion of intangibles already reflected on Berkshire's balance sheet), it makes up nearly half the $62.4 billion difference between Berkshire's book value and Buffett's estimate of his conglomerate's intrinsic value.

It's quite clear that Geico's intangibles, its gecko included, are a very important piece of the Berkshire pie.

Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$452,697.25 (1.66%) $7,395.26
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$301.55 (1.71%) $5.08
The Progressive Corporation Stock Quote
The Progressive Corporation
$121.77 (1.09%) $1.31

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/13/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.