72: The Subtle Wisdom Of Warren Buffett
An interesting comment reveals how he looks at investments
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Things that make you say ‘hmm’
“… And Progressive, I don’t know what their net worth is, but it must be somewhere around 20-or-so billion, and I haven’t looked for a long time.” - Warren Buffett, 2022 Berkshire Hathaway annual meeting
Warren Buffett, the man who supposedly reads annual reports all day hasn’t looked at the net worth of one of his most important subsidiaries’ most important competitors “for a long time”. Seriously?
Either Buffett is displaying his folksy charm or there’s investment wisdom to be gained here.
It’s not unreasonable to think that Buffett doesn’t know what Progressive’s net worth is. After all, the folks at GEICO — from the CEO on down — are incentivized on two metrics: growth in policies in force and profitability of seasoned policies. Those two variables drive intrinsic value growth at GEICO. It’s not a far leap to think the same variables affect Progressive.
Here’s what I think is going on. Buffett knows insurance better than most people alive. He’s spent decades watching the industry evolve. Over that time he’s probably honed his thinking down to a handful of variables that tell him 95% of what’s going on in a company. My guess is he looks at premium volume, profitability, and market share data to compare how Progressive is doing against GEICO.
What probably doesn’t need attention is Progressive’s capital level. Buffett knows the company is heavily regulated and basically limited to a 3:1 premiums-to-capital ratio. Buffett probably did some quick math on Progressive’s premium volume ($48 billion in 2021) to come up with that $20 billion estimate. For reference, Progressive’s actual capital at the end of 2021 was $18 billion.
Buffett’s entire comment took probably ten seconds to say but it contained the germ of an idea worth thinking about again and again. What are the few key variables that really drive the value of a company?
Stay rational! —Adam
