Geico Credit Cards: Buffett's 'Painful Confession'

Warren BuffettWarren Buffett — legendary investor and world’s second-richest person — brought himself down a slight notch, financially and humility-wise, thanks to the failed idea of a credit card for customers of Geico, the insurance stalwart owned by his Berkshire Hathaway.
Buffett admitted to Berkshire shareholders in his annual letter that his brainchild of a credit card branded to the third-largest U.S. car insurer, which Berkshire acquired in 1996, was a bad idea.
And he took action.
“And now a painful confession: Last year your chairman closed the book on a very expensive business fiasco entirely of his own making,” Buffett wrote to shareholders of the insurance and investment giant Berkshire.
He then explained that the “wrong type” of business helped doom the Geico credit card. After pre-tax losses from the credit card operation of about $6.3 million, Berkshire sold the $98 million portfolio of “troubled receivables” for 55 cents on the dollar. Total loss: $50.3 million.
“For many years I had struggled to think of side products that we could offer our millions of loyal Geico customers. Unfortunately, I finally succeeded, coming up with a brilliant insight that we should market our own credit card. I reasoned that GEICO policyholders were likely to be good credit risks and, assuming we offered an attractive card, would likely favor us with their business. We got business all right – but of the wrong type,” Buffett said.
Buffett even admitted that his Geico managers warned him they would not get the “cream of Geico’s customers.” Instead, they got the — “well, let’s call it the non-cream,” Buffett said.
Otherwise, Buffett said, Geico and its executives are as excited about the insurance company as he was in January 1951 “when I first visited the company as a 20-year-old student.”
Since Berkshire acquired control of Geico in 1996, its market share has increased from 2.5 percent to 8.1 percent, with a net addition of seven million policyholders.
It is arguably the best known, in large part to an $800 million annual advertising budget, including the pervasive caveman and talking gecko commercials.

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