2001: What's going on with GEICO's renewal rates?

AUDIENCE MEMBER: I’m Jack Hurst (PH), Philadelphia, Pennsylvania. Three notes of thanks. First, for American Express for the terrific job they’ve done the last three times in scheduling reservations for me.

The second is thanks for the care you take with your annual report. There is nothing more accessible than the statistics in that report, and the text is just absolutely marvelous.

The third one is the care and feeding you give to troubled businesses like World Book, which I’m glad has survived, and Dexter Shoes.

They’re closing the plant in Milo, Maine, which is advantageous for the shareholders. But they gave the people enough time that, because of the additional — Jackson Labs expanded, they’re hiring, and Fidelity brought 6,000 jobs into the area. So those people will have better chance for jobs than they had to — if they were kicked out right away.

The second point is a question about GEICO. You have a wonderful table in your annual report showing the number of policies issued and the policies in force at the end of each year, for the last seven or eight years.

In general, at the end of one year, the policies in force are equal to 95 percent of the policies in force at the beginning of the year, plus 60 percent of those that have been issued in the year.

And that’s been constant, up until this last year, when the amount in force at the end of 2000 is 24 percent of the policies issued in 2000 and 95 percent of those that were in force at the end of 1999.

I’m curious if Mr. Nicely has asked, first, “Why is there such a large difference in lapse between the first year policies and the renewal policies?” and, “Why is there such a discontinuity in the year 2000?”

WARREN BUFFETT: The — I’ll answer the last one first, about GEICO. The retention rate is affected overwhelmingly by two factors.

One is the mix between the below-standard business, the standard business, and the better business, in terms of risk. In other words, we have — just making a calculation here — we have 75 percent or so of our business, plus, in the preferred category.

But we have grown faster up till the last year or so — in the last three or four years before that — up till the last year in the standard and the non-standard business. Those latter two categories have far greater lapse — or non-retention ratios — or lapse ratios — than the preferred business.

They’re two different businesses almost. So any change in the mix between preferred and the other two categories will change the aggregate retention ratio very substantially.

The second thing is that the first year has a much higher retention — lapse ratio — than the second year of a policy. And, in turn, than the third, and so on.

In other words, if you get to preferred business that’s been with you five or more years, you have a very, very high retention ratio.

In the last few years, we’ve added more new business than we were adding in the years before that. So we have had a higher percentage of new business and we’ve had a higher percentage of non-preferred business, both of which would make the aggregate lapse ratio look higher, even though the lapse ratio, when categorized by class of business and age of business, really hadn’t changed very much.

Now, it’s true, however, our retention ratio in the preferred business has fallen by a point or so.

But that’s the big difference. And now, unfortunately, you know, our new business is not as strong. So you’ll actually see, and — but, our preferred business is running stronger than our standard and non-standard.

So you are seeing the mix go back in the other direction, right now. I mean, currently, that’s going on.

Through right to date this year, our preferred business is up in aggregate policy holders. And our standard and non-standard is down.

So what you’ve deduced from those figures reflects changes in mix and age of business far more than it does retention ratio, although there was a minor change in the retention ratio. And that will be true. And maybe I should explain that better in the annual reports in the future.

I touched on it once a year ago, but we can make that clearer in future reports.

What you said about the American Express people, I echo. I mean, they have just done a fabulous job with people.

We sort of turned the problem over to them of how people get here and where they stay and all of that. And we’ve had wonderful help from the local American Express office.

And frankly, they’ve been so good, we don’t even think about it. We just refer people on to American Express. And I congratulate them for the job they’ve done. Thank you. (Applause)