Warren Buffett is considered expert in many things in the financial world. Credit cards apparently are not among them.
The world’s second-richest person often admits when he gets things wrong. He did so on Saturday in his annual letter to shareholders of his Omaha, Nebraska-based insurance and investment company, Berkshire Hathaway Inc.
Buffett had a brainstorm: create a credit card for customers of Geico Corp., the third-largest U.S. car insurer, which Berkshire has owned since 1996.
Though Geico underwriting profit fell 29 percent last year as loss claims increased, premiums earned grew 9 percent as it won new business in part through $800 million of advertising, many featuring a talking gecko.
Thanks to Geico chief Tony Nicely’s leadership, Buffett said he is “more excited” about Geico now than he was when he first visited the company in 1951, as a 20-year-old student.
He’s probably referring to the car insurance.
“For many years,” Buffett wrote, “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.”
And they did — but as at many traditional credit card lenders, it was the wrong type of business.
Buffett said Geico lost $6.3 million pretax on cards before he “finally woke up.” It lost $44 million more when it sold a $98 million portfolio of card receivables, at 55 cents on the dollar.
“Your chairman closed the book on a very expensive business fiasco entirely of his own making,” Buffett wrote.
“Geico’s managers, it should be emphasized, were never enthusiastic about my idea,” he went on. “They warned me that instead of getting the cream of Geico’s customers we would get the — well, let’s call it the non-cream. I subtly indicated that I was older and wiser.”
Buffett said he was half-right. “I was just older.”
Buffett is 79.