Great Trades of History: Warren Buffett and GEICO

I don’t know anything about [GEICO], but I wanted to come here and learnWarren Buffet, aged 20, to GEICO’s then-financial vice president

Renowned investor and trader Warren Buffett has got married twice, the second time on his 76th birthday. But arguably one of the greatest passions of his life has been for an insurance company. This is US-based Government Employees Insurance Company, usually known as GEICO and, which Buffett once dubbed in an article, “the Security I Like Best”.

Buffet’s relationship with GEICO began when he was a young man. At the age of 20 he discovered that Ben Graham, author of The Intelligent Investor and his investment idol and later his mentor, was chair of the company.

“Warren was curious,” relates Buffett biographer Alice Schroeder in The Snowball, her book about his life. “So on a cold, wintry Saturday morning, he jumped on the earliest train to Washington, D.C. and showed up at GEICO’s door.”

Buffett managed to gain access to the financial vice president and give the somewhat surprised executive a grilling about the business. He was impressed enough to put $10,000 into GEICO shares, then around two-thirds of his total assets. He sold the shares a year later for a 50 per cent profit.

What had attracted Buffett to this apparently mundane business? First, he thought it had good growth prospects. Then there was the fact that GEICO sold its products without agents, which kept costs down. Also, the fact that all its clients were government employees helped it to “avoid the folks who drive thirty miles over the speed limit after downing half a bottle of tequila”, as Schroeder puts it.

Characteristics of the insurance business in general also attracted him. Annual renewing contracts mean steady cashflows. And the premiums and payouts model that insurance businesses use “sounded to him like getting to use someone else’s money for free, just the kind of idea he liked”, says Schroeder.

Buffet’s initial return from GEICO was just the beginning of his profitable relationship with the business. After selling out, he subsequently reinvested in the business, eventually putting $45m into it and gaining full control.

Buffett sees GEICO as a “permanent” part of his portfolio, he told Fortune magazine journalist Carol Loomis in 1988, and it remains here to this day. Today it has annual revenues of over $25bn.

As with all relationships, however, there have been some hard times. When Buffett sold his first batch of stock it was because he had seen another insurance business, Western Insurance, that he liked more.

Then when he invested for the second time in 1976 he did so as a rescuer. The business was in the middle of what would turn out to be the worst year in its history. But Buffett felt, as he noted in his 1989 annual letter to Berkshire Hathaway shareholders, that GEICO’s problems were big but solvable. He was proved right, as a new chief executive and a fresh financing structure put the business back on track.

There may be more turbulence to come for GEICO, however. As in many industries, established players in insurance are facing disruption from startups. Some of these are providing more flexible insurance products, while others promise documentation free of the usual insurance industry jargon.

But GEICO is holding its own. For example, it recently adapted to suit the “gig economy” by starting to offer rideshare insurance for users of apps like Uber and Lyft.

And GEICO can take comfort from the fact that under Buffet’s hold it has long enjoyed strong support from its main investor. This is, says Schroeder, “simply because he love[s] it”.

[GEICO was] growing like a dandelion in June and printing money like the U.S. MintAlice Schroeder, Warren Buffett’s biographer