In 1979, GEICO, an auto insurance company based in Washington, DC, that had been brought close to bankruptcy just three years earlier was searching for a new chief investment officer. The companyâs recent near-death experience, and the perception of insurance companiesâ investment efforts as hidebound, and highly risk-averse, had made the search difficult. The recruiter, Lee Getz, vice chairman of Russell Reynolds, did find a candidate who later turned it down because his wife refused to move to Washington.2 Lamenting his lack of success in filling the position in over a year, Getz told his friend Lou Simpson about the little insurance company with big problems that no one wanted to tackle. He asked Simpson, the chief executive of California-based investment firm Western Asset Management, if he was interested in the job. Simpson was reluctant.3 Western Asset Management had been a subsidiary of a big California bank holding company. Simpson was sick of politicking within the confines of bank bureaucracy, and didnât have any great desire to repeat the experience in an insurance company. He also knew that GEICO had almost gone belly up just three years earlier.
As a favor, Getz asked Simpson to interview with the companyâs chairman, John âJackâ Byrne Jr., the man who had almost single-handedly pulled GEICO back from the brink of insolvency.4 Simpson agreed if only to help out an old friend. He traveled to Washington to meet with Byrne, who Simpson judged as being âa very, very smart guy,â but also a micro-manager involved in everything GEICO did.5 Simpson found the role interesting, but not compelling. He craved autonomy, and Byrne, who had just saved GEICO, seemed unlikely to grant it. Byrne called Simpson back for a second interview. Though he had reservations he dutifully traveled back to Washington. In the second interview, Byrne told Simpson, âWeâre really interested in you. But the one hoop youâre going to have to go through is to meet with Warren Buffett.â6 With about 20 percent of GEICO, Buffett was the largest shareholder through Berkshire Hathaway. Byrne said, âWarren thinks we need a new investment person. The person before was really not up to the job.â7 Though Buffett didnât yet have a high profile, Simpson had read about the Nebraska-based value investor who was just renewing a longstanding interest in GEICO.
âUnstoppableâ GEICO
Buffett has a storied 65-year association with GEICO, beginning in 1951 as a 20-year-old graduate student in Benjamin Grahamâs value investing class at Columbia. He recounted the first 45 years of that association in his 1995 Chairmanâs Letter following Berkshireâs purchase of the half of GEICO it didnât own.8 It was then the seventh-largest auto insurer in the United States, with about 3.7 million cars insured (in 2015, it is second, with 12 million policies in force). Buffett attended Columbia Universityâs graduate business school between 1950 and 1951 because he wanted to study under Graham, the great value investor and investment philosopher, who was a professor there. Seeking to learn all he could about his hero, he found that Graham was the chairman of Government Employees Insurance Company, to Buffett âan unknown company in an unfamiliar industry.â9 A librarian referred him to Bestâs Fire and Casualty insurance manualâa large compendium of insurersâwhere he learned that GEICO was based in Washington, DC.
On a Saturday in January 1951, Buffett took the early train to Washington and headed for GEICOâs downtown headquarters. The building was closed for the weekend, but he frantically pounded on the door until a custodian appeared. He asked the puzzled janitor if there was anyone in the office the young Buffett could talk to. The man said heâd seen one man working on the sixth floorâLorimer Davidson, assistant to the president and founder, Leo Goodwin, Sr. Buffett knocked on his door and introduced himself. Davidson, a former investment banker who had led a round of funding for GEICO before joining it, spent the afternoon describing to Buffett the intricacies of the insurance industry and the factors that help one insurer succeed over the others.10
Davidson taught Buffett that GEICO was the very model of an insurer built to succeed. Formed in 1936, at the height of the Great Depression by Goodwin and his wife Lillian, GEICO was set up to be low-cost from the get go.11 Goodwin had been an executive at the United Services Automobile Association (USAA), an auto insurer founded to insure military personnel, and a pioneer in the direct marketing of insurance. He had seen data that showed federal government employees and enlisted military officers tended to be financially stable, and also low-risk drivers. Those two attributes, he surmised, would mean that premiums were paid on time, with lower and infrequent claims. Agents were typically used to provide professional advice for more complex business insurance requirements. Auto insurance, though it was mandatory and expensive, was also relatively simple. Most consumers would know what they required in an auto policy.12 Goodwin reasoned that GEICO could cut out the agents and market directly to consumers, thereby minimizing distribution costs, just as USAA had. Those two in...