GEICO, a 48 bagger on initial investment of $46 millionGEICO is one of Warren Buffett's top investment, notable in the return and also the transformative nature of the business during the course of his ownership. Warren Buffett's interest in GEICO dates back to 1951 when, at only 21 years old, he used up 65% of his net worth to purchase shares of GEICO. A year later he sold out, to buy cheaper security (P/E 1x). However, he bought GEICO again in 1976 when the company was in distressed, accumlating with a fully converted cost base of $1.31 per share. He will subsequently declared it as a holding that Berkshire will never sell and Berkshire acquired the remaining stake in 1995.
Low cost auto insurerGEICO is a low cost auto insurer. It bypasses commissioned insurance salesmen and sell low cost auto insurance through the mail at discounts of 30%-40% directly to Federal, State and Municipal government employees and certain categories of enlisted military officers.
The Company’s low cost advantage in their core automobile insurance offering would persist and endure for decades to come. GEICO’s underwriting and loss adjustment expenses typically amounted to just 25% of premiums – at times 10-15 percentage points lower than their competitors, including such direct insurance writes as Allstate and State Farm.
With the company's significant low-cost advantage, plus the emerging post-world war II automobile boom, the company would go on to consistenly post underwriting profit for the next 35 years in a row.
Many shall be restored that now are fallen and many shall fall that now are in honorBy the 1970s, the government begun to legislate mandated price reductions. Faced with new regulations and infrlation, the GEICO's executive made a series of egregious pricing errors extending its clientele to higher risk categories. This began a stream of significant losses. In 1975, GEICO lost $126 million and bankruptcy was a real risk. GEICO's shares, which had traded as high as $61 in 1972, were down to just under $5. By 1976, the stock was a little more than $2 per share. The existing CEO was booted and GEICO broad of directors hired a new head as chairman, president and CEO.
Invest with a catalystThe new CEO was extremely sucessful in turning the situation around. Within a year, GEICO returned to profitability. In the following year, GEICO declared a dividend. Warren Buffett arranged to meet with the CEO and was so impressed that the started buying GEICO stock the next morning at $2.125. He subsequently increased his stake through more open market purchase and converitable preferred stock. Overall, his fully converted cost basis was just $1.31 per share.
GEICO Timeline
· Founded in 1936 in San Antonio by Leo and Lillian Goodwin.
· $100,000 in seed capital.
· $25,000 by the Goodwin’s and $75,000 by the Rhea family.
· Typical auto policy $27.50.
· 1937: 3,700 policies with $104,000 in premiums.
· 1937: Company relocated in Washington, D.C.
· 1940: Company books first underwriting profit. 25,000 polices in force.
· 1941: Hail storm in D.C. cements Company’s service reputation.
· 1940-1974: 35 consecutive years of profits.
Graham-Newman Timeline
· 1948: Members of Rhea want to sell their portion of Company.
· 1948: Graham-Newman buys 50% of GEICO for $712,000. Benjamin Graham becomes Chairman of the Board.
· 1948: SEC finally approves the purchase via a distribution to Graham-Newman’s partners/shareholders.
· 1948: Original OTC distribution $27 for one share.
· 1950: GEICO licensed in 15 states. 144,000 policies in force. $8 million in premiums.
· 1958: Triples addressable market by soliciting non-government professionals.
· 1958: Leo Goodwin retires. Replaced by Lorimer Davidson. $10,000 invested in GEICO had grown to $475,000.
· 1965: Graham retires from GEICO board.
· 1971: Jerry Newman retires from GEICO board and Warren Buffett nominated to replace Newman on the board.
· 1972: Graham-Newman’s original $712,000 investment worth over $400,000,000 – or more than all of Graham-Newman partnership profits combined!
Warren Buffett Timeline
· 1950: While studying under Graham at Columbia University, Buffett discovers that Graham is Chairman of GEICO.
· 1951: Buffett travels to GEICO in D.C. on a Saturday and gets a daylong insurance tutorial from Lorimer “Davy” Davidson.
· 1951: Upon graduation, Buffett moves back to Omaha and joins his father’s brokerage firm. He spends most of his time hawking GEICO to family and friends.
· 1951: Buffett invests over 50% of his net worth in GEICO (350 shares @ $29 3/8). GEICO closes at $37 ½ at year-end.
· Buffett writes “The Security I Like Best” in The Commercial and Financial Chronicle on December 6, 1951
· 1952: Buffett sells his GEICO stock at $43 5/8 to purchase Western Insurance Securities at 1X earnings.
· Buffett’s original $10,282 investment in GEICO would grow to $1.3 million over the next 20 years.
Berkshire Hathaway Timeline – Part I
· 1974: Cracks emerge in GEICO due to unbridled go-go growth.
· 1974: No-fault insurance, inflation and poor underwriting leaves GEICO woefully under reserved.
· 1975: $124 million in losses.
· 1975: Buffett’s warnings in a personal visit to CEO Gidden go unheeded.
· 1976: $40 million in losses first half of the year.
· 1976: Stock falls from high of $61 in 1972, to $42 in 1974 to $2 in the spring of 1976. Gidden out. Jack Byrne from Travelers in.
· 1976: Byrne fires 50% of employees, raises rates by 40% and tells N.J. insurance commissioner to “go impregnate yourself.”
· 1976: Buffett lurking in the wings asks Kay Graham of WaPo to broker a meeting with Byrne. Byrne says “Buffett who?” and refuses meeting. Davy Davidson calls Byrne and reads him the riot act for refusing meeting. Buffett and Byrne meet late into the night and morning discussing GEICO at Graham’s Georgetown estate.
· 1976: Buffett begins buying GEICO stock the very next morning. First trade 500,000 shares at 2 1/8. Buffett’s all-in investment would come to $19 million in a convertible preferred, plus $4.1 million @ $2.55 per share. Buffett’s fully converted cost-basis was approx. $1.31 per share.
· 1977: Byrne returns GEICO back to profitability.
Berkshire Hathaway Timeline – Part II
· 1980: Buffett sizes up Berkshire’s GEICO investment to $45 million – or 33% of GEICO.
· 1981: GEICO 31% of Berkshire’s equity portfolio.
· 1982: Berkshire’s 35% “look-through” ownership of $250 million in GEICO’s annual insurance premiums greater than own direct insurance premiums.
· 1984: Berkshire’s 36% “look-through” ownership of $320 million in GEICO’s annual insurance premiums double Berkshire’s own direct insurance premiums.
· 1985: GEICO investment ($596 million) 50% of Berkshire’s equity portfolio – a peak.
· 1984: Cumulative GEICO dividends $180 million.
· 1987: Buffett’s Chairman’s Letter names GEICO (and Cap Cities/ABC and WaPo) “permanent holdings.”
· 1990: GEICO investment worth $1,044,625,000.
Berkshire Hathaway Timeline – Part III
· 1994: GEICO investment worth $1,678,250,000.
· 1994: Buffett initiates formal merger and acquisition discussions with GEICO.
· 1994: Buffett proposes Berkshire-GEICO stock swap. GEICO balks.
· 1995: Buffett proposes new issue of Berkshire preferred as acquisition currency. GEICO balks. GEICO wants all-cash deal $70. Buffett does not have the cash.
· 1995: On August 1, Disney announces their acquisition of Cap Cities/ABC. Buffett’s Cap Cities/ABC investment of $345 million now worth nearly $2.5 billion.
· 1995: On August 25, Buffett announces Berkshire’s acquisition of the remaining 49% of GEICO for $2.3 billion.
· From the real panic low’s set in the spring of 1976 of $2.25, by the fall of 1995, GEICO’s stock had soared to over $300 (split-adjusted).
· 1996: GEICO’s best year of policy growth (+10%) in 20 years.
· 1999: Buffett and Tony Nicely increase marketing budget to $242 million from $33 million in 1995. New auto policy growth of 1.65 million. Policies in force +4.3 million.
· 1996-2012: Market share up 4X to 9.6%. Annual auto premiums up 5X to $17 billion. Ad spending +$1 billion from $33 million. Cumulative underwriting profits since 1995 +10 billion. Float up 4X to $12 billion. Conservative valuation of GEICO $15 billion.
Low cost auto insurerGEICO is a low cost auto insurer. It bypasses commissioned insurance salesmen and sell low cost auto insurance through the mail at discounts of 30%-40% directly to Federal, State and Municipal government employees and certain categories of enlisted military officers.
The Company’s low cost advantage in their core automobile insurance offering would persist and endure for decades to come. GEICO’s underwriting and loss adjustment expenses typically amounted to just 25% of premiums – at times 10-15 percentage points lower than their competitors, including such direct insurance writes as Allstate and State Farm.
With the company's significant low-cost advantage, plus the emerging post-world war II automobile boom, the company would go on to consistenly post underwriting profit for the next 35 years in a row.
Many shall be restored that now are fallen and many shall fall that now are in honorBy the 1970s, the government begun to legislate mandated price reductions. Faced with new regulations and infrlation, the GEICO's executive made a series of egregious pricing errors extending its clientele to higher risk categories. This began a stream of significant losses. In 1975, GEICO lost $126 million and bankruptcy was a real risk. GEICO's shares, which had traded as high as $61 in 1972, were down to just under $5. By 1976, the stock was a little more than $2 per share. The existing CEO was booted and GEICO broad of directors hired a new head as chairman, president and CEO.
Invest with a catalystThe new CEO was extremely sucessful in turning the situation around. Within a year, GEICO returned to profitability. In the following year, GEICO declared a dividend. Warren Buffett arranged to meet with the CEO and was so impressed that the started buying GEICO stock the next morning at $2.125. He subsequently increased his stake through more open market purchase and converitable preferred stock. Overall, his fully converted cost basis was just $1.31 per share.
GEICO Timeline
· Founded in 1936 in San Antonio by Leo and Lillian Goodwin.
· $100,000 in seed capital.
· $25,000 by the Goodwin’s and $75,000 by the Rhea family.
· Typical auto policy $27.50.
· 1937: 3,700 policies with $104,000 in premiums.
· 1937: Company relocated in Washington, D.C.
· 1940: Company books first underwriting profit. 25,000 polices in force.
· 1941: Hail storm in D.C. cements Company’s service reputation.
· 1940-1974: 35 consecutive years of profits.
Graham-Newman Timeline
· 1948: Members of Rhea want to sell their portion of Company.
· 1948: Graham-Newman buys 50% of GEICO for $712,000. Benjamin Graham becomes Chairman of the Board.
· 1948: SEC finally approves the purchase via a distribution to Graham-Newman’s partners/shareholders.
· 1948: Original OTC distribution $27 for one share.
· 1950: GEICO licensed in 15 states. 144,000 policies in force. $8 million in premiums.
· 1958: Triples addressable market by soliciting non-government professionals.
· 1958: Leo Goodwin retires. Replaced by Lorimer Davidson. $10,000 invested in GEICO had grown to $475,000.
· 1965: Graham retires from GEICO board.
· 1971: Jerry Newman retires from GEICO board and Warren Buffett nominated to replace Newman on the board.
· 1972: Graham-Newman’s original $712,000 investment worth over $400,000,000 – or more than all of Graham-Newman partnership profits combined!
Warren Buffett Timeline
· 1950: While studying under Graham at Columbia University, Buffett discovers that Graham is Chairman of GEICO.
· 1951: Buffett travels to GEICO in D.C. on a Saturday and gets a daylong insurance tutorial from Lorimer “Davy” Davidson.
· 1951: Upon graduation, Buffett moves back to Omaha and joins his father’s brokerage firm. He spends most of his time hawking GEICO to family and friends.
· 1951: Buffett invests over 50% of his net worth in GEICO (350 shares @ $29 3/8). GEICO closes at $37 ½ at year-end.
· Buffett writes “The Security I Like Best” in The Commercial and Financial Chronicle on December 6, 1951
· 1952: Buffett sells his GEICO stock at $43 5/8 to purchase Western Insurance Securities at 1X earnings.
· Buffett’s original $10,282 investment in GEICO would grow to $1.3 million over the next 20 years.
Berkshire Hathaway Timeline – Part I
· 1974: Cracks emerge in GEICO due to unbridled go-go growth.
· 1974: No-fault insurance, inflation and poor underwriting leaves GEICO woefully under reserved.
· 1975: $124 million in losses.
· 1975: Buffett’s warnings in a personal visit to CEO Gidden go unheeded.
· 1976: $40 million in losses first half of the year.
· 1976: Stock falls from high of $61 in 1972, to $42 in 1974 to $2 in the spring of 1976. Gidden out. Jack Byrne from Travelers in.
· 1976: Byrne fires 50% of employees, raises rates by 40% and tells N.J. insurance commissioner to “go impregnate yourself.”
· 1976: Buffett lurking in the wings asks Kay Graham of WaPo to broker a meeting with Byrne. Byrne says “Buffett who?” and refuses meeting. Davy Davidson calls Byrne and reads him the riot act for refusing meeting. Buffett and Byrne meet late into the night and morning discussing GEICO at Graham’s Georgetown estate.
· 1976: Buffett begins buying GEICO stock the very next morning. First trade 500,000 shares at 2 1/8. Buffett’s all-in investment would come to $19 million in a convertible preferred, plus $4.1 million @ $2.55 per share. Buffett’s fully converted cost-basis was approx. $1.31 per share.
· 1977: Byrne returns GEICO back to profitability.
Berkshire Hathaway Timeline – Part II
· 1980: Buffett sizes up Berkshire’s GEICO investment to $45 million – or 33% of GEICO.
· 1981: GEICO 31% of Berkshire’s equity portfolio.
· 1982: Berkshire’s 35% “look-through” ownership of $250 million in GEICO’s annual insurance premiums greater than own direct insurance premiums.
· 1984: Berkshire’s 36% “look-through” ownership of $320 million in GEICO’s annual insurance premiums double Berkshire’s own direct insurance premiums.
· 1985: GEICO investment ($596 million) 50% of Berkshire’s equity portfolio – a peak.
· 1984: Cumulative GEICO dividends $180 million.
· 1987: Buffett’s Chairman’s Letter names GEICO (and Cap Cities/ABC and WaPo) “permanent holdings.”
· 1990: GEICO investment worth $1,044,625,000.
Berkshire Hathaway Timeline – Part III
· 1994: GEICO investment worth $1,678,250,000.
· 1994: Buffett initiates formal merger and acquisition discussions with GEICO.
· 1994: Buffett proposes Berkshire-GEICO stock swap. GEICO balks.
· 1995: Buffett proposes new issue of Berkshire preferred as acquisition currency. GEICO balks. GEICO wants all-cash deal $70. Buffett does not have the cash.
· 1995: On August 1, Disney announces their acquisition of Cap Cities/ABC. Buffett’s Cap Cities/ABC investment of $345 million now worth nearly $2.5 billion.
· 1995: On August 25, Buffett announces Berkshire’s acquisition of the remaining 49% of GEICO for $2.3 billion.
· From the real panic low’s set in the spring of 1976 of $2.25, by the fall of 1995, GEICO’s stock had soared to over $300 (split-adjusted).
· 1996: GEICO’s best year of policy growth (+10%) in 20 years.
· 1999: Buffett and Tony Nicely increase marketing budget to $242 million from $33 million in 1995. New auto policy growth of 1.65 million. Policies in force +4.3 million.
· 1996-2012: Market share up 4X to 9.6%. Annual auto premiums up 5X to $17 billion. Ad spending +$1 billion from $33 million. Cumulative underwriting profits since 1995 +10 billion. Float up 4X to $12 billion. Conservative valuation of GEICO $15 billion.
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