32 THE WARREN BUFFETT WAY
Buffett then spent f ive hours getting an education in the insurance
business from the only person working that day: Lorimer Davidson, an
investment off icer who eventually became the company’s CEO. What
he learned intrigued him.
GEICO had been founded on a couple of simple but fairly revolu-
tionary concepts: If you insure only people with good driving records,
you’ll have fewer claims; and if you sell direct to customers, without
agents, you keep overhead costs down.
Back home in Omaha and working for his father’s brokerage f irm, a
very young Warren Buffett wrote a report of GEICO for a f inancial
journal in which he noted, in what may be the understatement of that
decade, “There is reason to believe the major portion of growth lies
ahead.”^2 Buffett put $10,282 in the company, then sold it the next year at
50 percent prof it. But he always kept track of the company.
Throughout the 1950s and 1960s, GEICO prospered. But then it
began to stumble. For several years, the company had tried to expand its
customer base by underpricing and relaxing its eligibility requirements,
and two years in a row it seriously miscalculated the amount needed
for reserves (out of which claims are paid ). The combined effect of these
mistakes was that, by the mid-1970s, the once-bright company was near
bankruptcy.
When the stock price dropped from $61 to $2 a share in 1976,
Warren Buffett started buying. Over a period of f ive years, with an un-
shakable belief that it was a strong company with its basic competitive
advantages unchanged, he invested $45.7 million in GEICO.
The very next year, 1977, the company was prof itable again. Over
the next two decades, GEICO had positive underwriting ratios—mean-
ing that it took in more in premiums than it paid out in claims—in every
year but one. In the industry, where negative ratios are the rule rather
than the exception, that kind of record is almost unheard of. And that
excess f loat gives GEICO tremendous resources for investments, bril-
liantly managed by a remarkable man named Lou Simpson.
By 1991, Berkshire owned nearly half (48 percent) of GEICO. The
insurance company’s impressive performance, and Buffett’s interest in
the company, continued to climb. In 1994, serious discussions began
about Berkshire’s buying the entire company, and a year later the f inal
deal was announced. At that point, Berkshire owned 51 percent of
GEICO, and agreed to purchase the rest for $2.3 billion. This at a time