Back home in Omaha and working for his father’s brokerage firm, a very young Warren Buffett wrote a report of GEICO for a financial 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 profit.
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 five years, with an unshakable 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 profitable again. Over the next two decades, GEICO had positive underwriting ratios—meaning 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 float gives GEICO tremendous resources for investments, brilliantly 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 final deal was announced. At that point, Berkshire owned 51 percent of GEICO, and agreed to purchase the rest for $2.3 billion.