Why Warren Buffett invested in GEO. The Warren Buffett GEICO investment was a home-run for Buffett. Here’s why and how. Buffett made purchases of GEICO in 1976, 1979 and 1980 at an average price of $6.67 per share; he owned 33.3% of GEICO by 1980, and eventually, the entire company by 1986. (As a point of reference, after-tax operating earnings per share had risen to $9.01 by 1987.)
GEICO made costly business mistakes that nearly bankrupted the company. In the early 1970s, GEICO managers made serious errors in estimating their claims costs, leading the company to significantly underprice its policies and almost go bankrupt. The company was saved only because Jack Byrne came in as CEO in 1976 and took drastic remedial measures.
One of these was reversing the strategic direction of the company. GEICO had made a mis-step in aggressively seeking growth by casting its net wide and insuring almost any driver that wanted insurance; this led to the insuring of drivers that were much more accident-prone and hence financially costly. Instead, GEICO needed to step back to what it was good at: insuring only preferred drivers at low cost via direct mail.
Buffett took interest in GEICO again after Jack took over, because he believed in Jack and in GEICO’s fundamental competitive strength.
Investing in GEICO’s Competitive Advantage
GEICO’s competitive advantage lay in its extremely low operating costs. This set the company apart from hundreds of competitors that also offer auto insurance. This was the most important component of GEICO’s moat, as low-cost is often the most important factor someone looking for car insurance would consider. The lower GEICO’s cost relative to its competitors, the wider the moat GEICO enjoyed.
In addition to low cost, the other factor that a car owner looking for an insurance policy would consider is service. Service is a qualitative factor that can be evaluated in many ways, but two of the ways Buffett identified were the number of voluntary auto policies, and the complaint ratio.
GEICO performed well on both these metrics – it had high numbers of voluntary auto policies relative to its competitors, and its complaint ratio was the lowest among the top 5 auto insurers. This allowed it to generate high return on invested capital, making GEICO an excellent Warren Buffett investment.